Table of Contents

** **

 

** **

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**FORM 10-Q**

** **

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**(MarkOne)**

 
| **x**                                                       | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|-------------------------------------------------------------|---------------------------------------------------------------------------------------------------------|
|                                                        |
| **For the  quarterly period ended September 30, 2009** |
| ** **                                                  |
| **OR**                                                      |
|                                                        |
| **o**                                                       | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**Commission File Number: 0-19700**

 

**AMYLIN PHARMACEUTICALS, INC.**

**(Exact name of registrant asspecified in its charter)**

 

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

 

**(858) 552-2200**

(Registrant’s telephone number, includingarea code)

 

**Not Applicable**

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

 

Indicateby check mark whether the registrant (1) has filed all reports required 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, anaccelerated filer, a non-accelerated filer, or a smaller reporting company. Seedefinitions of “large accelerated filer,” “accelerated filer,” and “smallerreporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

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

 

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 October 23, 2009** |
|--------------------------------|----------------|---------------------------------------------------------|
| Common Stock,  $.001 par value | **** **** | ****141,742,739****                                     |

** **

 

 

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Table of Contents

 

**AMYLIN PHARMACEUTICALS, INC.**

** **

**TABLE OF CONTENTS**

 
| COVER PAGE                             |                                                                                                                    |
|----------------------------------------|-------------------------------------------------------------------------------------------------------------------------|
| ** **                             | ** **                                                                                                              | ** ** |
| TABLE OF CONTENTS                      | 2                                                                                                                       |
|                                   |                                                                                                                    |   |
| **PART I. FINANCIAL INFORMATION** | ** **                                                                                                              |
|                                   |                                                                                                                    |   |
| ITEM 1.                                | Financial Statements                                                                                                    | 3 |
|                                   |                                                                                                                    |   |
|                                   | Consolidated  Balance Sheets as of September 30, 2009 (unaudited) and  December 31, 2008                      | 3 |
|                                   |                                                                                                                    |   |
|                                   | Consolidated Statements of Operations for the three  and nine months ended September 30, 2009 and 2008 (unaudited) | 4 |
|                                   |                                                                                                                    |   |
|                                   | Consolidated Statements of Cash Flows for the nine  months ended September 30, 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                             | 21 |
|                                   |                                                                                                                    |   |
| ITEM 3.                                | Quantitative and  Qualitative Disclosures about Market Risk                                                             | 32 |
|                                   |                                                                                                                    |   |
| ITEM 4.                                | Controls and Procedures                                                                                                 | 32 |
|                                   |                                                                                                                    |   |
| **PART II. OTHER INFORMATION**    | ** **                                                                                                              |
|                                   |                                                                                                                    |   |
| ITEM 1.                                | Legal Proceedings                                                                                                       | 33 |
|                                   |                                                                                                                    |   |
| ITEM 1A.                               | Risk Factors                                                                                                            | 34 |
|                                   |                                                                                                                    |   |
| ITEM 6.                                | Exhibits                                                                                                                | 46 |
|                                   |                                                                                                                    |   |
| SIGNATURE                              | 47                                                                                                                      |

** **

**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)**

 
| ** **                                                                                                                                                                      | ** ** | **September 30,  2009** | ** ** | **December 31,  2008 (1)** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|---------------------------------|------------|
| ** **                                                                                                                                                                      | ** ** | **(unaudited)**              | ** ** | **(Note 1)**               | ** ** |
| Assets                                                                                                                                                                          | ** ** | ** **                   | ** ** | ** **                      | ** ** |
| Current assets:                                                                                                                                                                 |       |                         |       |                            |       |
| Cash and cash equivalents                                                                                                                                                       |       | $                            | 111,232    |                            | $          | 237,263 |   |
| Short-term investments                                                                                                                                                          |       | 508,464                      |       | 579,575                         |       |
| Accounts receivable, net                                                                                                                                                        |       | 77,049                       |       | 62,369                          |       |
| Inventories, net                                                                                                                                                                |       | 103,831                      |       | 115,823                         |       |
| Other current assets                                                                                                                                                            |       | 71,283                       |       | 41,038                          |       |
| Total current assets                                                                                                                                                            |       | 871,859                      |       | 1,036,068                       |       |
|                                                                                                                                                                            |       |                         |       |                            |       |
| Property, plant and equipment, net                                                                                                                                              |       | 751,609                      |       | 655,444                         |       |
| Other long-term assets                                                                                                                                                          |       | 29,727                       |       | 23,755                          |       |
| Debt issuance costs                                                                                                                                                             |       | 9,503                        |       | 11,786                          |       |
|                                                                                                                                                                            |       | $                            | 1,662,698  |                            | $          | 1,727,053 |   |
|                                                                                                                                                                            |       |                         |       |                            |       |
| Liabilities and  Stockholders’ Equity                                                                                                                                      |       |                         |       |                            |       |
|                                                                                                                                                                            |       |                         |       |                            |       |
| Current liabilities:                                                                                                                                                            |       |                         |       |                            |       |
| Accounts payable                                                                                                                                                                |       | $                            | 32,699     |                            | $          | 39,467 |   |
| Accrued compensation                                                                                                                                                            |       | 55,946                       |       | 65,145                          |       |
| Payable to collaborative partner                                                                                                                                                |       | 61,739                       |       | 60,470                          |       |
| Other current liabilities                                                                                                                                                       |       | 87,714                       |       | 90,125                          |       |
| Restructuring liability, current portion                                                                                                                                        |       | 7,821                        |       | 24,235                          |       |
| Notes payable, current portion                                                                                                                                                  |       | 31,250                       |       | 31,250                          |       |
| Deferred revenue                                                                                                                                                                |       | —                       |       | 3,086                           |       |
| Total current liabilities                                                                                                                                                       |       | 277,169                      |       | 313,778                         |       |
|                                                                                                                                                                            |       |                         |       |                            |       |
| Long-term deferred credit                                                                                                                                                       |       | 125,000                      |       | 125,000                         |       |
| Restructuring liability, net of current portion                                                                                                                                 |       | 21,385                       |       | 22,503                          |       |
| Deferred collaborative profit-sharing                                                                                                                                           |       | 40,060                       |       | —                          |       |
| Other long-term obligations, net of current portion                                                                                                                             |       | 28,261                       |       | 31,724                          |       |
| Notes payable, net of current portion                                                                                                                                           |       | 70,313                       |       | 93,750                          |       |
| Convertible senior notes, net                                                                                                                                                   |       | 637,879                      |       | 621,021                         |       |
|                                                                                                                                                                            |       |                         |       |                            |       |
| Commitments and contingencies                                                                                                                                                   |       |                         |       |                            |       |
|                                                                                                                                                                            |       |                         |       |                            |       |
| Stockholders’ equity:                                                                                                                                                      |       |                         |       |                            |       |
| Preferred stock, $.001 par value, 7,500 shares  authorized, none issued and outstanding at September 30, 2009  and December 31, 2008                        |       | —                       |       | —                          |       |
| Common stock, $.001 par value, 450,000 shares  authorized, 141,743 and 137,623 issued and outstanding at  September 30, 2009 and December 31, 2008, respectively |       | 142                          |       | 138                             |       |
| Additional paid-in capital                                                                                                                                                      |       | 2,362,064                    |       | 2,291,762                       |       |
| Accumulated deficit                                                                                                                                                             |       | (1,897,596                   | )          | (1,761,611                      | )          |
| Accumulated other comprehensive loss                                                                                                                                            |       | (1,979                       | )          | (11,012                         | )          |
| Total stockholders’ equity                                                                                                                                                 |       | 462,631                      |       | 519,277                         |       |
|                                                                                                                                                                            |       | $                            | 1,662,698  |                            | $          | 1,727,053 |   |

 

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**(1)****        **Adjusted for the required retroactive adoption ofauthoritative guidance related to convertible debt instruments that may besettled in cash upon conversion (Note 2).

 

See accompanying notes to consolidated financial statements.

