Tableof Contents

 

 

 

**UNITEDSTATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C. 20549**

 

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**FORM 10-Q**

 

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**(MarkOne)**

 
| **x**                                                   | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|---------------------------------------------------------|---------------------------------------------------------------------------------------------------------|
|                                                    |                                                                                                    |
| **For the  quarterly period ended March 31, 2009** |
| ** **                                              |
| **OR**                                                  |
|                                                    |                                                                                                    |
| **o**                                                   | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**Commission File Number: 0-19700**

 

**AMYLINPHARMACEUTICALS, INC.**

**(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 tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements 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 ofthis chapter) during the preceding 12 months (or for such shorter period thatthe registrant 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 28, 2009** |
|--------------------------------|------------|-------------------------------------------------------|
| Common Stock,  $.001 par value |       | 140,909,635                                           |

** **

** **

** **

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**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, 2009 (unaudited) and December 31,  2008              |       | 3 |
|                                    |                                                                                                        |       |   |
|                                    | Consolidated  Statements of Operations for the three months ended March 31, 2009 and  2008 (unaudited) |       | 4 |
|                                    |                                                                                                        |       |   |
|                                    | Consolidated  Statements of Cash Flows for the three months ended March 31, 2009 and  2008 (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                                                 |       | 27 |
|                                    |                                                                                                        |       |   |
| ITEM 4.                                 | Controls and  Procedures                                                                                    |       | 27 |
|                                    |                                                                                                        |       |
| **PART II. OTHER  INFORMATION**    | ** **                                                                                                  | ** ** |
|                                    |                                                                                                        |       |
| ITEM 1.                                 | Legal Proceedings                                                                                           |       | 27 |
|                                    |                                                                                                        |       |   |
| ITEM 1A.                                | Risk Factors                                                                                                |       | 28 |
|                                    |                                                                                                        |       |   |
| ITEM 6.                                 | Exhibits                                                                                                    |       | 41 |
|                                    |                                                                                                        |       |
| SIGNATURE                               |                                                                                                        | 42         |

** **

**2**

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**Table of Contents**

** **

**PART I. FINANCIALINFORMATION**

** **

**ITEM 1. Financial Statements**

** **

**AMYLIN PHARMACEUTICALS,INC.**

** **

**Consolidated BalanceSheets**

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

 
| ** **                                                                                                                                                             | ** ** | **March 31,  2009** | ** ** | **December 31,  2008 (1)** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|--------------------------------------|------------|
| ** **                                                                                                                                                             | ** ** | **(unaudited)**          | ** ** | **(Note 1)**                    | ** ** |
| Assets                                                                                                                                                                 | ** ** | ** **               | ** ** | ** **                           | ** ** |
| Current assets:                                                                                                                                                        |       |                     |       |                                 |       |
| Cash and cash equivalents                                                                                                                                              |       | $                        | 179,748    |                                 | $          | 237,263 |   |
| Short-term investments                                                                                                                                                 |       | 531,667                  |       | 579,575                              |       |
| Accounts receivable, net                                                                                                                                               |       | 62,065                   |       | 62,369                               |       |
| Inventories, net                                                                                                                                                       |       | 119,713                  |       | 115,823                              |       |
| Other current assets                                                                                                                                                   |       | 60,857                   |       | 41,038                               |       |
| Total current assets                                                                                                                                                   |       | 954,050                  |       | 1,036,068                            |       |
|                                                                                                                                                                   |       |                     |       |                                 |       |
| Property, plant and equipment, net                                                                                                                                     |       | 689,128                  |       | 655,444                              |       |
| Other long-term assets                                                                                                                                                 |       | 23,244                   |       | 23,755                               |       |
| Debt issuance costs                                                                                                                                                    |       | 11,025                   |       | 11,786                               |       |
|                                                                                                                                                                   |       | $                        | 1,677,447  |                                 | $          | 1,727,053 |   |
|                                                                                                                                                                   |       |                     |       |                                 |       |
| Liabilities and  Stockholders’ Equity                                                                                                                             |       |                     |       |                                 |       |
|                                                                                                                                                                   |       |                     |       |                                 |       |
| Current liabilities:                                                                                                                                                   |       |                     |       |                                 |       |
| Accounts payable                                                                                                                                                       |       | $                        | 36,686     |                                 | $          | 39,467 |   |
| Accrued compensation                                                                                                                                                   |       | 35,172                   |       | 65,145                               |       |
| Payable to collaborative partner                                                                                                                                       |       | 67,359                   |       | 60,470                               |       |
| Other current liabilities                                                                                                                                              |       | 92,257                   |       | 90,125                               |       |
| Restructuring liability, current portion                                                                                                                               |       | 14,772                   |       | 24,235                               |       |
| Notes payable, current portion                                                                                                                                         |       | 31,250                   |       | 31,250                               |       |
| Deferred revenue, current portion                                                                                                                                      |       | 2,015                    |       | 3,086                                |       |
| Total current liabilities                                                                                                                                              |       | 279,511                  |       | 313,778                              |       |
|                                                                                                                                                                   |       |                     |       |                                 |       |
| Long-term deferred credit                                                                                                                                              |       | 125,000                  |       | 125,000                              |       |
| Restructuring liability, net of current portion                                                                                                                        |       | 19,545                   |       | 22,503                               |       |
| Other long-term obligations, net of current portion                                                                                                                    |       | 27,307                   |       | 31,724                               |       |
| Notes payable, net of current portion                                                                                                                                  |       | 85,938                   |       | 93,750                               |       |
| Convertible senior notes                                                                                                                                               |       | 626,511                  |       | 621,021                              |       |
|                                                                                                                                                                   |       |                     |       |                                 |       |
| Commitments and contingencies                                                                                                                                          |       |                     |       |                                 |       |
|                                                                                                                                                                   |       |                     |       |                                 |       |
| Stockholders’ equity:                                                                                                                                             |       |                     |       |                                 |       |
| Preferred stock, $.001 par value, 7,500 shares authorized, none  issued and outstanding at March 31, 2009 and December 31, 2008                              |       | —                   |       | —                               |       |
| Common stock, $.001 par value, 450,000 shares authorized, 140,862 and  137,623 issued and outstanding at March 31, 2009 and December 31,  2008, respectively |       | 141                      |       | 138                                  |       |
| Additional paid-in capital                                                                                                                                             |       | 2,331,933                |       | 2,291,762                            |       |
| Accumulated deficit                                                                                                                                                    |       | (1,808,565               | )          | (1,761,611                           | )          |
| Accumulated other comprehensive loss                                                                                                                                   |       | (9,874                   | )          | (11,012                              | )          |
| Total stockholders’ equity                                                                                                                                        |       | 513,635                  |       | 519,277                              |       |
|                                                                                                                                                                   |       | $                        | 1,677,447  |                                 | $          | 1,727,053 |   |

 

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**(1)  **Adjusted for the required retroactiveadoption of FSP APB 14-1.

 

See accompanyingnotes to consolidated financial statements.

 

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**AMYLIN PHARMACEUTICALS,INC.**

** **

**Consolidated Statementsof Operations**

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

**(unaudited)**

 
| ** **                                                          | ** ** | **Three months ended  March 31,** | ** ** |
|---------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                          | ** ** | **2009**                                         | ** ** | **2008 (1)** | ** ** |
| Revenues:                                                           |       |                                             |       |   |   |
| Net product sales                                                   |       | $                                                | 179,332    |   | $ | 178,721 |   |
| Revenues under collaborative agreements                             |       | 14,342                                           |       | 18,516 |   |
| Total revenues                                                      |       | 193,674                                          |       | 197,237 |   |
|                                                                |       |                                             |       |   |   |
| Costs and expenses:                                                 |       |                                             |       |   |   |
| Cost of goods sold                                                  |       | 18,632                                           |       | 22,024 |   |
| Selling, general and administrative                                 |       | 87,556                                           |       | 98,243 |   |
| Research and development                                            |       | 60,019                                           |       | 77,206 |   |
| Collaborative profit sharing                                        |       | 73,017                                           |       | 69,901 |   |
| Total costs and expenses                                            |       | 239,224                                          |       | 267,374 |   |
|                                                                |       |                                             |       |   |   |
| Operating loss                                                      |       | (45,550                                          | )          | (70,137 | ) |
|                                                                |       |                                             |       |   |   |
| Interest and other income                                           |       | 3,023                                            |       | 11,030 |   |
| Interest and other expense                                          |       | (4,427                                           | )          | (11,992 | ) |
| Net loss                                                            |       | $                                                | (46,954    | ) | $ | (71,099 | ) |
|                                                                |       |                                             |       |   |   |
| Net loss per share, basic and diluted                               |       | $                                                | (0.34      | ) | $ | (0.52 | ) |
|                                                                |       |                                             |       |   |   |
| Shares used in computing net loss per share, basic and diluted |       | 138,804                                          |       | 135,859 |   |

 

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**(1)  **Adjusted for the required retroactiveadoption of FSP APB 14-1.

 

See accompanying notes to condensedconsolidated financial statements.

 

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**AMYLIN PHARMACEUTICALS,INC.**

** **

**Consolidated Statementsof Cash Flows**

**(in thousands)**

**(unaudited)**

 
| ** **                                                                    | ** ** | **Three months ended  March 31,** | ** ** |
|-------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                    | ** ** | **2009**                                         | ** ** | **2008 (1)** | ** ** |
| Operating activities:                                                         |       |                                             |       |   |   |
| Net loss                                                                      |       | $                                                | (46,954    | ) | $ | (71,099 | ) |
| Adjustments to reconcile net loss to net cash used for operating  activities: |       |                                             |       |   |   |
| Depreciation and amortization                                                 |       | 8,722                                            |       | 6,484 |   |
| Amortization debt discount and debt issuance costs                            |       | 2,201                                            |       | 3,252 |   |
| Employee stock-based compensation                                             |       | 10,954                                           |       | 14,062 |   |
| Stock-settled compensation accruals                                           |       | 7,352                                            |       | 7,092 |   |
| Other non-cash expenses, net                                                  |       | 600                                              |       | 967 |   |
| Changes in operating assets and liabilities:                                  |       |                                             |       |   |   |
| Accounts receivable, net                                                      |       | 304                                              |       | 8,067 |   |
| Inventories, net                                                              |       | (3,890                                           | )          | 2,148 |   |
| Other current assets                                                          |       | (20,143                                          | )          | 2,479 |   |
| Accounts payable and accrued liabilities                                      |       | (64                                              | )          | 17,073 |   |
| Accrued compensation                                                          |       | (11,971                                          | )          | (7,191 | ) |
| Payable to collaborative partner                                              |       | 6,889                                            |       | 521 |   |
| Deferred revenue                                                              |       | (1,071                                           | )          | (1,071 | ) |
| Restructuring liabilities                                                     |       | (12,421                                          | )          | — |   |
| Other assets and liabilities, net                                             |       | (4,369                                           | )          | 3,217 |   |
| Net cash flows used for operating activities                                  |       | (63,861                                          | )          | (13,999 | ) |
|                                                                          |       |                                             |       |   |   |
| Investing activities:                                                         |       |                                             |       |   |   |
| Purchases of short-term investments                                           |       | (242,256                                         | )          | (368,471 | ) |
| Sales and maturities of short-term investments                                |       | 291,626                                          |       | 362,162 |   |
| Purchases of property, plant and equipment, net                               |       | (38,833                                          | )          | (86,448 | ) |
| Increase in other long-term assets                                            |       | (217                                             | )          | (339 | ) |
| Net cash flows provided by (used for) investing activities                    |       | 10,320                                           |       | (93,096 | ) |
|                                                                          |       |                                             |       |   |   |
| Financing activities:                                                         |       |                                             |       |   |   |
| Issuance of common stock, net                                                 |       | 3,838                                            |       | 6,606 |   |
| Repayment of notes payable                                                    |       | (7,812                                           | )          | — |   |
| Net cash flows (used for) provided by financing activities                    |       | (3,974                                           | )          | 6,606 |   |
|                                                                          |       |                                             |       |   |   |
| Change in cash and cash equivalents                                           |       | (57,515                                          | )          | 100,489 |   |
|                                                                          |       |                                             |       |   |   |
| Cash and cash equivalents at beginning of period                              |       | 237,263                                          |       | 422,232 |   |
| Cash and cash equivalents at end of period                                    |       | $                                                | 179,748    |   | $ | 321,743 |   |
|                                                                          |       |                                             |       |   |   |
| **Supplemental disclosure of cash flow  information:**                        | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| Property, plant and equipment additions in other current liabilities          |       | $                                                | 5,472      |   | $ | 22,196 |   |
| Non-cash interest capitalized to property, plant and equipment                |       | $                                                | 4,055      |   | $ | 2,518 |   |
|                                                                          |       |                                             |       |   |   |
| **Non-cash financing activities:**                                            | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| Issuance of common stock for contingent share settled obligation              |       | $                                                | —     |   | $ | 30,000 |   |
| Shares contributed as employer 401(k) match                              |       | $                                                | 5,104      |   | $ | 4,283 |   |
| Shares contributed to employee stock ownership plan                           |       | $                                                | 20,250     |   | $ | 16,996 |   |

 

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**(1)  **Adjusted for the required retroactive adoption of FSPAPB 14-1.

 

See accompanying notes to consolidatedfinancial statements.

 

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**AMYLIN PHARMACEUTICALS,INC.**

** **

**Notes to ConsolidatedFinancial Statements**

**March 31, 2009**

**(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 ofRegulation S-X. The information as of March 31, 2009, and for the threemonths ended March 31, 2009 and 2008, are unaudited. In the opinion ofmanagement, the information reflects all adjustments necessary to make theresults of operations for the interim periods a fair statement of suchoperations. All such adjustments are of a normal recurring nature. Interimresults are not necessarily indicative of results for a full year. The balancesheet at December 31, 2008, has been derived from the audited consolidatedfinancial statements at that date, adjusted for the retroactive adoptionof  FSP APB No. 14-1 (see Note 2),but does not include all information and footnotes required by U.S. generallyaccepted accounting principles for complete financial statements. For morecomplete financial information, these financial statements should be read inconjunction with the audited consolidated financial statements included inAmylin Pharmaceuticals, Inc.’s (referred to as the Company or Amylin)Annual Report on Form 10-K for the year ended December 31, 2008.