 

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**AMYLIN PHARMACEUTICALS,INC.**

** **

**Consolidated Statementsof Operations**

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

**(unaudited)**

** **
| ** **                                                                | ** ** | **Three months ended  September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|---------------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                | ** ** | **2009**                                             | ** ** | **2008 (1)**                                        | ** ** | **2009** | ** ** | **2008 (1)** | ** ** |
| Revenues:                                                                 |       |                                                 |       |                                                |       |   |   |   |   |
| Net product sales                                                         |       | $                                                    | 192,887    |                                                | $          | 201,364 |   | $ | 569,716 |   | $ | 580,420 |   |
| Revenues under  collaborative agreements                                  |       | 18,348                                               |       | 16,998                                              |       | 44,565 |   | 57,198 |   |
| Total revenues                                                            |       | 211,235                                              |       | 218,362                                             |       | 614,281 |   | 637,618 |   |
|                                                                      |       |                                                 |       |                                                |       |   |   |   |   |
| Costs and expenses:                                                       |       |                                                 |       |                                                |       |   |   |   |   |
| Cost of goods sold                                                        |       | 22,624                                               |       | 23,395                                              |       | 65,549 |   | 70,101 |   |
| Selling, general and  administrative                                      |       | 80,088                                               |       | 99,676                                              |       | 259,696 |   | 309,007 |   |
| Research and development                                                  |       | 52,660                                               |       | 73,466                                              |       | 176,280 |   | 226,073 |   |
| Collaborative profit  sharing                                             |       | 78,265                                               |       | 80,567                                              |       | 227,481 |   | 229,418 |   |
| Restructuring                                                             |       | —                                               |       | —                                              |       | 11,376 |   | — |   |
| Total costs and expenses                                                  |       | 233,637                                              |       | 277,104                                             |       | 740,382 |   | 834,599 |   |
|                                                                      |       |                                                 |       |                                                |       |   |   |   |   |
| Operating loss                                                            |       | (22,402                                              | )          | (58,742                                             | )          | (126,101 | ) | (196,981 | ) |
|                                                                      |       |                                                 |       |                                                |       |   |   |   |   |
| Interest and other income                                                 |       | 1,413                                                |       | 3,307                                               |       | 6,513 |   | 21,311 |   |
| Interest and other expense                                                |       | (5,670                                               | )          | (8,645                                              | )          | (15,020 | ) | (26,100 | ) |
| Loss on impairment of  investments                                        |       | —                                               |       | (14,943                                             | )          | (1,377 | ) | (14,943 | ) |
| Net loss                                                                  |       | $                                                    | (26,659    | )                                                   | $          | (79,023 | ) | $ | (135,985 | ) | $ | (216,713 | ) |
|                                                                      |       |                                                 |       |                                                |       |   |   |   |   |
| Net loss per share, basic  and diluted                                    |       | $                                                    | (0.19      | )                                                   | $          | (0.58 | ) | $ | (0.97 | ) | $ | (1.58 | ) |
|                                                                      |       |                                                 |       |                                                |       |   |   |   |   |
| Shares used in computing  net loss per share, basic and diluted |       | 141,308                                              |       | 137,389                                             |       | 140,350 |   | 136,799 |   |

 

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**(1)****        **Adjusted for the required retroactive adoption of authoritativeguidance related to convertible debt instruments that may be settled in cashupon conversion (Note 2).

 

See accompanying notes to condensedconsolidated financial statements.

 

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**AMYLIN PHARMACEUTICALS,INC.**

** **

**Consolidated Statementsof Cash Flows**

**(in thousands)**

**(unaudited)**

 
| ** **                                                                    | ** ** | **Nine months ended  September 30,** | ** ** |
|-------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                    | ** ** | **2009**                                            | ** ** | **2008 (1)** | ** ** |
| Operating activities:                                                         |       |                                                |       |   |   |
| Net loss                                                                      |       | $                                                   | (135,985   | ) | $ | (216,713 | ) |
| Adjustments to reconcile net loss to net cash used  for operating activities: |       |                                                |       |   |   |
| Depreciation and amortization                                                 |       | 26,587                                              |       | 21,321 |   |
| Amortization of debt discount and debt issuance  costs                        |       | 6,055                                               |       | 8,227 |   |
| Employee stock-based compensation                                             |       | 33,947                                              |       | 43,011 |   |
| Stock-settled compensation expenses                                           |       | 15,974                                              |       | 13,752 |   |
| Loss on impairment of investments                                             |       | 1,377                                               |       | 14,941 |   |
| Other non-cash expenses, net                                                  |       | 4,244                                               |       | 3,003 |   |
| Changes in operating assets and liabilities:                                  |       |                                                |       |   |   |
| Accounts receivable, net                                                      |       | (14,680                                             | )          | 9,449 |   |
| Inventories, net                                                              |       | 11,992                                              |       | 1,706 |   |
| Other current assets                                                          |       | (28,990                                             | )          | 1,406 |   |
| Accounts payable and accrued liabilities                                      |       | (3,122                                              | )          | 2,882 |   |
| Accrued compensation                                                          |       | 181                                                 |       | 15,167 |   |
| Payable to collaborative partner                                              |       | 1,269                                               |       | (5,349 | ) |
| Deferred revenue                                                              |       | (3,086                                              | )          | (3,214 | ) |
| Restructuring liabilities                                                     |       | (17,531                                             | )          | — |   |
| Deferred collaborative profit-sharing                                         |       | 40,060                                              |       | — |   |
| Other assets and liabilities, net                                             |       | (9,921                                              | )          | 1,482 |   |
| Net cash flows used for operating activities                                  |       | (71,629                                             | )          | (88,929 | ) |
|                                                                          |       |                                                |       |   |   |
| Investing activities:                                                         |       |                                                |       |   |   |
| Purchases of short-term investments                                           |       | (582,358                                            | )          | (712,287 | ) |
| Sales and maturities of short-term investments                                |       | 659,869                                             |       | 799,917 |   |
| Purchases of property, plant and equipment, net                               |       | (119,123                                            | )          | (237,806 | ) |
| Increase in other long-term assets                                            |       | (273                                                | )          | (3,144 | ) |
| Net cash flows used for investing activities                                  |       | (41,885                                             | )          | (153,320 | ) |
|                                                                          |       |                                                |       |   |   |
| Financing activities:                                                         |       |                                                |       |   |   |
| Issuance of common stock, net                                                 |       | 10,920                                              |       | 16,622 |   |
| Repayment of notes payable                                                    |       | (23,437                                             | )          | — |   |
| Net cash flows (used for) provided by financing  activities                   |       | (12,517                                             | )          | 16,622 |   |
|                                                                          |       |                                                |       |   |   |
| Change in cash and cash equivalents                                           |       | (126,031                                            | )          | (225,627 | ) |
|                                                                          |       |                                                |       |   |   |
| Cash and cash equivalents at beginning of period                              |       | 237,263                                             |       | 422,232 |   |
| Cash and cash equivalents at end of period                                    |       | $                                                   | 111,232    |   | $ | 196,605 |   |
|                                                                          |       |                                                |       |   |   |
| **Supplemental disclosure of cash  flow information:**                        | ** ** | ** **                                          | ** ** | ** ** | ** ** |
| Property, plant and equipment additions in other  current liabilities         |       | $                                                   | —     |   | $ | 8,703 |   |
| Non-cash interest capitalized to property, plant  and equipment               |       | $                                                   | 13,118     |   | $ | 9,433 |   |
|                                                                          |       |                                                |       |   |   |
| **Non-cash financing activities:**                                            | ** ** | ** **                                          | ** ** | ** ** | ** ** |
| Issuance of common stock for contingent share  settled obligation             |       | $                                                   | —     |   | $ | 30,000 |   |
| Shares contributed as employer 401(k) match                              |       | $                                                   | 5,104      |   | $ | 4,284 |   |
| Shares contributed to employee stock ownership  plan                          |       | $                                                   | 20,250     |   | $ | 16,996 |   |

 

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**(1)****        **Adjusted for the required retroactive adoption ofauthoritative guidance related to convertible debt instruments that may besettled in cash upon conversion (Note 2).

 

See accompanying notes to consolidatedfinancial statements.

 

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**AMYLIN PHARMACEUTICALS,INC.**

** **

**Notes to ConsolidatedFinancial Statements**

**September 30, 2009**

**(unaudited)**

** **

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

 

**Basis of Presentation**

** **

The informationcontained herein has been prepared in accordance with instructions for Form 10-Qand Article 10 of Regulation S-X. The information as of September 30,2009, and for the three and nine month periods ended September 30, 2009and 2008, are unaudited. In the opinion of management, the information reflectsall adjustments necessary to make the results of operations for the interimperiods a fair statement of such operations. All such adjustments are of anormal recurring nature. Interim results are not necessarily indicative ofresults for a full year. The balance sheet at December 31, 2008, has beenderived from the audited consolidated financial statements at that date butdoes not include all information and footnotes required by U.S. generallyaccepted accounting principles for complete financial statements.  The balance sheet at December 31, 2008has been adjusted for the retroactive adoption of new authoritative guidancefrom the Financial Accounting Standards Board (FASB) related to convertibledebt instruments that may be settled in cash upon conversion (see Note 2).  For more complete financial information,these financial statements should be read in conjunction with the auditedconsolidated financial statements included in Amylin Pharmaceuticals, Inc.’s(referred to as the Company, we or Amylin) Annual Report on Form 10-K forthe year ended December 31, 2008.

 

InMay 2009 the FASB issued authoritative guidance which establishes generalaccounting standards for disclosure for subsequent events.  We adopted this new guidance during thesecond quarter of 2009.  We haveevaluated subsequent events through November 5, 2009, the date of issuanceof the condensed consolidated financial statements.

 

In June 2009, theFASB issued authoritative guidance that provides for the FASB AccountingStandards CodificationTM (the “Codification”) to become the single officialsource of authoritative, nongovernmental U.S. generally accepted accountingprinciples (GAAP). The Codification did not change GAAP but reorganizes theliterature and is effective for interim and annual periods ending after September 15,2009.  These consolidated financialstatements and notes to consolidated financial statements have been conformedto the presentation required by the Codification.

 

**RevenueRecognition**

** **

***NetProduct Sales***

*** ***

We sell 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 we have nofurther obligations. We record product sales net of allowances for productreturns, rebates, wholesaler chargebacks, wholesaler discounts and prescriptionvouchers. We must make significant judgments in determining these allowances. Ifactual results differ from our estimates, we will be required to makeadjustments to these allowances in the future. We recorded anallowance related to the Department of Defense’s (DOD) Tricare Retail Pharmacyprogram pursuant to a final rule that was issued in March 2009 andbecame effective on May 26, 2009. The final rule clarified the DOD’s interpretation of the NationalDefense 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 $7.5 millionfor such rebates in the nine months ended September 30, 2009, of which$4.8 million represents a retroactive rebate assessment for sales made during2008.