 

**Revenue Recognition**

** **

***Net Product Sales***

*** ***

The Company sells BYETTA® (exenatide) injection for the treatment oftype 2 diabetes and SYMLIN® (pramlintideacetate) injection for the treatment of type 1 and type 2 diabetesprimarily to wholesale distributors, who, in turn, sell to retail pharmaciesand government entities. Product sales are recognized when delivery of theproducts has occurred, title has passed to the customer, the selling price isfixed or determinable, collectability is reasonably assured and the Company hasno further obligations. The Company records allowances for product returns,rebates, wholesaler chargebacks, wholesaler discounts and prescription vouchersat the time of sale and reports product sales net of such allowances. TheCompany must make significant judgments in determining these allowances. Ifactual results differ from the Company’s estimates, the Company will berequired to make adjustments to these allowances in the future.  The Company recorded an allowance for rebates relatedto the DOD’s Tricare Retail Pharmacy program pursuant to a final rule thatwas issued in March 2009 and is effective on May 26, 2009.  The final rule implements the DOD’s revisedinterpretation of the National Defense Authorization Act of 2008, or NDAA,signed into law on January 28, 2008. The final rule changed theprocess by which rebate obligations for the Tricare Retail Pharmacy program arecreated such that a contractual agreement is no longer required and thatobligation to pay such rebates emanates from the NDAA itself.  In consideration of this final rule theCompany recorded an allowance of $5.8 million for such rebates in the threemonths ended March 31, 2009, of which $4.8 million represents aretroactive rebate assessment for sales made during 2008 that now appearprobable of being assessed and paid.

 

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

 

***Revenues Under Collaborative Agreements***

*** ***

Amounts received for upfront product and technology license fees undermultiple-element arrangements are deferred and recognized over the period ofsuch services or performance if such arrangements require on-going services orperformance. Non-refundable amounts received for substantive milestones arerecognized upon achievement of the milestone. Amounts received for sharing ofdevelopment expenses are recognized in the period in which the related expensesare incurred. Any amounts received prior to satisfying these revenuerecognition 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.

 

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***Accounts***Receivable

*** ***

Tradeaccounts receivable are recorded net of allowances for cash discounts forprompt payment, doubtful accounts, product returns and chargebacks. Allowancesfor rebate discounts and distribution fees are included in other currentliabilities in the accompanying consolidated balance sheets. Estimates forallowances for doubtful accounts are determined based on existing contractualobligations, historical payment patterns and individual customercircumstances.  The allowance for doubtful accounts was $0.7 million and $0.6million at March 31, 2009 and December 31, 2008, respectively.

 

**Investments in UnconsolidatedEntities**

 

The Company uses the equitymethod of accounting for investments in other companies that are not controlledby the Company and in which the Company’s interest is generally between 20% and50% of the voting shares or the Company has significant influence over theentity, or both.  The Company’s share ofthe income or losses of these entities are included in interest and otherincome or interest and other expense, and the investments, which have a netbook value of $4.2 million and $4.7 million at March 31, 2009 and December 31,2008, respectively, are included in other long-term assets.  The Company recorded $0.6 million and $0.9 million for its share of equity method investee losses during the three months ended March 31,2009 and 2008, respectively.

 

**Fair Value Measurements**

 

Statement of Financial Accounting Standards (SFAS) No. 157, “*Fair Value Measurements*,” provides aframework for measuring fair value and requires expanded disclosures regardingfair value measurements. SFAS No. 157 defines fair value as the exchangeprice that would be received for an asset or paid to transfer a liability (anexit price) in the principal or most advantageous market for the asset orliability in an orderly transaction between market participants on themeasurement date. Market participants are buyers and sellers in the principalmarket that are (i) independent, (ii) knowledgeable, (iii) ableto transact and (iv) willing to transact. SFAS No. 157 prioritizesthe inputs 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 the assumptions that market  participants would use in pricing. |

 

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

 
| ** **                                               | ** ** | **Fair value measurements as of March 31, 2009** | ** ** |
|----------------------------------------------------------|------------|-------------------------------------------------------------------------------------|------------|
| ** **                                               | ** ** | **Total**                                                                           | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** |
| Short-term investments                                   |       | $                                                                                   | 531,667    |   | $ | 531,667 |   | $ | — |   | $ | — |   |
| Cash and cash equivalents                                |       | 179,748                                                                             |       | 179,748 |   | — |   | — |   |
| Derivative financial instrument contracts, net liability |       | (4,024                                                                              | )          | — |   | (4,024 | ) | — |   |
|                                                     |       | $                                                                                   | 707,391    |   | $ | 711,415 |   | $ | (4,024 | ) | $ | — |   |

 

# **Researchand Development Expenses**

#  

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

 

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**Derivative Financial Instruments**

 

**TheCompany mitigates certain financial exposures, including currency risk andinterest rate risk, through a controlled program of risk management thatincludes the use of derivative financial instruments. Derivatives are recordedon the balance sheet at fair value, with changes in value being recorded ininterest and other expense. The fair value of the Company’s derivativefinancial instruments was a net liability of $4.0 million and $4.8 millionat March 31, 2009 and December 31, 2008, respectively.  The Company has determined that itsderivative financial instruments are defined as Level 2 in the fair valuehierarchy. The Company recognized a gain of $0.7 million and a loss of $2.8 millionon derivative financial instruments for the three months ended March 31,2009 and 2008, respectively.**

** **

Thefollowing table summarizes the fair value and balance sheet classification ofthe Company’s derivative financial instruments (in thousands):

 
| ** **                                  | ** ** | **March 31, 2009** | ** ** | **December 31, 2008**  | ** **                                           |
|---------------------------------------------|------------|------------------------------|------------|----------------------------------|------------------------------------------------------|
| ** **                                  | ** ** | **Fair Value**          | ** ** | **Balance sheet  location** | ** **                                           | **Fair Value** | ** ** | **Balance sheet  location** | ** ** |
| Foreign currency derivative contracts       |       | $                            | 413        |                             | Other  current assets                                |   | $ | 160 |   | Other  current assets |   |
| Interest rate derivative contract (Note 11) |       | $                            | (4,437     | )                                | Other  long-term obligations, net of current portion |   | $ | (4,991 | ) | Other  long-term obligations, net of current portion |   |
|                                        |       |                         |       |                             |                                                 |   |   |   |   |
|                                        |       | $                            | (4,024     | )                                |                                                 |   | $ | (4,831 | ) |   |   |

** **

**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. Common stock equivalentsfrom stock options and warrants of 0.3 million and 3.3 million for the threemonths ended March 31, 2009 and 2008, respectively, are excluded from thecalculation of diluted loss per share for all periods presented because theeffect is antidilutive. Common stock equivalents from shares underlying ourconvertible senior notes of 15.2 million for the three months ended March 31,2009 and 2008 are also excluded from the calculation of diluted loss per sharebecause the effect is antidilutive. Infuture periods, if the Company reports net income and the common shareequivalents for our convertible senior notes are dilutive, the common stockequivalents will be included in the weighted average shares computation andinterest expense related to the notes will be added back to net income tocalculate diluted earnings per share.

 

**Accounting for Stock-Based Compensation**

 

EffectiveJanuary 1, 2006, the Company adopted the fair value method of accountingfor stock-based compensation arrangements in accordance with Financial AccountingStandards Board (FASB) revised Statement of Financial Accounting Standards(SFAS) No. 123 (SFAS 123R), “*Share-BasedPayment,”*which establishes accounting for non-cash stock-basedawards exchanged for employee services and requires companies to expense theestimated fair value of these awards over the requisite employee serviceperiod, which for the Company is generally the vesting period. The Company adoptedSFAS 123R using the modified prospective method. Under the modified prospectivemethod, prior periods are not revised for comparative purposes. The valuationprovisions of SFAS 123R apply to new awards and to awards that are outstandingon the effective date and subsequently modified or cancelled. Estimatednon-cash stock-based compensation expense for awards outstanding at theeffective date is being recognized over the remaining service period using thecompensation cost calculated for pro-forma disclosure purposes under SFAS 123, *“Accounting for Stock-Based Compensation.”*

 

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

 
| ** **                                              | ** ** | **Three months ended  March 31,** | ** ** |
|---------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                              | ** ** | **2009**                                         | ** ** | **2008** | ** ** |
| Selling, general and administrative expenses            |       | $                                                | 7,305      |   | $ | 8,332 |   |
| Research and development expenses                       |       | 3,649                                            |       | 5,730 |   |
|                                                    |       | $                                                | 10,954     |   | $ | 14,062 |   |
|                                                    |       |                                             |       |   |   |
| Net stock-based compensation expense, per common share: |       |                                             |       |   |   |
| Basic                                                   |       | $                                                | 0.08       |   | $ | 0.10 |   |
| Diluted                                                 |       | $                                                | 0.08       |   | $ | 0.10 |   |

 

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TheCompany recorded $11.0 million and $14.1 million of total non-cash stock-basedcompensation expense during the three months ended March 31, 2009 and2008, respectively, in all cases related to stock-based awards consisting ofstock options and employee stock purchase rights.  At March 31, 2009, total unrecognizedestimated compensation cost related to non-vested stock-based awards grantedprior to that date was $81.6 million, which is expected to be recognized over aweighted-average period of 2.5 years. The Company issued 0.1 million shares upon the exercise of stock optionsin the three months ended March 31, 2009.

 

In addition to the stock-based compensation discussed above, theCompany also recorded $5.8 million and $5.4 million of expenseassociated with its Employee Stock Ownership Plan, or ESOP, for the threemonths ended March 31, 2009 and 2008, respectively.  The breakdown of non-cash ESOP expense byoperating statement classification is presented below (in thousands):

 
| ** **                                   | ** ** | **Three months ended  March 31,** | ** ** |
|----------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                   | ** ** | **2009**                                         | ** ** | **2008** | ** ** |
| Selling, general and administrative expenses |       | $                                                | 3,231      |   | $ | 2,807 |   |
| Research and development expenses            |       | 2,522                                            |       | 2,588 |   |
|                                         |       | $                                                | 5,753      |   | $ | 5,395 |   |

 

**Consolidation**

 

The consolidated financial statements include the accounts of theCompany and its wholly owned subsidiaries, Amylin Ohio, LLC, and AmylinInvestments, LLC. All significant intercompany transactions and balanceshave been eliminated in consolidation.

 

**Recently Issued Accounting Pronouncements**

** **

In April 2009, the FASB issued the following newaccounting standards:

 

·                 FASB Staff Position (FSP) FAS 157-4, “*Determining Whether a Market Is Not Active and aTransaction Is Not Distressed,” (*FSP FAS 157-4). FSP FAS 157-4provides guidelines for making fair value measurements more consistent with theprinciples presented in SFAS 157. FSP FAS 157-4 provides additionalauthoritative guidance in determining whether a market is active or inactive,and whether a transaction is distressed, is applicable to all assets andliabilities (i.e. financial and nonfinancial) and will require enhanceddisclosures.

 

·                 FSP FAS 115-2, FSP FAS 124-2, and EITF 99-20-2, “*Recognition and Presentation of Other-Than-TemporaryImpairments*,” (FSP FAS 115-2, FSP 124-2 AND EITF 99-20-2). FSP FAS115-2, FSP FAS 124-2, and EITF 99-20-2 provides additional guidance to providegreater clarity about the credit and noncredit component of another-than-temporary impairment event and to more effectively communicate whenan other-than-temporary impairment event has occurred. This FSP applies to debtsecurities.

 

·                 FSP FAS 107-1 and APB 28-1, “*Interim Disclosures about Fair Value of FinancialInstruments*,” (FSP FAS 107-1 and APB 28-1). FSP FAS 107-1 and FSPAPB 28-1, amends FASB Statement No. 107, “*Disclosuresabout Fair Value of Financial Instruments*,” to require disclosuresabout fair value of financial instruments in interim as well as in annualfinancial statements. This FSP also amends APB Opinion No. 28, “*Interim Financial Reporting*,” to requirethose disclosures in all interim financial statements.

 

These standards are effective for periods ending afterJune 15, 2009. The Company is evaluating the impact that these standardswill have on its consolidated financial statements.

 

**2.****             ****Adoption of FSP No. APB 14-1**

 

Effective January 1, 2009, the Company adoptedthe provisions of FSP No. APB 14-1 “*Accountingfor Convertible Debt Instruments that may be Settled in Cash Upon Conversion(Including Partial Cash Settlement).*”  FASP No. ABP 14-1 requires that theliability and equity components of convertible debt instruments within thescope of FSP APB No. 14-1 shall be separately accounted for in a mannerthat will reflect the entity’s nonconvertible debt borrowing rate when interestcost is recognized in subsequent periods. The carrying amount of the liabilitycomponent of the convertible debt instrument is determined by measuring thefair value of a similar liability that does not have an associated equitycomponent. The carrying value of the equity component is determined bydeducting the fair value of the liability component from the initial proceeds

 

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ascribedto the convertible debt instrument as a whole. Related transaction costs areallocated to the liability and equity components in proportion to theallocation of proceeds and accounted for as debt issuance costs and equityissuance costs, respectively. The excess of the principal amount of theliability component over its carrying amount is amortized to interest expenseusing the interest method.  FSP No. ABP14-1 is applied retrospectively to all periods presented with the cumulativeeffect of the change in accounting principle on periods prior to thosepresented recognized as of the beginning of the first period presented.  Due to the Company’s option to electnet-share settlement upon conversion, the Company’s $575 million SeniorConvertible Notes issued in June 2007 (the 2007 Notes) are within thescope of FSP No. APB 14-1.  TheCompany’s $200 million Convertible Senior Notes issued in 2004 (the 2004 Notes)are not within the scope of FSP No. APB 14-1 as they may only be settledin shares of the Company’s common stock upon conversion.

 

Upon adoption, the Company recorded a cumulativedebt discount on the 2007 Notes of $185.6 million at inception, and an increaseof $180.3 million to stockholders’ equity representing the gross value of theequity component of $185.6 million net of allocated transaction costs of $5.3million.  The debt discount is being amortizedto interest expense over the term of the 2007 Notes, net of interestcapitalized, which resulted in a cumulative effect on retained earnings of thechange in accounting principle of $5.4 million as of January 1, 2008.  As required by the provisions of FSP No. APB14-1, the Company is retroactively adjusting its 2007 and 2008 financialstatements.

 

The Company’s net loss for the quarter ended March 31,2009 of $47.0 million, or $0.34 per share, includes $1.3 million, or $0.01 pershare, of incremental net interest and other expense due to the adoption of FSPNo. ABP 14-1.

 

Thefollowing table sets forth the effect of the retroactive adjustment of theapplicable line items within the accompanying consolidated balance sheet as of December 31,2008 (in thousands):

 
| ** **                         | ** ** | **As previously  reported** | ** ** | **Implementation  adjustments** | ** ** | **As adjusted** | ** ** |
|------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|----------------------|------------|
| Property, plant and equipment, net |       | $                                | 636,922    |                            | $          | 18,522               |       | $ | 655,444 |   |
| Debt issuance costs                |       | $                                | 15,884     |                            | $          | (4,098               | )          | $ | 11,786 |   |
| Convertible senior notes           |       | $                                | 775,000    |                            | $          | (153,979             | )          | $ | 621,021 |   |
| Additional paid-in capital         |       | $                                | 2,111,473  |                            | $          | 180,289              |       | $ | 2,291,762 |   |
| Accumulated deficit                |       | $                                | (1,749,725 | )                               | $          | (11,886              | )          | $ | (1,761,611 | ) |

 

The following table sets forth the effect of theretroactive adjustment of the applicable line items within the accompanyingconsolidated statement of operations for the three months ended March 31,2008 (in thousands, except per share amounts):

 
| ** **                 | ** ** | **As previously  reported** | ** ** | **Implementation  adjustments** | ** ** | **As adjusted** | ** ** |
|----------------------------|------------|----------------------------------|------------|---------------------------------|------------|----------------------|------------|
| Interest and other expense |       | $                                | (9,690     | )                               | $          | (2,302               | )          | $ | (11,992 | ) |
| Net loss                   |       | $                                | (68,797    | )                               | $          | (2,302               | )          | $ | (71,099 | ) |
| Net loss per share         |       | $                                | (0.51      | )                               | $          | (0.01                | )          | $ | (0.52 | ) |

 

Thefollowing table sets forth the effect of the retroactive adjustment of theapplicable line items within the accompanying consolidated statement of cashflows for the three months ended March 31, 2008 (in thousands):

 
| ** **                                            | ** ** | **As previously  reported** | ** ** | **Implementation  adjustments** | ** ** | **As adjusted** | ** ** |
|-------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|----------------------|------------|
| Net loss                                              |       | $                                | (68,797    | )                               | $          | (2,302               | )          | $ | (71,099 | ) |
| Amortization of debt discount and debt issuance costs |       | $                                | 950        |                            | $          | 2,302                |       | $ | 3,252 |   |

 

**3.****             ****Short-term Investment**s

 

The Company’s short-term investments, consisting principally of debtsecurities, are classified as available-for-sale and are stated at fair valuebased upon observed market prices (Level 1 in the fair value hierarchy).Unrealized holding gains or losses on these securities are included in othercomprehensive loss. The amortized cost of debt securities in this category isadjusted for amortization of premiums and accretion of discounts to maturity.For investments in mortgage-backed securities,

 

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amortizationof premiums and accretion of discounts are recognized in interest income usingthe interest method, adjusted for anticipated prepayments as applicable.Estimates of expected cash flows are updated periodically and changes arerecognized in the calculated effective yield prospectively as appropriate. Suchamortization is included in interest income. Realized gains and losses anddeclines in value judged to be other-than-temporary on available-for-salesecurities are included in impairment loss on investments. In assessingpotential impairment of its short-term investments, the Company evaluates theimpact of interest rates, potential prepayments on mortgage-backed securities,changes in credit quality, the length of time and extent to which the marketvalue has been less than cost, and the Company’s intent and ability to retain thesecurity in order to allow for an anticipated recovery in fair value. The costof securities sold is based on the specific-identification method.  Thefollowing is a summary of short-term investments as of March 31, 2009 and December 31,2008 (in thousands):

 
| ** **                                            | ** ** | **Available-for-Sale Securities** | ** ** |
|-------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                            | ** ** | **Amortized  Cost**                    | ** ** | **Gross  Unrealized  Gains (1)** | ** ** | **Gross  Unrealized  Losses(1)** | ** ** | **Estimated  Fair Value** | ** ** |
| **March 31, 2009**                               |       |                                   |       |   |   |   |   |   |   |
| U.S. Treasury securities                              |       | $                                      | 173,442    |   | $ | 222 |   | $ | (6 | ) | $ | 173,658 |   |
| Obligations of U.S. Government-sponsored  enterprises |       | 78,187                                 |       | 296 |   | (842 | ) | 77,641 |   |
| Corporate debt securities                             |       | 261,427                                |       | 224 |   | (2,758 | ) | 258,893 |   |
| Asset backed securities                               |       | 24,849                                 |       | 113 |   | (3,487 | ) | 21,475 |   |
| Total                                                 |       | $                                      | 537,905    |   | $ | 855 |   | $ | (7,093 | ) | $ | 531,667 |   |
|                                                  |       |                                   |       |   |   |   |   |   |   |
| **December 31, 2008**                            |       |                                   |       |   |   |   |   |   |   |
| U.S. Treasury securities                              |       | $                                      | 130,193    |   | $ | 449 |   | $ | — |   | $ | 130,642 |   |
| Obligations of U.S. Government-sponsored  enterprises |       | 129,197                                |       | 656 |   | (1,494 | ) | 128,359 |   |
| Corporate debt securities                             |       | 294,805                                |       | 175 |   | (4,090 | ) | 290,890 |   |
| Asset backed securities                               |       | 33,081                                 |       | 4 |   | (3,401 | ) | 29,684 |   |
| Total                                                 |       | $                                      | 587,276    |   | $ | 1,284 |   | $ | (8,985 | ) | $ | 579,575 |   |

 

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(1) Othercomprehensive loss included a net unrealized loss of $3.6 million and $3.3million on investments underlying the Company’s 2001 Non-Qualified DeferredCompensation Plan at March 31, 2009 and December 31, 2008,respectively.

 

The Company’sinvestments had gross unrealized losses of $7.1 million and $9.0 million at March 31,2009 and December 31, 2008, respectively. The unrealized losses on the Company’s investments in marketablesecurities is due in most instances to the increased volatility in the marketsimpacting the classes of securities the Company invests in and not adeterioration in credit ratings. The Company’s investments have a shorteffective duration, and since the Company has the ability and intent to holdthese investments until a recovery of fair value, which may be maturity, theCompany does not consider these investments to be other-than-temporarilyimpaired at March 31, 2009.

 

**4.****             ****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 $1.8 million and $5.1 million at March 31, 2009 and December 31,2008, respectively. Raw materials consists of bulk drug material for BYETTA andSYMLIN, work-in-process consists of in-process BYETTA cartridges, in-processSYMLIN cartridges and in-process SYMLIN vials, and finished goods consists ofBYETTA drug product in a disposable pen/cartridge delivery system, finishedSYMLIN drug product in vials for syringe administration and finished SYMLINdrug product in a disposable pen/cartridge delivery system.  The reduction in the valuation allowancereflects the scrapping of material previously reserved for that the Company wasunable to utilize.

 

Inventoriesconsist of the following (in thousands):

 
| ** **      | ** ** | **March 31,  2009** | ** ** | **December 31,  2008** | ** ** |
|-----------------|------------|--------------------------|------------|-----------------------------|------------|
| Raw materials   |       | $                        | 75,815     |                        | $          | 74,140 |   |
| Work-in-process |       | 21,173                   |       | 21,382                      |       |
| Finished goods  |       | 22,725                   |       | 20,301                      |       |
|            |       | $                        | 119,713    |                        | $          | 115,823 |   |

 

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**5.****             ****Other Current Assets**

 

Othercurrent assets consist of the following (in thousands):

 
| ** **           | ** ** | **March 31,****2009** | ** ** | **December 31,****2008** | ** ** |
|----------------------|------------|----------------------------|------------|-------------------------------|------------|
| Prepaid inventory    |       | $                          | 33,762     |                          | $          | 13,230 |   |
| Prepaid expenses     |       | 22,761                     |       | 23,623                        |       |
| Other current assets |       | 4,334                      |       | 4,185                         |       |
|                 |       | $                          | 60,857     |                          | $          | 41,038 |   |

 

**6.****             ****Debt Issuance Costs**

 

Debtissuance costs relate to the $200 million principal amount of2.5% convertible senior notes, due April 15, 2011, issued in April 2004,referred to as the 2004 Notes, the $575 million principal amount of 3.0%convertible senior notes, due June 15, 2014, issued in June 2007,referred to as the 2007 Notes, and a $125 million term loan entered into in December 2007,referred to as the Term Loan. Amortization of debt issuance costs are recorded as interest expense inthe consolidated statement of operations on a straight-line basis, whichapproximates the interest method over the contractual term of the related debt.The Company incurred total debt issuance costs of $19.1 million in connectionwith the 2004 Notes, the 2007 Notes and the Term Loan. Amortization expense of$0.8 million was recorded in each of the three months ended March 31, 2009and 2008, respectively.

 

**7.****             ****Other Current Liabilities**

 

Othercurrent liabilities consist of the following (in thousands):

 
| ** **                | ** ** | **March 31,****2009** | ** ** | **December 31,****2008** | ** ** |
|---------------------------|------------|----------------------------|------------|-------------------------------|------------|
| Accrued rebates           |       | $                          | 35,705     |                          | $          | 28,575 |   |
| Accrued expenses          |       | 40,498                     |       | 43,482                        |       |
| Other current liabilities |       | 16,054                     |       | 18,068                        |       |
|                      |       | $                          | 92,257     |                          | $          | 90,125 |   |

 

**8.****             ****Collaborative Agreements**

 

The Company hasentered into various collaborative agreements which provide it with rights todevelop, produce and market products using certain know-how, technology andpatent rights maintained by its collaborative partners. Terms of the variouscollaboration agreements may require the Company 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.

 

Effective thisquarter, the Company implemented EITF No. 07-01, “*Accounting for Collaborative Arrangements,”*orEITF 07-01, which prescribes that certain transactions betweencollaborators be recorded in the income statement on either a gross or netbasis, depending on the characteristics of the collaboration relationship, andprovides for enhanced disclosure of collaborative relationships. In accordancewith EITF 07-01, the Company evaluated its collaborative agreements forproper income statement classification based on the nature of the underlyingactivity. If payments to and from the Company’s collaborative partners are notwithin the scope of other authoritative accounting literature, the incomestatement classification for the payments is based on a reasonable, rationalanalogy to authoritative accounting literature that is applied in a consistentmanner. Amounts due from the Company’s collaborative partners related todevelopment activities are generally reflected as collaborative revenues andamounts due to the Company’s collaborative partners related to sharing ofcommercialization expenses are generally reflected as selling, general andadministrative expenses.  Milestonepayments and up-front payments received are generally reflected ascollaborative revenue as discussed above in Note 1, and milestone payments andup-front payments made are generally recorded as research and developmentexpenses if the payments relate to drug candidates that have not yet receivedregulatory approval.  Milestone paymentsand up-front payments made related to approved drugs (of which there have beennone to date) will generally be capitalized and amortized to cost of goods soldover the economic life of the product. Royalties received (of which there have been none to date) willgenerally be reflected as collaborative revenues and royalties paid aregenerally reflected as cost of goods sold. The adoption of EITF 07-01 did not affect the Company’s financialposition or results of operations.

 

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For collaborationswith commercialized products, if we are the principal, as defined in EITF No. 99-19,“*Reporting Revenue as a Principal versus Netas an Agent”,*or EITF 99-19, we record revenue and thecorresponding operating costs in their respective line items within ourstatement of income.  If the Company isnot the principal, it records operating costs as a reduction of revenue.EITF 99-19 describes the principal as the party who is responsible fordelivering the product or service to the customer, has latitude withestablishing price and has the risks and rewards of providing product orservice to the customer, including inventory and credit risk.

 

***Collaboration with Eli Lilly andCompany***

 

In September 2002, the Company and Lilly entered into acollaboration agreement for the global development and commercialization ofexenatide. The agreement was amended in 2006 and in 2009.

 

This agreement includes BYETTA and any sustained release formulationsof exenatide such as exenatide once weekly, the Company’s once weeklyformulation of exenatide for the treatment of type 2 diabetes. Under theterms of the agreement, operating profits from products sold in the UnitedStates are shared equally between Lilly and us. In 2005, the Company receivedUnited States Food and Drug Administration, or FDA, approval for thetwice-daily formulation of exenatide, which is marketed in the United Statesunder the trade name BYETTA. The agreement provides for tiered royaltiespayable to us by Lilly based upon the annual gross margin for all exenatideproduct sales, including any long-acting release formulations, outside of theUnited States. Royalty payments for exenatide product sales outside of theUnited States will commence after a one-time cumulative gross margin thresholdamount has been met. Lilly is responsible for 100% of the costs related todevelopment of exenatide once weekly and twice-daily BYETTA for sale outside ofthe United States.  Lilly is responsiblefor 100% of the costs related to commercialization of all exenatide productsfor sale outside of the United States.

 

At signing, Lilly made initial non-refundable payments to the Companytotaling $80 million, of which $50 million was amortized to revenuesunder collaborative agreements prior to 2004. The remaining $30 million isbeing amortized to revenues ratably over a seven-year period ending in September 2009,which represents the Company’s estimate of the period of its performance ofsignificant development 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 exenatide once weekly, ofwhich $75 million have been paid through March 31, 2009, $30 millionof which was converted into 0.8 million shares of the Company’s common stock inFebruary 2008. No additional development milestones may be earned underthe 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 paid andrecorded as revenue through March 31, 2009.

 

The Companyrecorded $12.9 million and $17.1 million of cost sharing payments due fromLilly for the three months ended March 31, 2009 and 2008,respectively,  related to the sharing ofBYETTA and exenatide once weekly development expenses, which are included inrevenues under collaborative agreements in the accompanying consolidatedstatements of operations.  In addition,the Company recorded $4.8 million and $3.9 million of selling, general andadministrative expenses for the three months ended March 31, 2009 and2008, respectively, for amounts due to Lilly for sharing of sales force andexternal marketing expenses.

 

In October 2008, the Company and Lilly entered into an ExenatideOnce Weekly Supply Agreement pursuant to which the Company will supply commercialquantities of exenatide once weekly for sale in the United States, if approvedby the FDA. In addition, if Lilly receives approval to market the product injurisdictions outside the United States, the Company will be required tomanufacture the product intended for commercial sale by Lilly in thosejurisdictions

 

Under the terms of the supply agreement, Lilly made a cash payment of$125 million to the Company, which represents an amount to compensate theCompany for the cost of carrying Lilly’s share of the capital investment madein the Company’s manufacturing facility in Ohio. Under the terms of the supplyagreement, the Company has agreed not to charge Lilly for Lilly’s share of theinterest costs capitalized to the facility. Accordingly the Company hasdetermined that a portion of the $125 million payment represents areimbursement to the Company of Lilly’s share of interest costs capitalized tothe facility that will be credited to Lilly for its share of the capitalizedinterest included in the cost of goods sold for exenatide once weekly asincurred. The Company has concluded that any excess amount represents deferredcollaborative revenue that will be amortized ratably over the economic usefullife of the exenatide once weekly product following its commercial launch. Theultimate allocation of the $125 million payment, which is classified as along-term deferred credit in the accompanying Consolidated Balance Sheets at March 31,2009, will be dependent upon the total amount of interest costs capitalized tothe facility when it is placed in service. Under certain circumstances,including upon an impairment of the exenatide once weekly manufacturingfacility, Lilly may receive a credit for the unearned portion of the$125 million payment which will be applied against Lilly’s share of theimpairment charge.

 

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In addition to the $125 million cash payment, the Company willrecover Lilly’s share of the over $500 million capital investment in thefacility through an allocation of depreciation to cost of goods sold inaccordance with the collaboration agreement. The total amount of the capitalinvestment that will ultimately be recovered from Lilly will be dependent uponthe proportion of product supplied for sale in the United States, the cost ofwhich is shared equally by the parties, and the proportion of product suppliedfor sale outside of the United States, the cost of which is paid for 100% byLilly.