 

We record all United States BYETTA and SYMLIN product sales. Withrespect to BYETTA, we have determined that we are qualified as a principalbased on our responsibilities under our contracts with Eli Lilly and Company,or Lilly, which include manufacture of product for sale in the United States,responsibility for establishing pricing in the United States, distribution,ownership of product inventory and credit risk from customers.

 

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***Revenues UnderCollaborative 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.

 

***CollaborativeProfit-Sharing***

*** ***

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

 

***Accounts***Receivable

 

Trade accounts receivable are recorded net ofallowances for cash discounts for prompt payment, doubtful accounts, productreturns and chargebacks. Allowances for rebate discounts and distribution feesare included in other current liabilities in the accompanying consolidatedbalance sheets. Estimates for allowances for doubtful accounts are determinedbased on existing contractual obligations, historical payment patterns andindividual customer circumstances.  The allowance for doubtful accountswas $0.7 million and $0.6 million at September 30, 2009 and December 31,2008, respectively.

 

**Investments in UnconsolidatedEntities**

 

We use the equity method ofaccounting for investments in other companies that are not controlled by us andin which our interest is generally between 20% and 50% of the voting shares orwe have significant influence over the entity, or both.  Our share of the income or losses of theseentities is included in interest and other income or interest and otherexpense, and the investments, which had a net book value of $4.3 million and$4.7 million at September 30, 2009 and December 31, 2008,respectively, are included in other long-term assets.  We recorded $1.8 million and $0.8 million for our share of equity method investee losses during the three months ended September 30,2009 and 2008, respectively, and $2.9 million and $2.8 million for our share of equity method investee losses during the nine months ended September 30,2009 and 2008, respectively.

 

**Fair Value Measurements**

 

The authoritative guidancefor fair value measurements defines fair value as the exchange price that wouldbe received for an asset or paid to transfer a liability (an exit price) in theprincipal or most advantageous market for the asset or liability in an orderlytransaction between market participants on the measurement date. Marketparticipants are buyers and sellers in the principal market that are (i) independent,(ii) knowledgeable, (iii) able to transact and (iv) willing totransact. The guidance prioritizes the inputs used in measuring fair value intothe 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 September 30, 2009** | ** ** |
|-----------------------------------------------------------|------------|------------------------------------------------------------|------------|
| ** **                                                | ** ** | **Total**                                                  | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** |
| Short-term investments                                    |       | $                                                          | 508,464    |   | $ | 508,464 |   | $ | — |   | $ | — |   |
| Cash and cash  equivalents                                |       | 111,232                                                    |       | 111,232 |   | — |   | — |   |
| Derivative financial  instrument contracts, net liability |       | (3,039                                                     | )          | — |   | (3,039 | ) | — |   |
|                                                      |       |                                                       |       |   |   |   |   |   |   |
|                                                      |       | $                                                          | 616,657    |   | $ | 619,696 |   | $ | (3,039 | ) | $ | — |   |

 

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# **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 anddevelop drug materials and delivery devices; and associated overhead expensesand facilities costs. Clinical trialcosts, including costs associated with third-party contractors, are asignificant component of research and development expenses. Invoicing fromthird-party contractors for services performed can lag several months. Weaccrue the costs of services rendered in connection with such activities basedon our estimate of management fees, site management and monitoring costs anddata management costs. Actual clinical trial costs may differ from estimatesand are adjusted in the period in which they become known.

#  

**Derivative Financial Instruments**

 

We mitigate certainfinancial exposures, including currency risk and interest rate risk, through acontrolled program of risk management that includes the use of derivativefinancial instruments. Derivatives are recorded on the balance sheet at fairvalue, with changes in value being recorded in interest and other expense. Thefair value of our derivative financial instruments was a net liability of$3.0 million and $4.8 million at September 30, 2009 and December 31,2008, respectively.  We have determinedthat our derivative financial instruments are defined as Level 2 in thefair value hierarchy. We recognized a gain of $0.4 million and a loss of $2.0million on derivative financial instruments for the three months ended September 30,2009 and 2008, respectively and a gain of $2.0 million and a loss of $1.8million on derivative financial instruments for the nine months ended September 30,2009 and 2008, respectively.  Gains andlosses on derivative financial instruments are included in interest and otherexpense in the accompanying Consolidated Statements of Operations.

 

The following table summarizes the fair value andbalance sheet classification of our derivative financial instruments (inthousands):

 
| ** **                                  | ** ** | **September 30,  2009** | ** ** | **December 31,  2008**                         | ** **           |
|---------------------------------------------|------------|------------------------------|------------|-----------------------------------------------------|----------------------|
| ** **                                  | ** ** | **Fair Value**               | ** ** | **Balance  sheet  location**                        | ** **           | **Fair Value** | ** ** | **Balance  sheet  location** | ** ** |
| Foreign currency derivative contracts       |       | $                            | 521        |                                                | Other current assets |   | $ | 160 |   | Other current assets |   |
|                                        |       |                         |       |                                                |                 |   |   |   |   |
| Interest rate derivative contract (Note 12) |       | (3,560                       | )          | Other long-term obligations, net of current portion |                 | (4,991 | ) | Other long-term obligations, net of current portion |   |
|                                        |       |                         |       |                                                |                 |   |   |   |   |
|                                        |       | $                            | (3,039     | )                                                   |                 |   | $ | (4,831 | ) |   |   |

** **

**Per Share Data**

** **

Basic and diluted netloss applicable to common stock per share is computed using the weightedaverage number of common shares outstanding during the period. Common stockequivalents from stock options of 0.2 million for both the three and ninemonths ended September 30, 2009, and common stock equivalents from stockoptions of 2.4 million and 2.9 million for the three and nine months ended September 30,2008, are excluded from the calculation of diluted loss per share for allperiods presented because the effect is antidilutive. Common stock equivalentsfrom shares underlying our convertible senior notes of 15.2 million for thethree and nine months ended September 30, 2009 and 2008 are also excludedfrom the calculation of diluted loss per share because the effect isantidilutive. In future periods, if wereport net income and the common share equivalents for our convertible seniornotes are dilutive, the common stock equivalents will be included in theweighted average shares computation and interest expense related to the noteswill be added back to net income to calculate diluted earnings per share.

 

**Accounting for Stock-Based Compensation**

 

Weutilize the fair value method of accounting for stock-based compensationarrangements.  Accordingly, we expensethe estimated fair value of non-cash stock-based awards granted to ouremployees over the requisite employee service period, which is generally thevesting period. The fair value method of accounting applies to awards grantedsubsequent to January 1, 2006, the date the fair value method ofaccounting for stock-based compensation arrangements became effective, and toawards that were outstanding on the effective date and subsequently modified orcancelled. Estimated non-cash stock-based compensation expense for awardsoutstanding as of January 1, 2006 is being recognized over the remaining serviceperiod of the award using the compensation cost calculated for pro-formadisclosure purposes under the former guidance.

 

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

 
| ** **                                                    | ** ** | **Three months ended  September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|---------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                    | ** ** | **2009**                                             | ** ** | **2008**                                            | ** ** | **2009** | ** ** | **2008** | ** ** |
| Selling, general and  administrative expenses                 |       | $                                                    | 6,956      |                                                | $          | 8,590 |   | $ | 21,873 |   | $ | 25,976 |   |
| Research and development  expenses                            |       | 3,944                                                |       | 5,419                                               |       | 12,074 |   | 17,035 |   |
|                                                          |       | $                                                    | 10,900     |                                                | $          | 14,009 |   | $ | 33,947 |   | $ | 43,011 |   |
|                                                          |       |                                                 |       |                                                |       |   |   |   |   |
| Net stock-based  compensation expense, per common share: |       |                                                 |       |                                                |       |   |   |   |   |
| Basic and diluted                                             |       | $                                                    | 0.08       |                                                | $          | 0.10 |   | $ | 0.24 |   | $ | 0.31 |   |

 

We recorded $10.9 million and $14.0 million of totalnon-cash, stock-based compensation expense during the three months ended September 30,2009 and 2008, respectively, and $33.9 million and $43.0 million of totalnon-cash, stock-based compensation expense during the nine months ended September 30,2009 and 2008, respectively, in all cases related to stock-based awardsconsisting of stock options and employee stock purchase rights.  At September 30, 2009, totalunrecognized estimated compensation cost related to non-vested stock-basedawards granted prior to that date was $64.1 million, which is expected to berecognized over a weighted-average period of 2.2 years.  We issued 0.4 million and 0.6 million sharesupon the exercise of stock options and 0.4 million and 0.8 million shares inconnection with our Employee Stock Purchase Plan in the three and nine monthsended September 30, 2009, respectively.