 

In October 2008, the Company and Lilly also entered into a loanagreement pursuant to which Lilly will make available to Amylin a$165 million unsecured line of credit that Amylin can draw upon from timeto time beginning on December 1, 2009 and ending on June 30, 2011.Any interest 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 fully advancedor June 30, 2014.

 

**9.****             ****Restructuring**

 

In November 2008 the Company announced acorporate restructuring, (referred to as “the Restructuring”) that reduced itsSan Diego work force by approximately 25 percent or 330 employees. Inconnection with the Restructuring, the Company recorded restructuring chargesof $54.9 million, consisting primarily of facility related charges,employee separation costs and asset impairments which were recorded in thequarter ended December 31, 2008.

 

The following table sets forth activity in therestructuring liability (in thousands):

 
| ** **                        | ** ** | **Employee  separation  costs** | ** ** | **Facilities  related  charges** | ** ** | **Other  restructuring  Charges** | ** ** | **Total** | ** ** |
|-----------------------------------|------------|---------------------------------|------------|----------------------------------|------------|-----------------------------------|------------|-----------|------------|
| Balance at December 31, 2008 |       | $                               | 8,291      |                             | $          | 38,447                            |       | $         | —     |   | $ | 46,738 |   |
| Accruals                          |       | —                          |       | —                           |       | —                            |       | —    |       |
| Payments                          |       | (8,192                          | )          | (4,229                           | )          | —                            |       | (12,421   | )          |
| Balance at March 31, 2009    |       | $                               | 99         |                             | $          | 34,218                            |       | $         | —     |   | $ | 34,317 |   |

 

The $12.4 million reduction in the restructuringliability during the three months ended March 31, 2009 consists of $8.2million of employee separation costs, reflecting severance and other separationbenefit payments and $4.2 million of facilities related charges reflectingongoing rental payments for abandoned facility leases. The Company recordsrestructuring activities in accordance with FASB Statement No. 44, *“Accounting for the Impairment and Disposal of Long-Lived Assets”*and FASB Statement No. 146 *“Accounting for CostsAssociated with Exit or Disposal Activities.”*

 

**10.****      ****Comprehensive Loss**

 

SFAS No. 130, “*Reporting Comprehensive Income,”* requires reporting anddisplaying comprehensive income (loss) and its components, which, for theCompany, includes net loss and unrealized gains and losses on investments. Inaccordance with SFAS No. 130, the accumulated balance of othercomprehensive income (loss) is disclosed as a separate component ofstockholders’ equity. For the three months ended March 31, 2009 and 2008,comprehensive loss consisted of (in thousands):

 
| ** **                            | ** ** | **Three months ended March 31,** | ** ** |
|---------------------------------------|------------|------------------------------------------------------|------------|
| ** **                            | ** ** | **2009**                                             | ** ** | **2008** | ** ** |
| Net loss                              |       | $                                                    | (46,954    | ) | $ | (71,099 | ) |
| Other comprehensive loss:             |       |                                                 |       |   |   |
| Unrealized gain (loss) on investments |       | 1,138                                                |       | (3,145 | ) |
| Comprehensive loss                    |       | $                                                    | (45,816    | ) | $ | (74,244 | ) |

 

**11.****      ****Convertible Senior Notes**

 

In June 2007, the Company issued the 2007Notes in a private placement, which have an aggregate principal amount of$575 million, and are due June 15, 2014. The 2007 Notes are seniorunsecured obligations and rank equally with all other existing and futuresenior unsecured debt. The 2007 Notes bear interest at 3.0% per year, payablein cash semi-annually, and are initially convertible into a total of up to9.4 million shares of common stock at a conversion price of $61.07 pershare,

 

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subjectto the customary adjustment for stock dividends and other dilutivetransactions. The Company may not redeem the 2007 Notes prior to maturity. Inaddition, if a “fundamental change” (as defined in the associated indentureagreement) occurs prior to the maturity date, the Company will in some casesincrease the conversion rate for a holder of notes that elects to convert itsnotes in connection with such fundamental change. The maximum conversion rateis 22.9252 ($43.62 per share), which would result in a maximum issuance13.2 million shares of common stock if all holders converted at themaximum conversion rate.  The principalamount of the 2007 Notes exceeds the current if-converted value.

 

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

 

Subject to certain exceptions, if the Companyundergoes a “designated event” (as defined in the associated indentureagreement) including a “fundamental change,” such as if a majority of theCompany’s Board of Directors ceases to be composed of the existing directors orother individuals approved by a majority of the existing directors, holders ofthe 2007 Notes will, for the duration of the notes, have the option to requirethe Company to repurchase all or any portion of their 2007 Notes. Thedesignated event repurchase price will be 100% of the principal amount of the2007 Notes to be purchased plus any accrued interest up to but excluding therelevant repurchase date. The Company will pay cash for all 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. Subject to certainlimitations, the Company will be required to pay the holders of the 2007 Notesspecial interest on the 2007 Notes if the Company fails to keep suchregistration statement effective during specified time periods. The 2007 Notespay interest in cash, semi-annually in arrears on June 15 and December 15of each year, which began on December 15, 2007.

 

The fair value of the 2007 Notes, determined byobserved market prices, was $347.0 and $260.4 million at March 31,2009 and December 31, 2008, respectively.

 

As discussed in Note 2, the 2007 Notes arewithin the scope of FSP No. APB 14-1which the Company adopted effective January 1,2009.

 

The following table summarizes the principal amountof the liability component, the unamortized discount and the net carryingamount of the 2007 Notes (in thousands):

 
| ** **                | ** ** | **March 31,  2009** | ** ** | **December 31,  2008** | ** ** |
|---------------------------|------------|--------------------------|------------|-----------------------------|------------|
| Principal amount          |       | $                        | 575,000    |                        | $          | 575,000 |   |
| Unamortized debt discount |       | (148,489                 | )          | (153,979                    | )          |
| Net carrying amount       |       | $                        | 426,511    |                        | $          | 421,021 |   |

 

The carrying amount of the equity component of the2007 Notes was $180.3 million at March 31, 2009 and December 31, 2008.  At March 31, 2009, the unamortizedbalance of the debt discount will be amortized over the remaining life of the2007 Notes, approximately five years.  The effective interest rate on the netcarrying value of the 2007 Notes was 9.3% in the three months ended March 31,2009 and 2008.

 

In April 2004, the Company issued the 2004Notes, which have an aggregate principal amount of $200 million, and are due April 15,2011, in a private placement. The 2004 Notes are senior unsecured obligationsand rank equally with all other existing and future senior unsecured debt. The2004 Notes bear interest at 2.5% per year, payable in cash semi-annually andare convertible into a total of up to 5.8 million shares of common stock at aconversion price of $34.35 per share, subject to customary adjustments forstock dividends and other dilutive transactions. The Company may not redeem the2004 Notes prior to maturity.  Asdiscussed in Note 2, the 2004 Notes are not within the scope of FSP No. APB14-1 as they can only be settled in shares of the Company’s common stock uponconversion.

 

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

 

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

 

Thefair value of the 2004 Notes, determined by observed market prices, was $173.0and $150.0 million at March 31, 2009 and December 31, 2008, respectively.

 

The Company capitalized $3.7 million, and$2.3 million of coupon interest expense and $4.0 million and $2.5 millionof non-cash interest in debt discount in the three months ended March 31,2009  and 2008, respectively, associatedwith construction in progress.

 

**12.****      ****Long-Term****Note Payable**

 

In December 2007, the Company****entered into a$140 million credit agreement with Bank of America, N.A., as administrativeagent, collateral agent and letter of credit issuer, Silicon Valley Bank andRBS Asset Finance, Inc., as syndication agents, and Comerica Bank and BMOCapital Markets Financing, Inc., as documentation agents.  The creditagreement provides for a $125 million Term Loan and a $15 million revolvingcredit facility.  The proceeds of both loans will be used for generalcorporate purposes.  The revolving creditfacility also provides for the issuance of letters of credit and foreignexchange hedging up to the $15 million borrowing limit.  The Company had an outstanding balance of$117.2 million and $125.0 million under the Term Loan at March 31, 2009 andDecember 31, 2008, respectively and had issued $7.1 million and $5.6 million ofstand-by letters of credit under the revolving credit facility primarily inconnection with office leases, at March 31, 2009 and December 31,2008, respectively.

 

The Company’s 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 the Company’s and 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 onthe Company’s election of either one, two, three or six months LIBOR term, andpayable at the end of the selected interest period but no less frequently thanquarterly as of the first business day of the quarter prior to the period inwhich the quarterly installment is due. The Company has elected to use the three month LIBOR rate, which was1.16% and 1.44% at March 31, 2009 and December 31, 2008,respectively.  Interest periods on therevolving credit facility may be either one, two, three or six months, andpayable at the end of the selected interest period but no less frequently thanquarterly, and the interest rate will be either LIBOR plus 1.0% or the Bank ofAmerica prime rate, as selected by the Company. Both loans have a final maturity date of December 21, 2010.

 

The 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 the Company’s outstanding obligations if not cured within applicablegrace periods. In addition, the credit agreement provides for automaticacceleration upon the occurrence of bankruptcy, other insolvency events and achange in control, as defined in the credit agreement as amended (see Note 16).There is an annual commitment fee associated with the revolving credit facilityof 0.25%.

 

Maturities of long-term notes payable for periods endingafter March 31, 2009 are as follows (in thousands):

 
| Nine months ending December 31, 2009 |   | $      | 23,438  |   |
|-------------------------------------------|--------|--------|---------|--------|
| Year ending December 31, 2010        |   | 93,750 |    |
| Total minimum long-term debt payments     |   | $      | 117,188 |   |

 

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In connection with theexecution of the Term Loan, the Company entered into an interest rate swap withan initial notional amount of $125 million on December 21, 2007 thathas resulted in a net fixed rate of 5.717% and matures on December 21,2010.  The Company determined that theinterest rate swap agreement is defined as Level 2 in the fair valuehierarchy.  The fair value of theinterest rate swap agreement was a liability of $4.4 million and $5.0 millionat March 31, 2009 and December 31, 2008, respectively.  The Company recognized a gain on the interestrate swap, which is included in interest and other expense, of $0.6 million forthe three months ended March 31, 2009, and the Company recognized a losson the interest rate swap, which is included in interest and other expense, of$3.7 million for the three months ended March 31, 2008.

 

**13.****      ****Stockholders’ Equity**

 

InMarch 2009, the Company contributed approximately 2.2 million newly issuedshares of its common stock, valued at $9.02 per share, to the Company’s ESOPfor amounts earned by participants during the year ended December 31,2008.

 

InMarch 2009, the Company contributed approximately 0.4 million newly issuedshares of its common stock, valued at $11.80 per share, to the Company’s 401(k) planfor amounts earned by participants during the year ended December 31,2008.

 

**14.****      ****Commitments and Contingencies**

 

# **Other Commitments**

#  

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

 

As of March 31,2009, if all such milestones are successfully achieved, the potential futuremilestone and other contingency payments due under certain contractualagreements are approximately $285.7 million in aggregate, of which $1.8 millionwould be due within the next 12 months.

 

The Company hascommitted to make future minimum payments to third parties for certaininventories in the normal course of business. The minimum purchase commitmentstotal approximately $292.8 million as of March 31, 2009. The majorityof these inventory commitments relate to exenatide once weekly and BYETTA,including minimum inventory purchases for exenatide once weekly of$266.8 million that are contingent upon FDA approval of exenatide onceweekly.

 

**15.****      ****Litigation**

 

Fromtime-to-time the Company becomes involved in various lawsuits, claims andproceedings relating to the conduct of its business, including those pertainingto product liability, patent infringement and employment claims. For example,the Company is currently involved in nine product liability cases*.*  On March 4, 2009, the Supreme Court heldin *Wyeth v. Levine* that federallaw does not preempt state product liability claims involvingpharmaceuticals.  This could result in anincrease in the number of state product liability claims filed against pharmaceuticalcompanies, including the Company.  The Company has also been notified ofadditional claimants who may file product liability complaints. While theCompany cannot predict the outcome of any lawsuit, claim or proceeding, theCompany believes the disposition of the current lawsuits is not likely to havea material effect on its financial condition or liquidity.

 

OnMarch 24, 2009, a putative class action titled San Antonio Fire &Police Fund v. Bradbury et al. (Case No. 4446-VCL) was filed by a stockholderof ours in the Court of Chancery of the State of Delaware.  The original complaint asserted claims forbreach of fiduciary duty against us and our current directors arising out ofcertain provisions contained in the Company’s outstanding debt instrumentsrelating to a change in a majority of the directors of the Board.  The plaintiff subsequently amended thecomplaint adding the indenture trustee under the 2007 Notes and theadministrative agent under the Credit Agreement as defendants.  The complaint seeks to invalidate those debtinstrument provisions or permit the Company’s Board to “approve” shareholdernominees, thus nullifying any potential default which might force the Companyto repay the outstanding balance.  On April 13,2009, a settlement was reached with the plaintiff to withdraw all allegationsthat the Company’s Board has not acted in good faith or has acted to entrenchitself or interfere with stockholder voting rights.  The plaintiff also withdrew all claims thatthe Board is breaching its ongoing duties to its stockholders.

 

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**16.****      ****Subsequent Events**

 

On April 16, 2009, TheCompany and Lilly announced the restructuring of its exenatide operations inorder to improve alliance effectiveness, increase financial and operationalefficiencies and maximize the value of BYETTA and exenatide once weekly.  Additionally,the Company and Lilly amended their Collaboration Agreement to require oneyear’s notice for termination of the agreement without cause. Previously, theagreement required only a six-month notice. In addition, the Company and Lillyalso agreed that internal marketing costs, which were previously not shared,are now shared within the alliance.

 

On April 29, 2009 the Company and Lilly announcedthat the companies have agreed in principle to the terms of a joint supplyagreement for an exenatide once weekly pen device.  The Company and Lilly have agreed inprinciple to cooperate in the development, manufacturing and marketing ofexenatide once weekly in a dual chamber cartridge pen configuration.  The companies will share the capital anddevelopment costs of the pen, including the initial capital investment ofapproximately $216 million over the next few years. The Company and Lilly haveagreed that the cost of the initial capital investment will be allocated 60percent to Lilly and 40 percent to the Company. The Company’s also announced efforts to examine a new exenatideformulation.

 

On May 4, 2009, the Company and Lilly enteredinto a cost allocation agreement, or the Cost Allocation Agreement, whichamends the exenatide development and commercialization cost-sharing provisionscontained in the companies’ Collaboration Agreement, dated September 19,2002, as amended, and Exenatide Once Weekly Supply Agreement, dated October 16,2008, or the Agreements.

 

Under the terms of the Cost Allocation Agreement, thefollowing changes will be applied with respect to the cost-sharing provisionsof the Agreements retroactively as of January 1, 2009:

 

·                 Lilly will be responsible for 53% of shared exenatideglobal development and commercialization expenses that generate utility both inthe United States and outside the United States, including global manufacturingdevelopment expenses.  The Company will beresponsible for 47% of these expenses;

 

·                 Lilly will assume 100% of all exenatide developmentand commercialization expenses that generate utility predominantly outside theUnited States.  Under the previouscost-sharing arrangement, the Company was responsible for 20% of some of theseexpenses; and

 

·                 The royalty structure for exenatide revenues generatedoutside the United States has been modified to reflect Lilly’s revised expenseburden, with a reduction in Lilly’s royalty payments to the Company.

 

The companies will continue to equally share allexenatide development and commercialization expenses that generate utilitypredominately in the United States.

 

On May 4, 2009, theCompany announced that it is restructuring its sales force to merge its existingprimary care and specialty sales forces into a single organization.  This restructuring will reduce the totalnumber of Amylin sales representatives by 200 employees.  The Company expects to incur charges underthe corporate restructuring during the second quarter, including an estimatedrestructuring charge of $13 to $15 million, of which approximately $11 to $13million will result in future cash expenditures, consisting primarily ofone-time severance and other employee-related costs.

 

On May 5, 2009, theCompany submitted its New Drug Application for exenatide once weekly to theUnited States Food and Drug Administration.

 

On May 6, 2009, the Company and certain of itssubsidiaries entered into an amendment, or the Amendment, to its CreditAgreement, dated December 21, 2007, among Bank of America, N.A., asadministrative agent, collateral agent and letter of credit issuer, SiliconValley Bank and RBS Asset Finance, Inc., as syndication agents, andComerica Bank and BMO Capital Markets Financing, Inc., as documentationagents.  As negotiated by the Company,the Amendment provides that lenders under the Credit Agreement agreed toconsent to a Specified Change of Control, defined in the Amendment as theelection of six or more shareholder nominees to the Company’s Board ofDirectors at the Company’s 2009 Annual Meeting of Stockholders, and that suchSpecified Change of Control will not result in an event of default under theCredit Agreement, in each case upon the satisfaction or waiver of certainconditions as set forth in the Amendment. The Amendment also provides for a waiver of any potential defaultarising from existing litigation contesting the validity or enforceability ofany provision of the Credit Agreement.

 

Under the terms of the Amendment, the Company will notpay any upfront fee for the consent or waiver granted by the lenders who are aparty to the Amendment.  In the eventthat a Specified Change of Control occurs, if the Company has not paid off theloan commitments under the Credit Agreement within ten days of such event, theCompany will pay 0.50% of the then outstanding loan commitments under theCredit Agreement in consideration of the consent and will pay 0.25% to Bank ofAmerica Leasing and Capital, LLC for managing the request to obtain thenecessary lender consent to the Amendment.

 

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**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 may differmaterially from those discussed here. Factors that could cause or contribute todifferences in our actual results include those discussed under the caption “CautionaryFactors That May Affect Future Results,” as well as those discussedelsewhere in this quarterly report on Form 10-Q or in our other publicdisclosures. You should consider carefully those cautionary factors, togetherwith all of the other information included in this quarterly report on Form 10-Q.Each of the cautionary factors, either alone or taken together, could adverselyaffect our business, operating results and financial condition, as well asadversely affect the value of an investment in our common stock. There may beadditional risks that we are not presently aware of or that we currentlybelieve are immaterial which could also impair our business and financialposition. We disclaim any obligation to update these forward-lookingstatements.

 

**Overview**

 

We are a biopharmaceutical company committed to improving the lives ofpeople with diabetes, obesity and other diseases through the discovery,development and commercialization of innovative medicines. We have developedand gained approval for two first-in-class medicines to treat diabetes, BYETTA® (exenatide) injection and SYMLIN® (pramlintide acetate) injection, both of whichwere commercially launched in the United States during the second quarter of2005. BYETTA was approved in the European Union, or EU, in 2006 and ourcollaboration partner, Eli Lilly and Company, or Lilly, has commerciallylaunched BYETTA in 51countries as of March 31, 2009. Our near-termbusiness strategy is to create value for patients and our stockholders bycapitalizing on market drivers, such as the recent inclusion by the AmericanDiabetes Association, or ADA, of BYETTA as the only new addition to theirtreatment guidelines. Our focus remains on increasing BYETTA and SYMLINrevenue, preparing for the successful launch of exenatide once weekly, ifapproved, significantly improving operating results and progressing towardpositive operating cash flow by the end of 2010. Our long-term strategy isfocused on making prudent investment decisions based on strong clinical data toadvance our obesity program. We intend to finalize our obesity funding anddevelopment strategy by the end of 2009.

 

BYETTA is the first and only approved medicine in anew class of compounds called glucagon-like peptide-1, or GLP-1, receptoragonists. We began selling BYETTA in the United States in June 2005.BYETTA is approved in the United States for the treatment of patients withtype 2 diabetes who have not achieved adequate glycemic control and areusing metformin, a sulfonylurea and/or a thiazolidinediene, or TZD, threecommon oral therapies for type 2 diabetes. In October 2008, the ADAand the European Association for the Study of Diabetes, or EASD, updated theirtype 2 diabetes treatment guidelines, placing the GLP-1 receptor agonistclass, of which BYETTA is the only approved product, as a secondary treatmentoption for type 2 diabetes patients. In August 2008, the Food andDrug Administration, or FDA, updated a prior alert for BYETTA referencingpancreatitis. Prescriptions declined in the second half of 2008. During thattime period we committed our field resources to educating the medical communityon the facts about BYETTA, pancreatitis and the product’s safety profile. Webelieve the decline in BYETTA prescriptions and demand for the productsstabilized during the quarter ended March 31, 2009. Net product sales of BYETTA were $157.7 million and $158.5 million forthe three months ended March 31, 2009 and 2008, respectively.

 

We have an agreement with Lilly for the global development andcommercialization of exenatide. This agreement includes BYETTA and anysustained-release formulations of exenatide such as exenatide once weekly, ouronce weekly formulation of exenatide for the treatment of type 2 diabetes.Under the terms of the agreement, operating profits from products sold in theUnited States are shared equally between Lilly and us. The agreement providesfor tiered royalties payable to us by Lilly based upon the annual gross marginfor all exenatide product sales, including any long-acting releaseformulations, outside of the United States. Royalty payments for exenatideproduct sales outside of the United States will commence after a one-timecumulative gross margin threshold amount has been met. We expect royaltypayments to commence in 2010. Lilly is responsible for 100% of the costsrelated to development of exenatide once weekly and twice-daily BYETTA for saleoutside of the United States. Lilly is responsible for commercialization andall of the costs related to commercialization of all exenatide products forsale outside of the United States.

 

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On April 16, 2009, weand Lilly announced the restructuring of our exenatide operations in order toimprove alliance effectiveness, increase financial and operational efficienciesand maximize the value of BYETTA and exenatide once weekly as discussed in Note16 to the accompanying financial statements. On May 4, 2009 we and Lilly entered into a cost allocation agreement which amendsthe exenatide development and commercialization cost-sharing provisionscontained in the collaboration agreement as discussed in Note 16 to theaccompanying financial statements.

 

SYMLIN is the first and only approved medicine in anew class of compounds called amylinomimetics. We began selling SYMLIN in theUnited States in April 2005. Symlin is approved in the United States forthe treatment of patients with either type 1 or type 2 diabetes whoare treated with mealtime insulin but who have not achieved adequate glycemiccontrol. In early 2008, we commercially launched the SymlinPen® 120 and SymlinPen® 60 peninjector devices in the United States. These new pre-filled pen-injectordevices feature simple, fixed dosing to improve mealtime glucose control. Net product sales of SYMLIN were $21.6million and $20.2 million for the three months ended March 31, 2009 and2008, respectively.

 

We currently have a fieldforce of approximately 600 people dedicated to marketing BYETTA and SYMLIN inthe United States. Our field force includes our specialty and primary caresales forces, and a managed care and government affairs organization. Inaddition, Lilly co-promotes BYETTA in the United States.  On May 4, 2009, we announced that we arerestructuring our sales force to merge our existing primary care and specialtysales forces into a single organization. This restructuring will reduce our total number of sales representativesby 200 employees.  The Company expects toincur charges under the corporate restructuring during the second quarter,including an estimated restructuring charge of $13 to $15 million, of whichapproximately $11 to $13 million will result in future cash expenditures,consisting primarily of one-time severance and other employee-related costs.

 

In addition to our marketedproducts, we are working with Lilly and Alkermes to develop exenatide onceweekly. We are also working with Parsons on the construction of a manufacturingfacility for exenatide once weekly in Ohio. We substantially completed theconstruction of this facility in 2008. We are now manufacturing exenatide onceweekly at commercial scale in this facility and using this material in clinicaltrials.  In March 2009, we reportedthat analysis of data from the ongoing extension of our DURATION-1 study designedto provide the data required to demonstrate comparability of commercial anddevelopment drug lots to support the regulatory submission of exenatide once weekly havebeen successfully completed and are part of the NDA submitted to FDA.   In March 2009, we also announced that ameta-analysis of primary cardiovascular events across controlled clinicalstudies of three months or greater, from the BYETTA database, showed noincreased risk of cardiovascular events associated with exenatide use and thatthese findings will be used to support the cardiovascular safety of exenatideonce weekly.  On May 5, 2009, wesubmitted our NDA for exenatide once weekly to the FDA.

 

On April 29, 2009 we and Lilly announcedthat the companies have agreed in principle to the terms of a joint supplyagreement for an exenatide once weekly pen device and to evaluate a newexenatide formulation as discussed in Note 16 to the accompanying financialstatements.

 

In October 2008 we entered into a commercial supply agreement withLilly, pursuant to which we will supply exenatide once weekly for sale in theUnited States, if approved. In addition we will supply Lilly with commercialquantities of exenatide once weekly for sale by Lilly outside of the UnitedStates, if approved. Under the terms of this agreement, Lilly made a$125 million cash payment to us in October 2008 representing anamount to compensate us for our cost of carrying Lilly’s share of the capitalinvestment in our exenatide once weekly manufacturing facility in Ohio. Inaddition to the $125 million cash payment, we will recover Lilly’s shareof the over $500 million capital investment in the facility through anallocation of depreciation to cost of goods sold in accordance with ourcollaboration agreement with Lilly. The total amount that will ultimately berecovered from Lilly will be dependent upon the proportion of product suppliedfor sale in the United States, the cost of which is shared equally by theparties, and the proportion of the product supplied for sale outside the UnitedStates, the cost of which is paid for 100% by Lilly. We also entered into aloan agreement with Lilly under which we may borrow up to $165 millionbeginning on December 1, 2009 and ending on June 30, 2011, withmaturity no later than June 30, 2014.

 

During the remainder of2009, we will continue to focus on building a superior profile for exenatideonce weekly by conducting three more clinical trials that will compareexenatide once weekly against competing products. The objective of these studiesis to support the launch of exenatide once weekly and demonstrate superiorityand the transformational nature of our exenatide once weekly therapy.  In March 2009, we announced positive results fromDURATION-2, the second in a series of five studies designed to test thesuperiority of exenatide once weekly, an investigational diabetes therapy, ascompared to other diabetes therapies.  In this study exenatide once weekly demonstrated **superior glucosecontrol with weight loss and no increase in hypoglycemia compared to**maximum dosesof **sitagliptin or pioglitazone.**

 

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In November 2008, we announced a strategic restructuring andworkforce reduction that reduced the size of our San Diego workforce byapproximately 25%, or 330 employees. The goal of the restructuring was tobetter align our cost structure with anticipated revenues and is part of ourbusiness plan to achieve positive operating cash flow by the end of 2010.Additionally, on May 4, 2009, we announced the restructuring of our salesforce as discussed above.  We continue tobelieve we have the appropriate resources to market BYETTA and SYMLIN, bringexenatide once weekly to market as soon as possible, and continue to advanceour obesity programs.

 

Our long-term growth strategy is focused on making prudent investmentdecisions based on strong clinical data to advance our obesity program andincludes our IntegratedNeurohormonal Therapies for Obesity strategy. In November 2007,we announced that overweight or obese subjects in a 24-week proof-of-conceptstudy treated with a combination of pramlintide, an analog of human amylin andthe same active ingredient in SYMLIN, and metreleptin, an analog of humanleptin, lost an average of 25 pounds from baseline, resulting in reduced bodyweight on average of 12.7%. In 2009 we plan to continue the development of apotential obesity medicine that is a combination of pramlintide and metreleptinand the development of a second generation amylinomimetic, now known asdavalintide (formerly known as AC2307), which we have now moved intoPhase 2 clinical trials. By the end of 2009, we intend to finalize ourobesity funding and development strategy.

 

Although our efforts will remain primarily focused on our near-termopportunities including BYETTA, SYMLIN and exenatide once weekly and selectinvestments in our obesity programs, we also maintain an active discoveryresearch program focused on novel peptide and protein therapeutics and areactively seeking to in-license additional drug candidates. We have also made anumber of strategic investments and collaborations for the potentialdevelopment of additional drug candidates.

 

Since our inception in September 1987, we havedevoted substantially all of our resources to our research and developmentprograms and, more recently, to the commercialization of our products. All ofour revenues prior to May 2005 were derived from fees and expensereimbursements under our BYETTA collaboration agreement with Lilly, previousSYMLIN collaborative agreements and previous co-promotion agreements. Duringthe second quarter of 2005, we began to derive revenues from product sales ofBYETTA and SYMLIN.  At March 31, 2009, our accumulateddeficit was approximately $1.8 billion.

 

At March 31,2009, we had approximately $711.4 million in cash, cash equivalents andshort-term investments.  Additionally wehave future availability of $165 million beginning December 1, 2009pursuant to the loan agreement with Lilly. Although we may not generatepositive operating cash flows for the next few of years, we intend to improveour operating results and reduce our use of cash for operating activities fromcurrent levels to achieve our goal to be operating cash flow positive by theend of 2010. Additionally, we expect that our use of cash for capitalexpenditures will decrease significantly from 2008 levels following thesubstantial completion of our manufacturing facility in Ohio in 2008. Refer tothe discussions under the headings “*Liquidityand Capital Resources*” below and “*CautionaryFactors That May Affect Future Results*” in Part I,Item 1A for further discussion regarding our anticipated future capitalrequirements.

 

**Applicationof Critical Accounting Policies**

 

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

 

Therewere no significant changes in critical accounting policies from those at December 31,2008, other than the adoption of FSP No. ABP 14-1 which required the estimationof the non-convertible borrowing rate for our 2007 Notes.  The financial information as of March 31,2009, should be read in conjunction with the financial statements for the yearended December 31, 2008, contained in our annual report on Form 10-Kfiled on February 27, 2009.