 

In addition to thestock-based compensation discussed above, we also recorded $3.5 millionand $12.7 million of expense associated with our Employee Stock Ownership Plan,or ESOP, for the three and nine months ended September 30, 2009,respectively, and $4.4 million and $15.1 million for the three and nine monthsended September 30, 2008, respectively. The breakdown of non-cash ESOP expense by operating statementclassification is presented below (in thousands):

 
| ** **                                   | ** ** | **Three  months ended** | ** ** | **Nine months  ended** | ** ** |
|----------------------------------------------|------------|-------------------------|------------|------------------------|------------|
| ** **                                   | ** ** | **September 30,**  | ** ** | **September 30,** | ** ** |
| ** **                                   | ** ** | **2009**                | ** ** | **2008**               | ** ** | **2009** | ** ** | **2008** | ** ** |
| Selling, general and administrative expenses |       | $                       | 2,102      |                   | $          | 2,648 |   | $ | 7,182 |   | $ | 8,503 |   |
| Research and development expenses            |       | 1,423                   |       | 1,760                  |       | 5,495 |   | 6,632 |   |
|                                         |       | $                       | 3,525      |                   | $          | 4,408 |   | $ | 12,677 |   | $ | 15,135 |   |

 

**Consolidation**

 

The consolidated financialstatements include our accounts and those of our wholly owned subsidiaries,Amylin Ohio, LLC and Amylin Investments, LLC. All significantintercompany transactions and balances have been eliminated in consolidation.

 

**Recently IssuedAccounting Pronouncements**

** **

In August 2009,the FASB issued new authoritative guidance for the fair value measurement ofliabilities when a quoted price in an active market is not available.  The new guidance is effective for reportingperiods beginning after August 28, 2009, which means that it will beeffective for our fourth quarter beginning October 1, 2009.  We are in the process of evaluating thisupdated guidance and therefore have not determined the impact that adoption ofthis new guidance will have on our financial position, results of operations orcash flows.

 

InSeptember 2009, the FASB issued authoritative guidance that providesadditional guidance on using the net asset value per share, provided by aninvestee, when estimating the fair value of an alternate investment that doesnot have a readily determinable fair value and enhances the disclosuresconcerning these investments. Examples of alternate investments that fallwithin the scope of this standard include investments in hedge funds andprivate equity, real estate, and venture capital partnerships. This Standard iseffective for interim and annual periods ending after December 15, 2009. Asof September 30, 2009, we do not have any investments that fall within thescope of this new guidance and therefore we do not anticipate that thisstandard will have a material impact on our consolidated financial statementdisclosures.

 

InOctober 2009, the FASB issued authoritative guidance that amends existingrevenue recognition accounting pronouncements related to multiple-deliverablerevenue arrangements.  The new guidance providesaccounting principles and application guidance on whether multiple deliverablesexist, how the arrangement should be separated, and how the considerationshould be allocated. This guidance eliminates the requirement to establish thefair value of undelivered products and services and instead provides forseparate 

 

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revenuerecognition based upon management’s estimate of the selling price for anundelivered item when there is no other means to determine the fair value ofthat undelivered item.  The new guidanceis effective prospectively for revenue arrangements entered into or materiallymodified in fiscal years beginning on or after June 15, 2010. Earlierapplication is permitted as of the beginning of a fiscal year.  We are currently evaluating the potentialimpact of this standard on our financial position and results of operations.

 

**2.     Adoptionof New Accounting Guidance for Convertible Debt Instruments that may be Settledin Cash upon Conversion**

 

Effective January 1, 2009, we adopted the newauthoritative guidance for accounting for convertible debt instruments that maybe settled in cash upon conversion (including partial cash settlement).  The new guidance requires that the liabilityand equity components of convertible debt instruments that may be settled incash upon conversion shall be separately accounted for in a manner that willreflect the entity’s nonconvertible debt borrowing rate when interest cost isrecognized 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 proceedsascribed to the convertible debt instrument as a whole. Related transactioncosts are allocated to the liability and equity components in proportion to theallocation of proceeds and accounted for as debt issuance costs and equityissuance costs, respectively. The excess of the principal amount of theliability component over its carrying amount is amortized to interest expenseusing the interest method.  The newguidance is applied retrospectively to all periods presented with thecumulative effect of the change in accounting principle on periods prior tothose presented recognized as of the beginning of the first periodpresented.  The $575 million SeniorConvertible Notes issued in June 2007 (the 2007 Notes) are within thescope of the new guidance because we have the option to elect net-sharesettlement upon conversion. The $200 million Convertible Senior Notes issued in2004 (the 2004 Notes) are not within the scope of the new guidance as they mayonly be settled in shares of our common stock upon conversion.

 

Upon adoption, we recorded a cumulative debtdiscount on the 2007 Notes of $185.6 million at inception, and an increase of$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 beingamortized to 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 the newguidance we are retroactively adjusting our 2007 and 2008 financial statements.

 

Our net loss for the quarter ended September 30,2009 of $26.7 million, or $0.19 per share, includes $0.8 million, or $0.01 pershare of incremental interest and other expense due to the adoption of the newguidance.  Our net loss for the ninemonths ended September 30, 2009 of $136.0 million, or $0.97 per share,includes $3.2 million, or $0.02 per share, of incremental interest and otherexpense due to the adoption of the new guidance.

 

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 tables set forth the effect of theretroactive adjustment of the applicable line items within the accompanyingconsolidated statement of operations for the three and nine months ended September 30,2008 (in thousands, except per share amounts):

 
| ** **                 | ** ** | **Three  months ended September 30, 2008** | ** ** |
|----------------------------|------------|-------------------------------------------------|------------|
| ** **                 | ** ** | **As  previously  reported**                    | ** ** | **Implementation    adjustments** | ** ** | **As  adjusted** | ** ** |
| Interest and other expense |       | $                                               | (7,343     | ) | $ | (1,302 | ) | $ | (8,645 | ) |
| Net loss                   |       | $                                               | (77,721    | ) | $ | (1,302 | ) | $ | (79,023 | ) |
| Net loss per share         |       | $                                               | (0.57      | ) | $ | (0.01 | ) | $ | (0.58 | ) |

 

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| ** **                 | ** ** | **Nine  months ended September 30, 2008** | ** ** |
|----------------------------|------------|------------------------------------------------|------------|
| ** **                 | ** ** | **As  previously   reported**                  | ** ** | **Implementation    adjustments** | ** ** | **As  adjusted** | ** ** |
| Interest and other expense |       | $                                              | (20,721    | ) | $ | (5,379 | ) | $ | (26,100 | ) |
| Net loss                   |       | $                                              | (211,334   | ) | $ | (5,379 | ) | $ | (216,713 | ) |
| Net loss per share         |       | $                                              | (1.54      | ) | $ | (0.04 | ) | $ | (1.58 | ) |

 

The following tables set forth the effect of theretroactive adjustment of the applicable line items within the accompanyingconsolidated statement of cash flows for the nine months ended September 30,2008 (in thousands):

 
| ** **                                             | ** ** | **Nine  months ended September 30, 2008** | ** ** |
|--------------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                             | ** ** | **As  previously   reported**                  | ** ** | **Implementation    adjustments** | ** ** | **As  adjusted** | ** ** |
| Net loss                                               |       | $                                              | (211,334   | ) | $ | (5,379 | ) | $ | (216,713 | ) |
| Amortization of debt discount and debt issuance  costs |       | $                                              | 2,848      |   | $ | 5,379 |   | $ | 8,227 |   |

 

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

 

Our short-term investments,consisting principally of debt securities, are classified as available-for-saleand are stated at fair value based upon observed market prices (Level 1 inthe fair value hierarchy). Unrealized holding gains or losses on thesesecurities are included in other comprehensive loss. The amortized cost of debtsecurities in this category is adjusted for amortization of premiums andaccretion of discounts to maturity. For investments in mortgage-backedsecurities, amortization of premiums and accretion of discounts are recognizedin interest income using the interest method, adjusted for anticipatedprepayments as applicable. Estimates of expected cash flows are updatedperiodically and changes are recognized in the calculated effective yieldprospectively as appropriate. Such amortization is included in interest income.Realized gains and losses and declines in value judged to beother-than-temporary on available-for-sale securities are included inimpairment loss on investments. In assessing potential impairment of ourshort-term investments, we evaluate the impact of interest rates, potentialprepayments on mortgage-backed securities, changes in credit quality, thelength of time and extent to which the market value has been less than cost,and our intent and ability to not sell the security for a sufficient period oftime in order to allow for an anticipated recovery in fair value. The cost ofsecurities sold is based on the specific-identification method.

 

Thefollowing is a summary of short-term investments as of September 30, 2009and December 31, 2008 (in thousands):

 
| ** **                                            | ** ** | **Available-for-Sale Securities** | ** ** |
|-------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                            | ** ** | **Amortized  Cost**                    | ** ** | **Gross  Unrealized  Gains (1)** | ** ** | **Gross  Unrealized  Losses(1)** | ** ** | **Estimated  Fair Value** | ** ** |
| **September 30,  2009**                          |       |                                   |       |   |   |   |   |   |   |
| U.S.  Treasury securities                             |       | $                                      | 192,639    |   | $ | 87 |   | $ | (17 | ) | $ | 192,709 |   |
| Obligations  of U.S. Government-sponsored enterprises |       | 86,251                                 |       | 405 |   | (575 | ) | 86,081 |   |
| Corporate  debt securities                            |       | 210,109                                |       | 1,086 |   | (162 | ) | 211,033 |   |
| Asset  backed securities                              |       | 19,389                                 |       | 71 |   | (819 | ) | 18,641 |   |
| Total                                                 |       | $                                      | 508,388    |   | $ | 1,649 |   | $ | (1,573 | ) | $ | 508,464 |   |
|                                                  |       |                                   |       |   |   |   |   |   |   |
| **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 $2.1 million and $3.3million on investments underlying our 2001 Non-Qualified Deferred CompensationPlan at September 30, 2009 and December 31, 2008, respectively.