 

For adiscussion of our critical accounting policies, see “Item 7. Management’sDiscussion and Analysis of Financial Condition and Results of Operations” inour annual report on Form 10-K filed on February 27, 2009.

 

**Results of Operations**

 

**Comparisonof Three Months Ended March 31, 2009 to Three Months Ended March 31,2008**

 

***Net Product Sales***

 

Netproduct sales for the three months ended March 31, 2009 and 2008 were$179.3 million and $178.7 million, respectively, and consisted of shipmentsof BYETTA and SYMLIN, less allowances for product returns, rebates, wholesalerchargebacks, wholesaler discounts and prescription vouchers.

 

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

 
| ** ** | ** ** | **Three months ended  March 31,** | ** ** |
|------------|------------|--------------------------------------------------|------------|
| ** ** | ** ** | **2009**                                         | ** ** | **2008** | ** ** |
| BYETTA     |       | $                                                | 157.7      |   | $ | 158.5 |   |
| SYMLIN     |       | 21.6                                             |       | 20.2 |   |
|       |       | $                                                | 179.3      |   | $ | 178.7 |   |

 

The decrease in net product sales for BYETTA in thecurrent period primarily reflects a $5.4 million allowance for rebates relatedto the U.S. Department of Defense’s (DOD) Tricare Retail Pharmacy program, ofwhich $4.4 million relates to a retroactive rebate assessment for sales during2008, partially offset by higher prices in the three months ended March 31,2009 as compared to the same period in 2008.

 

The increases in net product sales for SYMLIN in thecurrent period primarily reflects continued growth in patient demand and higherprices partially offset by a reserve of $0.4 million for the DOD’s TricareRetail Pharmacy program, of which $0.4 million relates to a retroactive rebateassessment for sales during 2008.

 

As discussed above, we recorded an allowance for rebatesrelated to the DOD’s Tricare Retail Pharmacy program pursuant to a final rule thatwas issued in March 2009, and is effective May 26, 2009.  The final rule implements the DOD’s revisedinterpretation of the National Defense Authorization Act of 2008, or NDAA,signed into law on January 28, 2008. The final rule changed the process by which rebate obligations forthe Tricare Retail Pharmacy program are created such that a contractualagreement is no longer required and that obligation to pay such rebatesemanates from the NDAA itself.  Inconsideration of this final rule we recorded an allowance of $5.8 millionfor such rebates in the three months ended March 31, 2009, of which $4.8million represents a retroactive rebate assessment for sales made during 2008that now appear probable of being assessed and paid.

 

Sales of our products in future periods may beimpacted by numerous factors, including potential competition, the potentialapproval of additional products including exenatide once weekly, regulatorymatters, including expected label changes for BYETTA, economic factors andother environmental factors.

 

***Revenues Under Collaborative Agreements***

 

Revenues under collaborative agreements for the threemonths ended March 31, 2009 were $14.3****million,compared to $18.5 million for the same period in 2008. Substantially all of therevenue recorded in these periods consists of amounts earned pursuant to ourBYETTA collaboration agreement with Lilly. The $4.2 million decrease inrevenues under collaborative agreements in the current quarter compared to thesame period in 2008 reflects lower cost-sharing payments from Lilly forexenatide once weekly and BYETTA due to lower development expenses forexenatide once weekly and BYETTA.

 

The following table summarizes the components ofrevenues under collaborative agreements for the three months ended March 31,2009 and 2008 (in millions):

 
| ** **                        | ** ** | **Three months ended  March 31,** | ** ** |
|-----------------------------------|------------|--------------------------------------------------|------------|
| ** **                        | ** ** | **2009**                                         | ** ** | **2008** | ** ** |
| Amortization of up-front payments |       | $                                                | 1.1        |   | $ | 1.1 |   |
| Cost-sharing payments             |       | 13.2                                             |       | 17.4 |   |
|                              |       | $                                                | 14.3       |   | $ | 18.5 |   |

 

In future periods, we expect that revenues undercollaborative agreements will consist of ongoing cost-sharing payments fromLilly for sharing of development costs, possible future milestone payments,continued amortization of the $30 million portion of the up-front paymentreceived from Lilly upon signing of our collaboration agreement in 2002 and,following the commercial launch of exenatide once weekly, the amortization of aportion of the $125 million cash payment received in connection with theexenatide once weekly supply agreement discussed above. The amount ofcost-sharing revenue recorded will be dependent on the timing, extent andrelative proportion of total development costs for the exenatide once weeklyand BYETTA development programs incurred by us and by Lilly. The receipt andrecognition as revenue of future milestone payments is subject to theachievement of performance requirements underlying such milestone payments.

 

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***Cost of Goods Sold***

 

Costof goods sold was $18.6 million, representing a gross margin of 90%, and $22.0million, representing a gross margin of 88%, for the three months ended March 31,2009 and 2008, respectively, and is comprised primarily of manufacturing costsassociated with BYETTA and SYMLIN sales during the period.  The improvement in grossmargin for the three months ended March 31, 2009, compared to the sameperiod in 2008, primarily reflects higher net sales prices forBYETTA and SYMLIN. Quarterlyfluctuations in gross margins may be influenced by product mix, pricing and thelevel of sales allowances.

 

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

 

Selling, general and administrative expenses decreasedto $87.6 million for the three months ended March 31, 2009 from $98.2million for the same period in 2008. The decrease primarily reflects lowerpromotional spending for BYETTA and SYMLIN and the Company’s reduced coststructure following its restructuring at the end of 2008.  We expect that selling, general andadministrative expenses for 2009 will decrease from 2008 levels due to our reducedcost structure following our strategic restructuring implemented during thequarter ended December 31, 2008, and both the implementation of therestructuring of our exenatide alliance operations and the restructuring of oursales force discussed above.

 

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 drug materialsand delivery devices; and associated overhead expenses and facilities costs. Wecharge direct internal and external program costs to the respective developmentprograms. We also incur indirect costs that are not allocated to specificprograms because such costs benefit multiple development programs and allow usto increase our pharmaceutical development capabilities. These consistprimarily of facilities costs and other internal shared resources related tothe development and maintenance of systems and processes applicable to all ofour programs.

 

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

 

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

 
| ** **                         | ** ** | **Three months ended March 31,** | ** ** |
|------------------------------------|------------|------------------------------------------------------|------------|
| ** **                         | ** ** | **2009**                                             | ** ** | **2008** | ** ** | **Increase/(Decrease)** | ** ** |
| Diabetes (1)                       |       | $                                                    | 31.0       |   | $ | 40.4 |   | $ | (9.4 | ) |
| Obesity                            |       | 8.2                                                  |       | 17.0 |   | (8.8 | ) |
| Research and early-stage  programs |       | 6.3                                                  |       | 7.5 |   | (1.2 | ) |
| Indirect costs                     |       | 14.5                                                 |       | 12.3 |   | 2.2 |   |
|                               |       | $                                                    | 60.0       |   | $ | 77.2 |   | $ | 17.2 |   |

 

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(1)  Researchand development expenses for our diabetes programs consist primarily of costsassociated with BYETTA and exenatide once weekly which are shared by Lillypursuant to our collaboration agreement. Cost-sharing payments received by Lilly are included in revenues undercollaborative agreements.  Expendituresfor our diabetes development programs are generally partially offset by anincrease in cost-sharing payments from Lilly. Cost-sharing payments from Lilly for BYETTA and exenatide once weeklydevelopment expenses were $12.9 million and $17.1 million for the three monthsended March 31, 2009 and 2008, respectively.

 

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The$17.2 million decrease in research and development expenses for the threemonths ended March 31, 2009 as compared to the same period in 2008primarily reflects decreased expenses of $9.4 million for our diabetes programsand decreased expenses of $8.8 million for our obesity developmentprograms.  The decrease in expenses forour diabetes programs primarily reflects lower expenses associated withmanufacturing scale up for exenatide once weekly following the substantialcompletion of our Ohio manufacturing facility in 2008.  The decrease in expenses in our obesityprograms reflects the fact that research and development expenses for ourobesity programs for the three months ended March 31, 2008 included an $8million license payment for drug delivery technology.   We expect research and development expenses for 2009will decrease from 2008 levels due to our reduced cost structurefollowing our strategic restructuring implemented during the quarter ended December 31,2008 and the implementation of the restructuring of our exenatide allianceoperations discussed above.

 

***Collaborative Profit Sharing***

 

Collaborativeprofit sharing was $73.0 million and $69.9 million for the three months ended March 31,2009 and 2008, respectively, and consists of Lilly’s 50% share of the grossmargin for BYETTA in the United States.

 

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

 

Interestand other income consist primarily of interest income from investment of cashand other investments. Interest and other income decreased to $3.0 million forthe three months ended March 31, 2009 from $11.0 million for the sameperiod in 2008.  The decrease primarilyreflects lower average balances available for investment and lower interestrates earned on our short-term investments in the three months ended March 31,2009 as compared to the same period in 2008.

 

Interest and other expenseconsist primarily of interest expense resulting from our long-term debt obligations.Interest expense in the three months ended March 31, 2009 consists ofinterest on our $775 million par value of outstanding convertible senior notesand our $125 million of outstanding long-term note payable, the amortization ofassociated debt issuance costs and recognized gains and losses associated withrecording economic hedge transactions at fair value. Interest and other expense was $4.4million and $12.0 million for the three months ended March 31, 2009 and2008, respectively.  The decrease ininterest and other expense for the three months ended March 31, 2009primarily reflects an increase in capitalized interest associated with our Ohiomanufacturing facility, and a reduction in recognized losses associated witheconomic hedge transactions partially offset by increased non-cash interestexpense from the amortization of the debt discount on our 2007 Notes discussedin Note 2 to the accompanying financial statements.

 

***Net Loss***

 

Our net loss for thethree months ended March 31, 2009 was $47.0 million compared to a net lossof $71.1 million for the same period in 2008. The decrease in net lossprimarily reflects the decreased selling, general and administrative expensesand decreased research and development expenses and increased net productsales, partially offset by the decreased revenue under collaborative agreementsand increased collaborative profit-sharing discussed above.  We may incur operatinglosses for the next few years. In November 2008 we announced ourrestructuring and our business plan to become operating cash flow positive bythe end of 2010.  In addition, on May 4,2009 we announced the restructuring of our sales force as discussed above.  However, our ability to reach profitabilityin the future will be heavily dependent upon the amount of product sales thatwe achieve for BYETTA, SYMLIN and exenatide once weekly, if approved.  Our ability to achieve profitability in thefuture will also depend our ability to continue to control our operatingexpenses, including ongoing expenses associated with the continuedcommercialization of BYETTA and SYMLIN, costs associated with the developmentand commercialization of exenatide once weekly, if approved, and expensesassociated with our research and development programs, including our obesityand our early-stage development programs and related support infrastructure.Our operating results may fluctuate from quarter to quarter as a result ofdifferences in the timing of expenses incurred and revenues recognized.

 

# **Liquidity and Capital Resources**

#  

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

 

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At March 31,2009, we had approximately $711.4 million in cash, cash equivalents andshort-term investments, compared to $816.8 million at December 31, 2008, and we havefuture availability of $165 million beginning December 1, 2009pursuant to the loan agreement with Lilly. In November 2008, following ourrestructuring, we announced our business plan to be operating cash flowpositive by the end of 2010. Additionally, we expect that our use of cash forcapital expenditures will decrease significantly in 2009 as compared to 2008following the substantial completion of our manufacturing facility in Ohio in2008.  Therefore our current businessplan does not contemplate a need to raise additional funds from outside sourceshowever we will continue to evaluate the performance of our business andstrategic opportunities which may require us to raise additional funds fromoutside sources in the future. 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.

 

Weused cash of $63.9 million and $14.0 million for our operating activities inthe three months ended March 31, 2009 and 2008, respectively.   Our cash used for operating activities inthe three months ended March 31, 2009 included uses of cash due toincreases in other current assets and inventories of $20.1 million and $3.9million, respectively, and decreases in restructuring liabilities and accruedcompensation of $12.4 million and $12.0 million, respectively.  The increase in other current assets reflectsprepayments for raw material inventory and the increase in inventories reflectsinventory purchases in accordance with contractual agreements.  The decrease in restructuring liabilities reflectspayment of employee separation costs associated with our restructuring at theend of 2008 and rental payments on vacated facilities that we are activelyseeking to sublease.  The decrease inaccrued compensation primarily reflects the payment of annual compensationaccruals in the three months ended March 31, 2009.   Working capital changes may fluctuate fromquarter to quarter due to timing of inventory and other current asset purchasesand the timing of payments of accounts payable, accrued compensation and othercurrent liabilities.

 

Ourinvesting activities provided cash of $10.3 million and used cash of $93.1million for the three months ended March 31, 2009 and 2008, respectively.Investing activities in both quarters consisted primarily of purchases andsales of short-term investments and purchases of property, plant and equipmentand increases in other long-term assets.  Purchases of property, plant and equipment decreased to $38.8 millionfor the three months ended March 31, 2009 from $86.4 million for the threemonths ended March 31, 2008.  Thedecrease in purchases of property, plant and equipment primarily reflectsreduced expenditures for our Ohio manufacturing facility following itssubstantial completion in the year ended December 31, 2008. Through March 31,2009, we had expended in excess of $581 million associated with theconstruction of this facility, which includes costs associated with theconstruction of the facility, purchase and installation of equipment andcapitalized labor and materials required to validate the facility.  Additionally, we expect that our use of cashfor capital expenditures will decrease significantly in 2009 as compared to2008 following the substantial completion of our manufacturing facility in Ohioin 2008, partially offset by capital investments associated with the dual chamber cartridge pen configuration for exenatideonce weekly discussed above.  The initialcapital investment for the pen is expected to be $216 million over the next fewyears, which will be funded 60% by Lilly and 40% by us.  We will continue to evaluate potentialadditional investments in our Ohio manufacturing facility during the productlifecycle for exenatide once weekly.

 

Financingactivities used cash of $4.0 million and provided cash of $6.6 million for thethree months ended March 31, 2009 and 2008, respectively.  Financing activities in thethree months ended March 31, 2009 include $7.8 million in principalpayments on our $125 million term loan, partially offset by proceeds from theexercise of stock options and proceeds from our employee stock purchase plan.Financing activities for the three months ended March 31, 2008 includeproceeds from the exercise of stock options and proceeds from our employeestock purchase plan.

 

At December 31, 2008, we had $200 million in aggregateprincipal amount 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 at approximately$61.07 per share and are not redeemable at our option.  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 the Company to repurchase all or any portionof their 2007 Notes.