 

For the three month periodended September 30, 2009, there were no realized gains or losses on salesof available-for-sale securities.  Forthe three month period ended September 30, 2008, there were gross realizedgains on sales of available-for-sale securities of approximately$0.1 million and gross realized losses on sales of available-for-salesecurities of approximately $2.5 million, respectively.  Gross realized gains on sales ofavailable-for-sale securities totaled approximately $0.6 million and$2.1 million and the gross realized losses totaled $0.6 million and$4.1 million for the nine months ended September 30, 2009 and 2008,respectively.

 

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Contractual maturities ofshort-term investments at September 30, 2009 were as follows (inthousands):

 
| ** **                        | ** ** | **Fair Value** | ** ** |
|-----------------------------------|------------|----------------|------------|
| Due within 1 year            |       | $              | 401,080    |   |
| After 1 but within  5 years  |       | 76,783         |       |
| After 5 but within  10 years |       | 2,224          |       |
| After 10 years               |       | 28,377         |       |
| Total                             |       | $              | 508,464    |   |

 

For purposes of thesematurity classifications the final maturity date is used for securities not dueat a single maturity date.   Thisincludes asset-backed and mortgage-backed securities which are included inObligations of U.S Government-sponsored enterprises in the table above.

 

The following table shows the gross unrealized losses and fair value ofour investments with unrealized losses that are not deemed to beother-than-temporarily impaired, aggregated by investment category and lengthof time that individual securities have been in a continuous unrealized lossposition, at September 30, 2009 (in thousands):

 
| ** **                                           | ** ** | **Less than 12 Months** | ** ** | **12 Months or Greater** | ** ** | **Total**      | ** ** |
|------------------------------------------------------|------------|-------------------------|------------|--------------------------|------------|----------------|------------|
| ** **                                           | ** ** | **Fair Value**          | ** ** | **Unrealized  Losses**   | ** ** | **Fair Value** | ** ** | **Unrealized  Losses** | ** ** | **Fair Value** | ** ** | **Unrealized  Losses** | ** ** |
| U.S. Treasury securities                             |       | $                       | 45,893     |                     | $          | (17            | )          | $ | — |   | $ | — |   | $ | 45,893 |   | $ | (17 | ) |
| Obligations of U.S Government-sponsored  enterprises |       | 15,000                  |       | —                   |       | 18,967         |       | (575 | ) | 33,967 |   | (575 | ) |
| Corporate debt securities                            |       | 24,964                  |       | (70                      | )          | 22,840         |       | (92 | ) | 47,804 |   | (162 | ) |
| Asset-backed securities                              |       | 444                     |       | (43                      | )          | 15,506         |       | (776 | ) | 15,950 |   | (819 | ) |
|                                                 |       | $                       | 86,301     |                     | $          | (130           | )          | $ | 57,313 |   | $ | (1,443 | ) | $ | 143,614 |   | $ | (1,573 | ) |

 

Our investments had grossunrealized losses of $1.6 million and $9.0 million at September 30, 2009and December 31, 2008, respectively. During the nine months ended September 30, 2009, we recognized a$1.4 million other-than-temporary impairment loss for credit-related lossesassociated with two securities in our portfolio.  The impairment loss was based upon thedifference between the cost basis and the observed market prices for thesecurities.  The unrealized losses on ourinvestments in marketable securities is due in most instances to the increasedvolatility in the markets impacting certain of the classes of securities inwhich we invest and not a deterioration in credit ratings. Our investments havea short effective duration, and since we have the ability and intent not tosell these investments until a recovery of fair value, which may be atmaturity, we do not consider these investments to be other-than-temporarilyimpaired at September 30, 2009.

 

**4.    ****Inventories, net**

 

Inventories are stated at the lower of cost (FIFO)or market and net of a valuation allowance for potential excess and/or obsoletematerial of $0.4 million and $5.1 million at September 30, 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.  During 2009 we disposed of materialpreviously reserved for that we were unable to utilize and reduced thevaluation allowance accordingly.

 

Inventoriesconsist of the following (in thousands):

 
| ** **      | ** ** | **September 30,  2009** | ** ** | **December 31,  2008** | ** ** |
|-----------------|------------|------------------------------|------------|-----------------------------|------------|
| Raw materials   |       | $                            | 73,107     |                        | $          | 74,140 |   |
| Work-in-process |       | 18,032                       |       | 21,382                      |       |
| Finished goods  |       | 12,692                       |       | 20,301                      |       |
|            |       | $                            | 103,831    |                        | $          | 115,823 |   |

 

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

 

Other current assets consist of the following (inthousands):

 
| ** **           | ** ** | **September 30,  2009** | ** ** | **December 31,  2008** | ** ** |
|----------------------|------------|------------------------------|------------|-----------------------------|------------|
| Prepaid inventory    |       | $                            | 35,469     |                        | $          | 13,230 |   |
| Prepaid expenses     |       | 23,139                       |       | 23,623                      |       |
| Other current assets |       | 12,675                       |       | 4,185                       |       |
|                 |       | $                            | 71,283     |                        | $          | 41,038 |   |

 

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

 

Debt issuance costs relate tothe $200 million principal amount of 2.5% convertible senior notes, due April 15,2011, issued in April 2004, referred to as the 2004 Notes, the $575million principal amount of 3.0% convertible senior notes, due June 15,2014, issued in June 2007, referred to as the 2007 Notes, and a $125million term loan entered into in December 2007, referred to as the TermLoan.  Amortization of debt issuancecosts are recorded as interest expense in the consolidated statement ofoperations on a straight-line basis, which approximates the interest methodover the contractual term of the related debt. We incurred total debt issuancecosts of $19.1 million in connection with the 2004 Notes, the 2007 Notes andthe Term Loan. Amortization expense of $0.8 million was recorded in each of thethree months ended September 30, 2009 and 2008, respectively.  Amortization expense of $2.3 million wasrecorded in each of the nine months ended September 30, 2009 and 2008,respectively.

 

**7.****             ****Other CurrentLiabilities**

 

Other current liabilities consist of thefollowing (in thousands):

 
| ** **                 | ** ** | **September 30,****2009** | ** ** | **December 31,****2008** | ** ** |
|----------------------------|------------|--------------------------------|------------|-------------------------------|------------|
| Accrued rebates            |       | $                              | 39,420     |                          | $          | 28,575 |   |
| Accrued expenses           |       | 37,232                         |       | 43,482                        |       |
| Other  current liabilities |       | 11,062                         |       | 18,068                        |       |
|                       |       | $                              | 87,714     |                          | $          | 90,125 |   |

 

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

 

Wehave entered into various collaborative agreements which provide us with rightsto develop, produce and market products using certain know-how, technology andpatent rights maintained by our collaborative partners. Terms of the variouscollaboration agreements may require us to make and/or receive milestonepayments upon the achievement of certain product research and developmentobjectives and pay and/or receive royalties on future sales, if any, ofcommercial products resulting from the collaboration.

 

EffectiveJanuary 1, 2009, we implemented new authoritative guidance related toaccounting for collaborativearrangements.  The new guidance requires thatcertain transactions between collaborators be recorded in the income statementon either a gross or net basis, depending on the characteristics of thecollaboration relationship, and provides for enhanced disclosure ofcollaborative relationships. We evaluated our collaborative agreements forproper income statement classification based on the nature of the underlyingactivity. If payments to and from our collaborative partners are not within thescope of other authoritative accounting literature, the income statementclassification for the payments is based on a reasonable, rational analogy toauthoritative accounting literature that is applied in a consistent manner.Amounts due from our collaborative partners related to development activitiesare generally reflected as collaborative revenues and amounts due to ourcollaborative partners related to sharing of commercialization expenses aregenerally reflected as selling, general and administrative expenses.  Milestone payments and up-front paymentsreceived are generally reflected as collaborative revenue as discussed above inNote 1, and milestone payments and up-front payments made are generallyrecorded as research and development expenses if the payments relate to drugcandidates that have not yet received regulatory approval.  Milestone payments and up-front payments maderelated to approved drugs (of which there have been none to date) willgenerally be capitalized and amortized to cost of goods sold over the economiclife of the product.  Royalties received(of which there have been none to date) will generally be reflected ascollaborative revenues and royalties paid are generally reflected as cost ofgoods sold.  The adoption of the new guidancerelated to accounting for collaborative arrangements did not affect ourfinancial position or results of operations.

 

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Forcollaborations with commercialized products, if we are the principal we recordrevenue and the corresponding operating costs in their respective line itemswithin our statement of operations based on the nature of the shared expenses.  If we are not the principal, we recordoperating costs as a reduction of revenue. The principal is the party who is responsible for delivering the productor service to the customer, has latitude with establishing price and has therisks and rewards of providing product or service to the customer, includinginventory and credit risk.

 

***Collaboration with Eli Lilly andCompany***

 

In September 2002, we and Lilly entered into a collaborationagreement for the global development and commercialization of exenatide. Theagreement was amended in 2006 and in 2009.

 

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

 

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

 

In addition to these up-front payments, Lilly agreed to make futuremilestone payments of up to $85 million upon the achievement of certain developmentmilestones, including milestones relating to both twice daily and sustainedrelease formulations of exenatide such as exenatide once weekly, of which$75 million have been paid through September 30, 2009, $30 million ofwhich was converted into 0.8 million shares of our common stock in February 2008.No additional development milestones may be earned under the collaborationagreement.

 

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 through September 30, 2009,$40 million of these milestones have been paid and recorded as revenue andremaining milestones relate primarily to the commercial launch of exenatideonce weekly in selected territories throughout the world, including the UnitedStates.

 

We recorded $17.0million and $15.7 million of cost sharing payments due from Lilly for the threemonths ended September 30, 2009 and 2008, respectively, and recorded $40.6million and $53.1 million of cost sharing payments due from Lilly for the ninemonths ended September 30, 2009 and 2008, respectively, related to thesharing of BYETTA and exenatide once weekly development expenses, which areincluded in revenues under collaborative agreements in the accompanyingconsolidated statements of operations. In addition, we recorded a net credit of $0.6 million and $0.2 millionfor the three months ended September 30, 2009 and 2008, respectively, foramounts due from Lilly for shared sales force expenses, marketing expenses andother commercial support.  We recordednet expense of $4.6 million and $4.3 million for the nine months ended September 30,2009 and 2008, respectively, for amounts due to Lilly for shared sales forceexpenses, marketing expenses and other commercial support.

 

In October 2008, we and Lilly entered into an exenatide onceweekly supply agreement pursuant to which we will supply commercial quantitiesof exenatide once weekly for sale in the United States, if approved by the FDA.In addition, if Lilly receives approval to market the product in jurisdictionsoutside the United States, we will be required to manufacture the productintended for commercial sale by Lilly in those jurisdictions.

 

Under the terms of the supply agreement, Lilly made a cash payment of$125 million to us, which represents an amount to compensate us for theestimated past and future cost of carrying Lilly’s share of the capital investmentmade in our manufacturing facility in Ohio, that otherwise would have beenincluded in the cost of product produced at the facility and charged to Lillythrough our arrangements with them. In addition to this cash payment, we willrecover Lilly’s share of the capital investment in the facility through anallocation of depreciation expense to cost of goods sold as discussed below.Under the terms of the supply agreement, we have agreed not to charge Lilly forLilly’s share of the interest costs capitalized to the facility or any futurefinancing cost that may be related to financing the facility. Accordingly, wehave determined that a portion of the $125 million payment, amounting to$33.1 

 

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millionat September 30, 2009, represents a reimbursement to us of Lilly’s shareof interest costs capitalized to the facility that will be credited to Lillyfor its share of the capitalized interest included in the cost of goods soldfor exenatide once weekly as incurred. We have concluded that any excess amountrepresents deferred collaborative revenue for services to be provided to Lillyunder the supply agreement that will be amortized ratably over the economicuseful life of the exenatide once weekly product following its commerciallaunch. The ultimate allocation of the $125 million payment, which isclassified as a long-term deferred credit in the accompanying ConsolidatedBalance Sheets at September 30, 2009, will be dependent upon the totalamount of interest costs capitalized to the facility when it is placed inservice. Under certain circumstances, including upon an impairment of theexenatide once weekly manufacturing facility, Lilly may receive a credit forthe unearned portion of the $125 million payment which will be appliedagainst Lilly’s share of the impairment charge. The $125 million payment is not refundable to Lilly if exenatide onceweekly does not receive regulatory approval unless such non-approval results inan impairment as discussed above.

 

In addition to the $125 million cash payment, we will recoverLilly’s share of the over $500 million capital investment in the facilitythrough an allocation of depreciation to cost of goods sold in accordance withthe collaboration agreement. We retain ownership of the facility and Lilly’sshare of the capital investment to be recovered through the sharing of cost ofgoods sold is initially estimated to be 55% subject to adjustment based uponthe allocation of the proportion of product supplied for sale in the UnitedStates, the cost of which is shared equally by the parties, and the proportionof product supplied for sale outside of the United States, the cost of which ispaid for 100% by Lilly.

 

In October 2008, we and Lilly also entered into a loan agreementpursuant 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 the 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 theloan commitment is fully advanced or June 30, 2014.

 

In April 2009, we andLilly announced the restructuring of the exenatide operations in order toimprove alliance effectiveness, increase financial and operational efficienciesand maximize the value of BYETTA and exenatide once weekly.  Additionally,Amylin and Lilly amended their Collaboration Agreement to require oneyear’s notice for termination of the agreement without cause. Previously, theagreement required nine-month’s notice. In addition, Amylin and Lilly alsoagreed that internal marketing costs, which were previously not shared, are nowshared within the alliance.

 

In May 2009, we and Lilly entered into a costallocation agreement, the Cost Allocation Agreement, which amends the exenatidedevelopment and commercialization cost-sharing provisions contained in thecompanies’ Collaboration Agreement and Exenatide Once Weekly Supply Agreement,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.  We will be responsiblefor 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, we were 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 us.

 

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

 

In May 2009,we and Lilly entered into a joint supply agreement for an exenatide once weeklypen device.  Amylin and Lilly agreed tocooperate in the development, manufacturing and marketing of exenatide onceweekly in a dual chamber cartridge pen configuration.  The companies will share the capital anddevelopment costs of the pen, including the estimated total capital investmentof approximately $216 million which is expected to be incurred over the nextfew years. We and Lilly have agreed that the estimated cost of the totalcapital investment will be allocated 60% to Lilly and 40% to us, with Lillyfunding its share as the capital expenditures are incurred.  Through September 30, 2009, we haveincurred $69.5 million in capital expenditures associated with the exenatideonce weekly pen, which amount is included in construction in progress.  We have billed Lilly $40.1 million for theseexpenditures, of which $32.6 million has been received by us.  Capital reimbursements from Lilly, which areincluded in deferred collaborative profit-sharing in the accompanyingconsolidated balance sheet, are being deferred and will be amortized tocollaborative profit sharing for Lilly’s share of the depreciation included incost of goods sold for the exenatide once weekly pen device as incurred.

 

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

 

In November 2008, we announced a corporaterestructuring that reduced our San Diego work force by approximately25 percent, or 330 employees. In connection with the restructuring, werecorded restructuring charges of $54.9 million, consisting primarily offacility related charges, employee separation costs and asset impairments whichwere recorded in the quarter ended December 31, 2008.

 

In May 2009, weannounced a restructuring of our sales force to merge our existing primary careand specialty sales forces into a single organization.  This restructuring reduced the total numberof Amylin sales representatives by approximately 200 employees.  We recorded restructuring charges of $11.4million during the quarter ended June 30, 2009 consisting primarily ofemployee separation costs which were incurred in the quarter ended June 30,2009.  No additional restructuringcharges were recorded during the quarter ended September 30, 2009.  The following table summarizes the componentsof the restructuring charges (in thousands):

 
| ** **                  | ** ** | **Nine months ended September 30, 2009** | ** ** |
|-----------------------------|------------|-----------------------------------------------|------------|
| ** **                  | ** ** | **Accruals**                                  | ** ** | **Non-cash items** | ** ** | **Total** | ** ** |
| Employee separation costs   |       | $                                             | 10,629     |   | $ | 281 |   | $ | 10,910 |   |
| Other restructuring charges |       | 466                                           |       | — |   | 466 |   |
|                        |       | $                                             | 11,095     |   | $ | 281 |   | $ | 11,376 |   |

 

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                           |       | 10,629                          |       | —                           |       | 466                               |       | 11,095    |       |
| Payments                           |       | (18,799                         | )          | (9,362                           | )          | (466                              | )          | (28,627   | )          |
| Balance at September 30, 2009 |       | $                               | 121        |                             | $          | 29,085                            |       | $         | —     |   | $ | 29,206 |   |

 

The $17.5 million reduction in the restructuringliability during the nine months ended September 30, 2009 consists ofpayments of $18.8 million of employee separation costs, reflecting severanceand other separation benefit payments, $9.3 million of facilities relatedcharges reflecting ongoing rental payments for leases associated with vacated facilitiesand $0.5 million of other restructuring charges payments.  Partially offsetting these payments areadditional accruals of $11.1 million associated with the May 2009 salesforce restructuring discussed above.