 

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. The term loan is repayableon a quarterly basis, with no payments due quarters one through four, 6.25% ofthe outstanding principal due quarters five through eleven, and 56.25% of theoutstanding principal due in quarter twelve. At March 31, 2009 we had anoutstanding balance of 

 

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$117.2 millionunder the term loan and had issued $7.1 million of standby letters ofcredit under the revolving credit facility. Both loans have a final maturitydate of December 21, 2010. Interest on the term loan is payable quarterlyin arrears at a rate equal to 1.75% above the London Interbank Offered Rate, orLIBOR, of either one, two, three or six months LIBOR term at our election. Wehave entered into an interest rate swap agreement which resulted in a net fixedinterest rate of 5.717% under the term loan. The interest rate on the creditfacility is LIBOR plus 1.0% or the Bank of America prime rate, at ourelection.  The credit agreement providesfor automatic acceleration upon the occurrence of bankruptcy, other insolvencyevents and a change in control as defined in the credit agreement, as amended(see Note 16 to the accompanying financial statements).

 

In October 2008, we entered into a loan agreement with Lillypursuant to which Lilly will make available to us a $165 million unsecuredline of credit that we can draw upon from time to time beginning on December 1,2009 and ending on June 30, 2011. Any interest due under this creditfacility will bear interest at the five-day average three-month LIBOR rateimmediately prior to the date of the advance plus 5.25% and shall be due andpayable quarterly in arrears on the first business day of each quarter. Alloutstanding principal, together with all accrued and unpaid interest, shall bedue and payable 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, 2009 (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                                 |       | 107,375                                   |       | 22,250 |   | 42,000 |   | 34,500 |   | 8,625 |   |
| Long-term note payable                                                 |       | 117,188                                   |       | 31,250 |   | 85,938 |   | — |   | — |   |
| Interest on long-term note payable, net of  swap transactions (1) |       | 9,379                                     |       | 6,030 |   | 3,349 |   | — |   | — |   |
| Inventory purchase obligations(2)                                      |       | 313,478                                   |       | 57,427 |   | 121,821 |   | 134,230 |   | — |   |
| Construction contracts                                                 |       | 21,600                                    |       | 21,600 |   | — |   | — |   | — |   |
| Operating lease obligations                                            |       | 205,036                                   |       | 23,281 |   | 47,293 |   | 49,807 |   | 84,655 |   |
| Total(3)                                                               |       | $                                         | 1,549,056  |   | $ | 161,838 |   | $ | 500,401 |   | $ | 218,537 |   | $ | 668,280 |   |

 

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(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 $20.6 million ofoutstanding purchase orders, cancelable by us upon 30 days’ written notice,subject to reimbursement of costs incurred through the date of cancellation.

 

(3)          Excludes long-term obligationof $6.4 million related to deferred compensation, the payment of which issubject to elections made by participants that are subject to change.

 

In addition, under certain license and collaborationagreements we are required to pay royalties and/or milestone payments upon thesuccessful development and commercialization of related products.  We expect to make development milestonepayments up to $1.8 million associated with licensing agreements in the next 12months.  Additional milestones of up toapproximately $283.9 million could be paid over the next 10 to 15 years ifdevelopment and commercialization of all our early stage programs continue andare successful.  The significant majorityof these milestones relate to potential future regulatory approvals andsubsequent sales thresholds.  Given theinherent risk in pharmaceutical development, it is highly unlikely that we willultimately make all of these milestone payments; however, we would considerthese payments as positive because they would signify that the related productsare moving successfully through development and commercialization.

 

Our future capital requirements will depend on many factors, including:the amount of product sales we and Lilly achieve for BYETTA and exenatide onceweekly, if approved, and we achieve for SYMLIN; costs associated with thecontinued commercialization of BYETTA and SYMLIN; costs associated with theestablishment of our exenatide once weekly manufacturing facility; costs ofpotential licenses or acquisitions; the potential need to repay existingindebtedness; our ability to receive or need to make milestone payments; ourability, and the extent to which we establish collaborative arrangements forSYMLIN or any of our product candidates; progress in our research anddevelopment programs and the magnitude of these programs; costs involved inpreparing, filing, prosecuting, maintaining, enforcing or defending ourpatents; competing technological and market developments; and costs ofmanufacturing, including costs associated with establishing our ownmanufacturing capabilities or obtaining and validating additional manufacturersof our products; and scale-up costs for our drug candidates.

 

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**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.

 

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

 

We invest our excess cash primarily in United StatesGovernment securities, asset-backed securities, and debt instruments offinancial institutions and corporations with investment-grade credit ratings.These instruments have various short-term maturities. We do not utilizederivative financial instruments, derivative commodity instruments or othermarket risk sensitive instruments, positions or transactions in any materialfashion. Accordingly, we believe that, while the instruments held are subjectto changes in the financial standing of the issuer of such securities, we arenot subject to any material risks arising from changes in interest rates,foreign currency exchange rates, commodity prices, equity prices or othermarket changes that affect market risk sensitive investments. Our debt is notsubject to significant swings in valuation due to changes in interest rates asinterest rates on our debt are fixed.  The fair value ofour 2004 Notes and 2007 Notes at March 31, 2009 was approximately $173million and $347 million, respectively.  We have enteredinto an interest rate swap in connection with our $125 million termloan.  The fair value of the interest rateswap at March 31, 2009 was a liability of $4.4 million.  A hypothetical 1% adverse movein interest rates along the entire interest rate yield curve would notmaterially affect the fair value of our financial instruments that are exposedto changes in interest rates.

 

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

 

As of March 31,2009, 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, 2009.

 

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

 

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

 

**PART II. OTHER INFORMATION**

 

**Item 1.  Legal Proceedings**

 

Fromtime-to-time we become involved in various lawsuits, claims and proceedingsrelating to the conduct of our business, including those pertaining to productliability, patent infringement and employment claims. For example, we arecurrently involved in nine product liability cases*.*  On March 4, 2009, the Supreme Court heldin *Wyeth v. Levine* that federallaw does not preempt state product liability claims involvingpharmaceuticals.  This could result in anincrease in the number of state product liability claims filed againstpharmaceutical companies, including Amylin.  We have also been notified of additionalclaimants who may file product liability complaints. While we cannot predictthe outcome of any lawsuit, claim or proceeding, we believe the disposition ofthe current lawsuits is not likely to have a material effect on our financialcondition or liquidity.

 

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OnMarch 24, 2009, a putative class action titled San Antonio Fire &Police Fund v. Bradbury et al. (Case No. 4446-VCL) was filed by astockholder of ours in the Court of Chancery of the State of Delaware.  The original complaint asserted claims forbreach of fiduciary duty against us and our current directors arising out ofcertain provisions contained in our outstanding debt instruments relating to achange in a majority of the directors of the Board.  The plaintiff subsequently amended thecomplaint adding the indenture trustee under the 2007 Notes and theadministrative agent under the Credit Agreement as defendants.  The complaint seeks to invalidate those debtinstrument provisions or permit our Board to “approve” shareholder nominees,thus nullifying any potential default which might force us to repay theoutstanding balance.  On April 13,2009, a settlement was reached with the plaintiff to withdraw all allegationsthat our Board has not acted in good faith or has acted to entrench itself orinterfere with stockholder voting rights. The plaintiff also withdrew all claims that the Board is breaching itsongoing duties to our stockholders.

 

OnMay 6, 2009, we entered into an amendment of the Credit Agreement.  The amendment provides that lenders under theCredit Agreement agree to consent to the election of six or more stockholdernominees to our Board at our 2009 annual meeting of stockholders upon paymentof a fee and the satisfaction of certain conditions as set forth in theamendment.  A hearing of this case washeld on May 4, 2009.  As of May 5,2009, shareholders filing their own slate of director nominees are seeking toplace a combined total of five nominees on our Board.  The election of these five nominees out oftwelve Board seats at this year’s annual meeting will not trigger the relevantprovisions in our debt instruments.

 

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

 

**CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS**

 

The following sets forth cautionary factors that may affect our futureresults, including clarifications to the cautionary factors included in ourAnnual Report on Form 10-K for the fiscal year ended December 31,2008.

 

***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 $47.0 million for the three months ended March 31,2009, $321.9 million in 2008, $216.5 million in 2007 and$218.9 million in 2006. As of March 31, 2009, we had an accumulateddeficit of approximately $1.8 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 in the marketplace.***

 

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. The ability ofBYETTA and SYMLIN to generate revenue at the levels we expect will depend onmany factors, including the following:

 

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

 

·                  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;

 

·                  successfully expanding andsustaining manufacturing capacity to meet demand;

 

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·                  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. Any safety issues could cause us to suspend or ceasemarketing of our approved products, cause us to modify how we market ourapproved products, subject us to substantial liabilities, and adversely affectour 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 tocontinue our business.

 

The manufacturers of our products and drug candidates also are subjectto numerous federal, state, local and foreign laws relating to such matters assafe working conditions, manufacturing practices, environmental protection,fire hazard control and hazardous substance disposal. In the future, 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. In order to successfullycommercialize our products, including BYETTA and SYMLIN, and continue todevelop our drug candidates, including exenatide once weekly, we rely onvarious third parties to provide the necessary manufacturing.

 

There are a limited number of manufacturers that operate under the FDA’scGMP regulations capable of manufacturing for us. In addition, there are 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.

 

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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 have received FDA approval of a disposable pen for the delivery of SYMLIN incartridges. We rely on Wockhardt for the dosage form of SYMLIN in cartridgesand Ypsomed AG to manufacture the components for the SYMLIN disposable pen. Wealso rely on Hollister-Stier Laboratories LLC for the assembly of theSYMLIN 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 four 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 believethat business 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 exenatide once weekly on a commercial scale, ifit is approved by the FDA, we must complete construction of and commission anew facility and validate the manufacturing process. We are dependent onAlkermes and Parsons to assist us in the construction and commissioning of themanufacturing facility. We have never established, validated, and operated amanufacturing facility and cannot assure you that we will be able tosuccessfully establish or operate such a facility in a timely or economicalmanner, or at all. In addition, we are dependent on Alkermes to successfullydevelop and transfer to us its technology for manufacturing exenatide onceweekly and to supply us with commercial quantities of the polymer required tomanufacture exenatide once weekly. We also will need to obtain sufficientsupplies of diluents, solvents, devices, packaging and other componentsnecessary for commercial manufacture of exenatide once weekly.   If exenatide once weekly is approved, wewill be dependent upon Bachem, Mallinckrodt and Lonza to manufacture ourlong-term commercial supply of bulk exenatide, the active ingredient inexenatide once weekly, and upon single suppliers to produce components forpackaging exenatide once weekly. Although we are working diligently to qualify the commercial-scalemanufacturing process at this facility, we cannot be assured that we will beable to demonstrate comparability of product manufactured at development scaleand product manufactured at commercial scale. If we are unable to demonstratecomparability of product, we may not be able to commercially launch exenatideonce weekly in a timely manner or at all.

 

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***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, weexpect that there will continue to be a number of federal and state proposalsto implement government control over the pricing of prescriptionpharmaceuticals. In addition, increasing emphasis on managed care in the UnitedStates will continue to put pressure on the rate of adoption and pricing ofpharmaceutical 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. If government and other third-partypayers do not provide adequate coverage and reimbursement levels for ourproducts, the market acceptance of these products may be reduced.

 

***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 researchinstitutions. A number of our largest competitors, including AstraZeneca,Bristol-Myers Squibb, GlaxoSmithKline, Lilly, Merck & Co.,Novartis, Novo Nordisk, Pfizer, Sanofi-Aventis and Takeda Pharmaceuticals, arepursuing the development or marketing of pharmaceuticals that target the samediseases that we are targeting, and it is possible that the number of companiesseeking to develop products and therapies for the treatment of diabetes,obesity and other metabolic disorders will increase. Many of our competitorshave substantially greater financial, technical, human and other resources thanwe do and may be better equipped to develop, manufacture and markettechnologically superior products. In addition, many of these competitors havesignificantly greater experience than we do in undertaking preclinical testingand human clinical studies of new pharmaceutical products and in obtainingregulatory approvals of human therapeutic products. Accordingly, ourcompetitors may succeed in obtaining FDA approval for superior products. Furthermore,now that we have received FDA approval for BYETTA and SYMLIN, we may also becompeting against 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 using metformin, sulfonylureaand/or a TZD, three common oral therapies for type 2 diabetes. Our targetpopulation for SYMLIN is people with either type 2 or type 1 diabeteswhose therapy includes multiple mealtime insulin injections daily. Otherproducts are currently in development or exist in the market that may competedirectly with the products that we are developing or marketing. Various otherproducts are available or in development to treat type 2 diabetes,including:

 

·                 sulfonylureas;

 

·                 metformin;

 

·                 insulins, includinginjectable and inhaled versions;

 

·                 TZDs;

 

·                 glinides;

 

·                 DPP-IV inhibitors;

 

·                 incretin/GLP-1 agonists;

 

·                 PPARs; and

 

·                 alpha-glucosidaseinhibitors.

 

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.

 

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***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, and may adversely affect our ability to enterinto 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 complete our developmentprograms for exenatide once weekly or our obesity clinical trials;

 

·                 we may have to delay or terminate our plannedfilings for regulatory approval;

 

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

 

·                 we may not be able to enter into, if we choseto do so, any additional collaborative arrangements.

 

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

 

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

 

·                 delays in enrolling volunteers;

 

·                 lower than anticipated retention rate ofvolunteers in a clinical trial;

 

·                 negative results of clinical studies;

 

·                 insufficient supply or deficient quality ofdrug candidate materials or other materials necessary for the performance ofclinical trials;

 

·                 our inability to reach agreement with Lillyregarding the scope, design, conduct or costs of clinical trials with respectto BYETTA, exenatide once weekly or nasal exenatide; or

 

·                 serious side effects experienced by studyparticipants 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 exenatideonce weekly.***

 

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

 

·                 fund some of our research and developmentactivities;

 

·                 assist us in seeking and obtaining regulatoryapprovals; and

 

·                 assist us in the successful commercializationof BYETTA and exenatide once weekly.

 

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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 exenatide once weekly or the commercialization of BYETTA, or ifLilly’s efforts are not effective, our business may be negatively affected. Weare relying on Lilly to obtain regulatory approvals for and successfullycommercialize BYETTA and exenatide once weekly outside the United States. Ourcollaboration with Lilly may not continue or result in additional successfullycommercialized drugs. Lilly can terminate our collaboration at any time upontwelve months’ notice. If Lilly ceased funding and/or developing andcommercializing BYETTA or exenatide once weekly, we would have to seekadditional sources for funding and may have to delay, reduce or eliminate oneor more of our commercialization and development programs for these compounds.If Lilly does not successfully commercialize BYETTA outside the United Stateswe may receive limited or no revenues from them. In addition, we are dependenton Alkermes to successfully develop and transfer to us its technology formanufacturing exenatide once weekly. If Alkermes’ technology is notsuccessfully developed to effectively deliver exenatide in a sustained releaseformulation, or Alkermes does not devote sufficient resources to thecollaboration, our efforts to develop sustained release formulations ofexenatide 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 tothird party patent rights for required technologies, we could be adverselyaffected.***

 

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 exenatide once weekly,SYMLIN and our other drug candidates. These patents and applications covercomposition-of-matter, medical indications, methods of use, formulations andother inventive results. We have issued and pending applications forformulations of BYETTA and exenatide once weekly, but we do not have acomposition-of-matter patent covering exenatide. We also own or hold exclusiverights to various foreign patent applications that correspond to issued UnitedStates patents or pending United States patent applications.

 

Our success will depend in part on our ability 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. Once this exclusivity periodexpires, the Hatch-Waxman Act allows generic manufacturers to file AbbreviatedNew Drug Applications, or ANDAs, with the FDA requesting approval of genericversions of previously-approved products. For example, a generic pharmaceuticalmanufacturer could file an ANDA for SYMLIN as early as March 2009 and forBYETTA as early as April 2009. If an ANDA is filed for one of our approvedproducts prior to expiration of the patents covering those products, it couldresult in our initiating patent infringement litigation to enforce our rights.We can provide no assurances that we would prevail in such an action or in anychallenge 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 other jurisdictions,such as Europe and Australia. Furthermore, we may not have identified allUnited States and foreign patents that pose a risk of infringement.

 

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.

 

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***We may be unable to obtainregulatory clearance to market our drug candidates in the United States orforeign countries on a timely basis, or at all.***

 

Our drug candidates are subject to extensive government regulationsrelated to development, clinical trials, manufacturing and commercialization.The process of obtaining FDA and other regulatory approvals is costly,time-consuming, uncertain and subject to unanticipated delays. Regulatoryauthorities may refuse to approve an application for approval of a drugcandidate if they believe that applicable regulatory criteria are not satisfied.Regulatory authorities may also require additional testing for safety andefficacy. Moreover, if the FDA grants regulatory approval of a product, theapproval may be limited to specific indications or limited with respect to itsdistribution, and expanded or additional indications for approved drugs may notbe approved, which could limit our revenues. Foreign regulatory authorities mayapply similar limitations or may refuse to grant any approval. Unexpectedchanges to the FDA or foreign regulatory approval process could also delay orprevent the approval of our drug candidates.

 

The data collected from our clinical trials may not be sufficient tosupport approval of our drug candidates or additional or expanded indicationsby the FDA or any foreign regulatory authorities. Biotechnology stock priceshave declined significantly in certain instances where companies have failed tomeet expectations with respect to FDA approval or the timing for FDA approval.If the FDA’s or any foreign regulatory authority’s response is delayed or notfavorable for any of our drug candidates, our stock price could declinesignificantly.

 

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 our inventions, productsand drug candidates; and/or

 

·                 the enforceability, validity or scope ofprotection 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 monetary damages;

 

·                 encounter significant delays in bringing ourdrug candidates to market; and/or

 

·                 be precluded from participating in themanufacture, use or sale of our products or drug candidates or methods oftreatment requiring licenses.

 

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***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.

 

***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 of research anddevelopment milestones;

 

·                 collaboration revenues;

 

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

 

·                 marketing and other expenses;

 

·                 manufacturing or supply issues; and

 

·                 potential acquisitions of businesses andtechnologies and our ability to successfully integrate any such acquisitionsinto 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 BYETTA and SYMLIN;

 

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

 

·                 Development of exenatide once weekly andother pipeline candidates;

 

·                 Executing our INTO strategy;

 

·                 Our other research and developmentactivities;

 

·                 Other operating expenses;

 

·                 Potential acquisitions or investments incomplementary technologies or businesses; and

 

·                 Other general corporate purposes.

 

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

 

***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 quality 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 risk ofproduct 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. For example, we are currently involved in ten product liability cases*.*  On March 4, 2009, the Supreme Court heldin *Wyeth v. Levine* that federallaw does not preempt state product liability claims involvingpharmaceuticals.  This could result in anincrease in the number of state product liability claims filed againstpharmaceutical companies, including Amylin. We have also been notifiedof additional claimants who may file product liability complaints. Productliability claims could result in the imposition of substantial defense costsand liability on us, a recall of products, or a change in the indications forwhich they may be used. We currently have limited product liability insurancecoverage. We cannot assure you that our insurance will provide adequatecoverage against potential liabilities.

 

***Our ability to enter into and maintainthird-party relationships is important to our successful development andcommercialization of BYETTA, SYMLIN and our other drug candidates and to ourpotential profitability.***

 

With respect to sales, marketing and distribution outside the UnitedStates, we will be substantially dependent on Lilly for activities relating toBYETTA and sustained-release formulations of BYETTA, including exenatide onceweekly. We believe that we will 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, exenatide once weekly, Lillyis co-promoting within the United States. If Lilly ceased commercializingBYETTA or, if approved, exenatide once weekly, for any reason, we would likelyneed to either enter into a marketing and distribution arrangement with a thirdparty for those products or significantly increase our internal sales andcommercialization infrastructure.

 

We may not be able to enter into marketing and distributionarrangements or find a corporate partner for SYMLIN or our other drugcandidates as we deem necessary. If 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, with whom we choose to contract may not establishadequate sales and distribution capabilities or gain market acceptance for ourproducts, if any.

 

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***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 due in December 2010. Ourability to make payments on our debt, including the 2004 and 2007 Notes and theTerm Loan, will depend on our future operating performance and ability togenerate cash and may also depend on our ability to obtain additional debt orequity financing. During each of the last five years, our operating cash flowswere negative and insufficient to cover our fixed charges. We may need to useour cash to pay principal and interest on our debt, thereby reducing the fundsavailable to fund our research and development programs, strategic initiativesand working capital requirements. Our ability to generate sufficient operatingcash flow to service our indebtedness, including the 2004 and 2007 Notes andthe Term Loan, and fund our operating requirements will depend on our ability,alone or with others, to successfully develop, manufacture, obtain requiredregulatory approvals for and market our drug candidates, as well as otherfactors, including general economic, financial, competitive, legislative 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 have received notices from each of IcahnPartners LP and certain of its affiliates, referred to as the Icahn Groupand Eastbourne Capital Management, L.L.C., referred to as Eastbourne andcertain of its affiliates, announcing their intent to each nominate fiveindividuals for election to our Board of Directors at the 2009 annual meetingand, in the case of the Icahn Group, to submit a proposal for shareholderapproval requesting that we reincorporate in the state of North Dakota. If as aresult of this proxy contest a majority of our Board of Directors ceases to becomposed of the existing directors or other individuals approved by a majorityof the existing directors, then a “change of control” under the Term Loan and a“fundamental change” under the indenture for 2007 Notes will be triggered. Iftriggered, the lenders under the Term Loan may terminate their commitments andaccelerate our outstanding debt and the holders of our 2007 Notes may requireus to repurchase the notes. We may not have the liquidity or financialresources to do so at the times required or at all.

 

We may not have sufficient cash funds to redeem the 2004 and 2007 Notesupon a designated event or repay the Term Loan upon an event of default. We mayelect, subject to certain conditions, to pay the redemption price for the 2004Notes in our common stock or a combination of cash and our common stock. We maybe unable to satisfy the requisite conditions to enable us to pay some or allof the redemption price for the 2004 Notes in our common stock. If we areprohibited from redeeming the 2004 or 2007 Notes, we could seek consent fromour lenders to redeem the 2004 or 2007 notes. If we are unable to obtain theirconsent, we could attempt to refinance the 2004 or 2007 Notes. If we wereunable to obtain a consent or refinance, we would be prohibited from redeemingthe 2004 or 2007 Notes. If we were unable to redeem the 2004 or 2007 Notes upona designated event, it would result in an event of default under the indenturesgoverning the 2004 or 2007 Notes. An event of default under the indenturescould result in a further event of default under our other then-existing debt,including the Term Loan. In addition, the occurrence of a designated event maybe an event of default under our other debt. Further, an event of default underthe Term Loan could result in an event of default under the indenturesgoverning the 2004 or 2007 Notes.

 

***If our research and development programsfail to result in additional drug candidates, the growth of our business couldbe 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 our chiefexecutive officer, and other key executives and our ability to attract, retainand 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.

 

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***We may be unable to adequately preventdisclosure 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.

 

***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 activitiesinvolve the controlled use of hazardous materials, chemicals and variousradioactive compounds. Although we believe that our research and developmentsafety procedures for handling and disposing of these materials comply with thestandards prescribed by state and federal regulations, the risk of accidental contaminationor injury from these materials cannot be eliminated. In addition, as part ofthe development of our planned manufacturing activities, we will need todevelop 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, includingthose governing laboratory procedures, exposure to blood-borne pathogens andthe handling of biohazardous materials. Additional federal, state and locallaws and regulations affecting our operations may be adopted in the future. Wemay incur substantial costs to comply with, and substantial fines or penaltiesif we 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 areineffective 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 resources andcould 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 ourboard of directors to elect a director to fill a vacancy created by theexpansion of the board of directors;

 

·                  allowing ourboard of directors to issue, without stockholder approval, up to5.5 million shares of preferred stock with terms set by the board ofdirectors;

 

·                  limiting theability of holders of our outstanding common stock to call a special meeting ofour stockholders; and

 

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

 

Each of these provisions, as well as selected provisions of Delaware law,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, directors and majorstockholders control approximately 68% of our common stock.***

 

As of March 31, 2009, executive officers, directors and holders of5% or more of our outstanding common stock, in the aggregate, owned orcontrolled approximately 68% of our outstanding common stock. As a result,these stockholders are able to influence all matters requiring approval by ourstockholders, including the election of directors and the approval of corporatetransactions. This concentration of ownership may also delay, deter or preventa change in control of our company and may make some transactions moredifficult or impossible to complete without the support of these stockholders.

 

***We could be negatively affected as a resultof a proxy fight and other actions of activist shareholders.***

 

If a proxy contest results from one or both notices received from theIcahn Group or Eastbourne announcing their intent to each nominate fiveindividuals for election to our Board of Directors at the 2009 annual meetingand, in the case of the Icahn Group, to submit a proposal for shareholderapproval requesting that we reincorporate in the state of North Dakota, ourbusiness could be adversely affected because:

 

·                  responding toproxy contests and other actions by activist stockholders can be costly andtime-consuming, disrupting our operations and diverting the attention ofmanagement and our employees;

 

·                  if a majorityof our Board of Directors ceases to be composed of the existing directors orother individuals approved by a majority of the existing directors, we may berequired to repay $575 million under our 2007 Notes, $125 millionunder our Term Loan and any amounts that may be outstanding under our$15 million revolving credit facility, and if a cross-default istriggered, $200 million under our 2004 Notes;

 

·                  perceiveduncertainties as to our future direction may impact our existing and potentialcollaborations or strategic relationships and in-licensing opportunities andmay make it more difficult to attract and retain qualified personnel; and

 

·                  if individualsare elected to our Board of Directors with a specific agenda, it may adverselyaffect our ability to effectively and timely implement our strategic plan.

 

***Substantial future sales of our commonstock by us or our existing stockholders or the conversion of our convertiblesenior notes to common stock could cause the trading price of our common stockto 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.

 

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***Significant volatility in the market pricefor 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, 2007, thehigh and low sales price of our common stock varied significantly, as shown inthe following table:

 
| ** **                                   | ** ** | **High** | ** ** | **Low** | ** ** |
|----------------------------------------------|------------|----------|------------|---------|------------|
| **Year ending December 31, 2009**       |       |     |       |    |       |
| Second Quarter (through April 28, 2009) |       | $        | 12.30      |    | $          | 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 |   |
| **Year ended December 31, 2007**        |       |     |       |    |       |
| Fourth Quarter                               |       | $        | 51.10      |    | $          | 35.83 |   |
| Third Quarter                                |       | $        | 53.25      |    | $          | 40.86 |   |
| Second Quarter                               |       | $        | 46.93      |    | $          | 36.91 |   |
| First Quarter                                |       | $        | 42.45      |    | $          | 35.55 |   |

 

Given the uncertainty of our future funding, whether BYETTA and SYMLINwill meet our expectations, and the regulatory approval of our other drug candidates,we may continue to experience volatility in our stock price for the foreseeablefuture. In addition, the following factors may significantly affect the marketprice 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;

 

·                  our ability to complete ourOhio manufacturing facility and the commercial manufacturing process forexenatide once weekly;

 

·                  developments in ourrelationships with 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;

 

·                  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.

 

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**ITEM6.  Exhibits**

 

The following exhibits are included as part of thisreport:

 
| **Exhibit  Number** | ** ** | **Description**                                                                                                                                                                                                                                                                                                    |
|---------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |       |                                                                                                                                                                                                                                                                                                               |
| 3.1                 |       | Amended  and Restated Certificate of Incorporation (filed as an exhibit to  Registrant’s registration statement on Form S-1 (File  No. 333-44195) or amendments thereto and incorporated herein by  reference)                                                                                      |
|                |       |                                                                                                                                                                                                                                                                                                               |
| 3.2                 |       | 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                |       | 2003  Non-Employee Directors’ Stock Option Plan (the “Directors’ Plan”), as amended†                                                                                                                                                                                                      |
|                |       |                                                                                                                                                                                                                                                                                                               |
| 10.2                |       | Directors’  Plan Option Agreement, as amended†                                                                                                                                                                                                                                                           |
|                |       |                                                                                                                                                                                                                                                                                                               |
| 10.3                |       | Letter  Agreement, dated April 9, 2009, between Registrant and Eli Lilly and  Company                                                                                                                                                                                                                         |
|                |       |                                                                                                                                                                                                                                                                                                               |
| 31.1                |       | Certification  of Principal Financial Officer pursuant to Rule 13a-14(a) and  Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended                                                                                                                                                |
|                |       |                                                                                                                                                                                                                                                                                                               |
| 31.2                |       | Certification  of Principal Executive Officer pursuant to Rule 13a-14(a) and  Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended                                                                                                                                                |
|                |       |                                                                                                                                                                                                                                                                                                               |
| 32.1                |       | Certifications  Pursuant to U.S.C. Section 1350, as adopted pursuant to Section 906  of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                   |

 

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| † | Indicates management or compensatory plan or  arrangement required to be identified pursuant to Item 15(c). |
|--------|-------------------------------------------------------------------------------------------------------------|

 

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**SIGNATURE**

 

Pursuant to the requirements of the Securities Exchange Act of 1934,the registrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.

 
|                              |                                                                                                                                                                                   |
|------------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                         | Amylin Pharmaceuticals, Inc.                                                                                                                                                      |
|                         |                                                                                                                                                                                   |   |
| Date: May 11, 2009 | By:                                                                                                                                                                                    | /S/ MARK G. FOLETTA |
|                         | Mark G. Foletta,*Senior Vice President, Finance and  Chief Financial Officer  (on behalf of the registrant and as the  registrant’s principal financial and accounting  officer)* |

 

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