 

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

 

Comprehensive lossincludes net loss and unrealized gains and losses on investments.  We disclose the accumulated balance of othercomprehensive loss as a separate component of stockholders’ equity. For thethree and nine months ended September 30, 2009 and 2008, comprehensiveloss consisted of (in thousands):

 
| ** **                            | ** ** | **Three months ended  September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|---------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                            | ** ** | **2009**                                             | ** ** | **2008**                                            | ** ** | **2009** | ** ** | **2008** | ** ** |
| Net loss                              |       | $                                                    | (26,659    | )                                                   | $          | (79,023 | ) | $ | (135,985 | ) | $ | (216,713 | ) |
| Other comprehensive loss:             |       |                                                 |       |                                                |       |   |   |   |   |
| Unrealized gain (loss) on investments |       | 2,203                                                |       | (4,434                                              | )          | 9,033 |   | (8,072 | ) |
| Comprehensive loss                    |       | $                                                    | (24,456    | )                                                   | $          | (83,457 | ) | $ | (126,952 | ) | $ | (224,785 | ) |

 

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

 

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

 
| ** **                     | ** ** | **September 30,********2009** | ** ** | **December 31,********2008** | ** ** |
|--------------------------------|------------|------------------------------------|------------|-----------------------------------|------------|
| **2007 Notes**                 |       |                               |       |                              |       |
| Principal  amount              |       | $                                  | 575,000    |                              | $          | 575,000 |   |
| Unamortized  debt discount     |       | (137,121                           | )          | (153,979                          | )          |
| Net  carrying amount           |       | 437,879                            |       | 421,021                           |       |
|                           |       |                               |       |                              |       |
| **2004 Notes**                 |       |                               |       |                              |       |
| Principal  amount              |       | 200,000                            |       | 200,000                           |       |
|                           |       |                               |       |                              |       |
| Convertible  senior notes, net |       | $                                  | 637,879    |                              | $          | 621,021 |   |

 

In June 2007, we issued the 2007 Notes in aprivate placement, which have an aggregate principal amount of$575 million, and are due June 15, 2014. The 2007 Notes are 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, subject to the customary adjustment for stock dividends and otherdilutive transactions. We 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, we will in some cases increasethe conversion rate for a holder of notes that elects to convert its notes inconnection with such fundamental change. The maximum conversion rate is 22.9252($43.62 per share), which would result in a maximum issuance of13.2 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.

 

The2007 Notes will be convertible into shares of our common stock unless we electnet-share settlement. If we elect net-share settlement, we will satisfy theaccreted value of the obligation in cash and will satisfy the excess ofconversion value over the accreted value in shares of our common stock based ona daily conversion value, determined in accordance with the associatedindenture agreement, calculated on a proportionate basis for each day of therelevant 20-day observation period. Holders may convert the 2007 Notes only inthe following circumstances and to the following extent: (1) during thefive business-day period after any five consecutive trading day period (themeasurement period) in which the trading price per note for each day of suchmeasurement period was less than 97% of the product of the last reported saleprice of our common stock and the conversion rate on each such day; (2) duringany calendar quarter after the calendar quarter ending March 31, 2007, ifthe last reported sale price of our common stock for 20 or more trading days ina period of 30 consecutive trading days ending on the last trading day of theimmediately preceding calendar quarter exceeds 130% of the applicableconversion price in effect on the last trading day of the immediately precedingcalendar quarter; (3) upon the occurrence of specified events; and (4) the2007 Notes will be convertible at any time on or after April 15, 2014through the scheduled trading day immediately preceding the maturity date.

 

Subject to certain exceptions, if we undergo a “designatedevent” (as defined in the associated indenture agreement) including a “fundamentalchange,” such as if a majority of our Board of Directors ceases to be composedof the existing directors or other individuals approved by a majority of theexisting directors, holders of the 2007 Notes will, for the duration of thenotes, have the option to require us to repurchase all or any portion of their2007 Notes. The designated event repurchase price will be 100% of the principalamount of the 2007 Notes to be purchased plus any accrued interest up to butexcluding the relevant repurchase date. We will pay cash for all notes sorepurchased. The 2007 Notes have been registered under the Securities Act of1933, as amended, to permit registered resale of the 2007 Notes and of thecommon stock issuable upon conversion of the 2007 Notes. Subject to certainlimitations, we will be required to pay the holders of the 2007 Notes specialinterest on the 2007 Notes if we fail to keep such registration statementeffective during specified time periods. The 2007 Notes pay interest in cash,semi-annually in arrears on June 15 and December 15 of each year,which began on December 15, 2007.

 

The fair value of the 2007 Notes, determined byobserved market prices, was $443.1 and $260.4 million at September 30,2009 and December 31, 2008, respectively.

 

As discussed in Note 2, the 2007 Notes arewithin the scope of the new authoritative guidance for accounting forconvertible debt instruments that may be settled in cash upon conversionbecause we have the option to elect net-share settlement upon conversion.

 

The carrying amount of the equity component of the2007 Notes was $180.3 million at September 30, 2009 and December 31,2008.  At September 30, 2009, theunamortized balance of the debt discount will be amortized over the remaininglife of the 2007 Notes, approximately five years.  The effective interest rate on the net carrying valueof the 2007 Notes was 9.3% for both the three and nine month periods ended September 30,2009 and 2008.

 

In April 2004, we issued the 2004 Notes, whichhave an aggregate principal amount of $200 million, and are due April 15,2011. 

 

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The2004 Notes are senior unsecured obligations and rank equally with all otherexisting and future senior unsecured debt. The 2004 Notes bear interest at 2.5%per year, payable in cash semi-annually and are convertible into a total of upto 5.8 million shares of common stock at a conversion price of $34.35 pershare, subject to customary adjustments for stock dividends and other dilutivetransactions. We may not redeem the 2004 Notes prior to maturity.  As discussed in Note 2, the 2004 Notes arenot within the scope of the new authoritative guidance for accounting forconvertible debt instruments that may be settled in cash upon conversion asthey can only be settled in shares of our common stock upon conversion.

 

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

 

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

 

Thefair value of the 2004 Notes, determined by observed market prices, was $186.5and $150.0 million at September 30, 2009 and December 31, 2008,respectively.

 

We capitalize interest associatedwith construction in progress.  For thethree months ended September 30, 2009 and 2008 we capitalized $4.2 millionand $3.4 million of coupon interest, respectively, and $4.8 million and $3.8million of non-cash interest expense associated with amortization of the debtdiscount, respectively.  For the ninemonths ended September 30, 2009 and 2008 we capitalized $11.7 million and$8.7 million of coupon interest expense, respectively, and $13.1 million and$9.4 million of non-cash interest expense associated with amortization of thedebt discount, respectively.

 

**12.****  ****Long-Term****NotePayable**

 

In December 2007, we****entered into a$140 million credit agreement with Bank of America, N.A., as administrativeagent, collateral agent and letter of credit issuer, Silicon Valley Bank andRBS Asset Finance, Inc., as syndication agents, and Comerica Bank and BMOCapital Markets Financing, Inc., as documentation agents.  The creditagreement provides for a $125 million Term Loan and a $15 million revolvingcredit facility.  The proceeds of both loans 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.  We had an outstanding balance of $101.6million and $125.0 million under the Term Loan and had issued $8.9 million and$5.6 million of stand-by letters of credit under the revolving credit facilityprimarily in connection with office leases, at September 30, 2009 and December 31,2008, respectively.

 

Our domesticsubsidiaries, Amylin Ohio LLC and Amylin Investments LLC, are co-borrowersunder the credit agreement.  The loans under the revolving credit facilityare secured by substantially all of our and the two domestic subsidiaries’assets (other than intellectual property and certain other excludedcollateral).  The Term Loan is repayable on a quarterly basis, withno principal payments due quarters one through four, 6.25% of the outstandingprincipal due quarters five through eleven, and 56.25% of the outstandingprincipal due in quarter twelve. Interest on the Term Loan will be paid quarterly on the unpaid principalbalance at 1.75% above the London Interbank Offered Rate, or LIBOR, based onour election of either one, two, three or nine months LIBOR term, and payableat 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. We have elected to use the three month LIBOR rate, which was 0.3% and1.44% at September 30, 2009 and December 31, 2008, respectively.  Interest periods on the revolving creditfacility may be either one, two, three or nine months, and payable at the endof the selected interest period but no less frequently than quarterly, and theinterest rate will be either LIBOR plus 1.0% or the Bank of America prime rate,as selected by us.  Both loans have afinal 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 our outstanding obligations if not cured within applicable graceperiods. In addition, the credit agreement provides for automatic accelerationupon the occurrence of bankruptcy, other insolvency events and a change incontrol, as defined in the credit agreement as amended. There is an annualcommitment fee associated with the revolving credit facility of 0.25%.

 

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Maturitiesof long-term notes payable for periods ending after September 30, 2009 areas follows (in thousands):

 
| Three months ending December 31,  2009 |   | $      | 7,813   |   |
|---------------------------------------------|--------|--------|---------|--------|
| Year ending  December 31, 2010         |   | 93,750 |    |
| Total minimum debt payments                 |   | $      | 101,563 |   |

 

In connection with theexecution of the Term Loan, we entered into an interest rate swap with aninitial notional amount of $125 million on December 21, 2007 that hasresulted in a net fixed rate of 5.717% and matures on December 21,2010.  We determined that the interestrate swap agreement is defined as Level 2 in the fair value hierarchy.  The fair value of the interest rate swapagreement was a liability of $3.6 million and $5.0 million at September 30,2009 and December 31, 2008, respectively. For the three months ended September 30, 2009 and 2008 werecognized a gain on the interest rate swap of $0.3 million and a loss on theinterest rate swap of $0.4 million, respectively.  For the nine months ended September 30,2009 and 2008 we recognized a gain on the interest rate swap of $1.4 millionand a loss on the interest rate swap of $1.0 million, respectively. The gainsand losses on the interest rate swap are included in interest and otherexpense.

 

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

 

In March 2009, wecontributed approximately 2.2 million newly issued shares of our common stock,valued at $9.02 per share, to our ESOP for amounts earned by participants duringthe year ended December 31, 2008.

 

InMarch 2009, we contributed approximately 0.4 million newly issued sharesof our common stock, valued at $11.80 per share, to our 401(k) plan foramounts earned by participants during the year ended December 31, 2008.

 

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

 

# **Other Commitments**

#  

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

 

As of September 30,2009, if all such milestones are successfully achieved, the potential futuremilestone and other contingency payments due under certain contractualagreements are approximately $287.4 million in aggregate, of which $2.5 millionwould be due within the next 12 months.

 

We have committedto make future minimum payments to third parties for certain inventories in thenormal course of business. The minimum purchase commitments total approximately$60.7 million as of September 30, 2009. The majority of theseinventory commitments relate to exenatide once weekly and BYETTA, includingminimum inventory purchases for exenatide once weekly of $38.7 millionthat are contingent upon FDA approval of exenatide once weekly.

 

As of September 30, 2009, capital commitments tocomplete construction of our exenatide once weekly manufacturing facility inOhio are $7.9 million, and capital commitments related to the exenatideonce weekly pen device are $66.4 million.

 

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

 

Fromtime to time in the ordinary course of business, we become involved in variouslawsuits, claims and proceedings relating to the conduct of our business,including those pertaining to product liability, patent infringement andemployment claims.  Since August 2008,Amylin and Lilly have been named as defendants in 39 separate product liabilitycases involving approximately 208 plaintiffs in various courts in the UnitedStates.  These cases have been brought byindividuals who allege they have used BYETTA. They generally seek compensatory and punitive damages for allegedinjuries, consisting primarily of pancreatitis, and in some cases, wrongfuldeath.  Most of the cases are pending inCalifornia state court, where the Judicial Council has granted our petition fora “coordinated proceeding” for all California state court cases alleging harmallegedly as a result of BYETTA use.  We have also received notice from plaintiff’scounsel of additional claims by individuals who have not filed suit.  While we cannot predict the outcome of anylawsuit, claim or proceeding, we and Lilly intend to vigorously defend thesematters. These matters are at an early stage and as a result we cannot estimatepotential losses, if any, at this time.

 

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**16.**** ****SubsequentEvents**

 

OnOctober 30, 2009, we and Takeda Pharmaceutical Company Limited, or Takeda,entered into a License, Development and Commercialization Agreement, or thedevelopment agreement, pursuant to which the companies will co-develop andcommercialize pharmaceutical products containing compounds specified in thedevelopment agreement for the treatment of human indications including, but notlimited to, (i) weight management and/or obesity, (ii) glycemiccontrol and (iii) cardiovascular disease. Amylin will receive a one-time, non-refundable cash payment of $75million from Takeda in connection with the execution of the developmentagreement.

 

Amylinwill also receive certain payments upon the achievement of milestone eventsincluding:  (i) up to $200 millionfor achieving development milestones with respect to two specific products andup to $50 million for achieving development milestones with respect to anyadditional products; (ii) up to $140 million per product for achievingcommercial milestones related to the first sale of a product in variousterritories; and (iii) up to $800 million per product for the achievementof certain sales based milestones. Takeda will also pay Amylin double-digit tiered royalties based on totalannual sales of products.

 

Amylinwill be responsible for executing all development activities for each productthrough the completion of all phase 2 clinical trials of such products for thepurpose of obtaining regulatory approval in the United States.  Amylin will also be responsible for certainthird party royalties.  Takeda will beresponsible for the execution of all other development activities for thepurpose of obtaining regulatory approval in and outside the United States.  Throughout the term of the developmentagreement, Takeda will generally be responsible for 80% of the developmentcosts associated with obtaining approval for the products in the United Statesand Amylin will be responsible for 20% of such costs, except for certain clinicalsafety trial costs for which Amylin will have additional cost-sharingresponsibility.  Takeda will beresponsible for 100% of all development costs associated with obtainingapproval for the products outside the United States.

 

Takedawill be responsible for commercializing the products in and outside the UnitedStates and will be responsible for all commercialization costs associated withthe products.  Amylin will have theoption to co-commercialize the first 2 approved products containing differentclinically active ingredients and any follow-on products containing theidentical ingredients.

 

Thedevelopment agreement will terminate at Takeda’s election or upon theexpiration of all Takeda payment obligations to Amylin.  Either party may terminate the agreement forcause, including the commencement of insolvency, bankruptcy, reorganization orother similar proceeding by a party or if the other party breaches any materialprovision of the development agreement including breaches of payment orcommercially reasonable efforts obligations. Further, either party may terminate the development agreement for safetyissues or failure to obtain any necessary third party license.

 

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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 thefuture, future operating and economic performance and other statementsregarding future performance. These statements are not guarantees of futureperformance or events. Our actual results may differ materially from thosediscussed here. Factors that could cause or contribute to differences in ouractual results include those discussed under the caption “Cautionary FactorsThat May Affect Future Results,” as well as those discussed elsewhere inthis quarterly report on Form 10-Q or in our other public disclosures. Youshould consider carefully those cautionary factors, together with all of theother information included in this quarterly report on Form 10-Q. Each ofthe cautionary factors, either alone or taken together, could adversely affectour business, operating results and financial condition, as well as adverselyaffect the value of an investment in our common stock. There may be additionalrisks that we are not presently aware of or that we currently believe areimmaterial which could also impair our business and financial position. Wedisclaim any obligation to update these forward-looking statements.

 

**Overview**

 

We are a biopharmaceuticalcompany committed to improving the lives of people with diabetes, obesity andother diseases through the discovery, development and commercialization ofinnovative medicines. We have developed and gained approval for twofirst-in-class medicines to treat diabetes, BYETTA® (exenatide)injection and SYMLIN® (pramlintide acetate) injection, both of whichwere commercially launched in the United States during the second quarter of2005. BYETTA was approved in the European Union, or EU, in 2006 and ourcollaboration partner, Eli Lilly and Company, or Lilly, has commerciallylaunched BYETTA in 60 countries as of September 30, 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, continuing to significantly improve operating results and progressingtoward sustainable positive operating cash flow by the end of 2010. Ourlong-term strategy is focused on making prudent investment decisions based onstrong clinical data to advance our obesity program. In October 2009, theAmerican Association of Clinical Endocrinologists (AACE) and the AmericanCollege of Endocrinology (ACE) also approved new treatment guidelines with theinclusion of BYETTA for the successful treatment of patients with type 2diabetes.

 

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 has been approved in the United States for the treatment of patientswith type 2 diabetes who have not achieved adequate glycemic control andare using metformin, a sulfonylurea and/or a thiazolidinediene, or TZD, threecommon oral therapies for type 2 diabetes. In October 2009, the FDAapproved an expanded indication for BYETTA as a stand-alone medication(monotherapy) along with diet and exercise to improve glycemic control inadults with type 2 diabetes.  The FDAalso approved changes to the BYETTA label to incorporate updated safetyinformation, including pancreatitis-related safety language and an expansion ofexisting language regarding use of BYETTA in patients with renalimpairment.   In October 2008, theADA and the European Association for the Study of Diabetes, or EASD, updatedtheir type 2 diabetes treatment guidelines, placing the GLP-1 receptoragonist class, of which BYETTA is the only approved product, as a secondarytreatment option for type 2 diabetes patients.  Prescriptions declined in the second half of2008. During that time period we committed our field resources to educating themedical community on the facts about BYETTA, pancreatitis and the product’ssafety profile. We believe the decline in BYETTA prescriptions and demand forthe product continued to stabilize during the quarter ended September 30,2009.  Net product sales of BYETTA were $171.1million and $179.9 million for the three months ended September 30, 2009and 2008, respectively, and $503.9 million and $515.9 million for the ninemonths ended September 30, 2009 and 2008, respectively.

 

We have an agreement withLilly for the global development and commercialization of exenatide. Thisagreement includes BYETTA and any sustained-release formulations of exenatidesuch as exenatide once weekly, our once weekly formulation of exenatide for thetreatment of type 2 diabetes. Under the terms of the agreement, operatingprofits from products sold in the United States are shared equally betweenLilly and us. The agreement provides for tiered royalties payable to us byLilly based upon the annual gross margin for all exenatide product sales,including any long-acting release formulations, outside of the United States.Royalty payments for exenatide product sales outside of the United States willcommence after a one-time cumulative gross margin threshold amount has beenmet. We expect royalty payments to commence in 2010. Lilly is responsible for100% of the costs related to development of exenatide once weekly andtwice-daily BYETTA for sale outside of the United States. Lilly is responsiblefor commercialization and all of the costs related to commercialization of allexenatide products for sale outside of the United States.

 

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Inthe second quarter of 2009, we entered into several agreements with Lilly thatwill enable us to improve the operational effectiveness and efficiency of ourcollaboration agreement.  In April 2009,we and Lilly announced the restructuring of our exenatide operations in orderto improve alliance effectiveness, increase financial and operationalefficiencies and maximize the value of BYETTA and exenatide once weekly.  In May 2009, we and Lilly entered into a cost allocation agreement which amendsthe exenatide development and commercialization cost-sharing provisionscontained in the collaboration agreement.

 

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 pre-filled pen-injector devicesfeature simple, fixed dosing to improve mealtime glucose control. Net product sales of SYMLIN were $21.8million and $21.5 million for the three months ended September 30, 2009and 2008, respectively, and $65.8 million and $64.5 million for the nine monthsended September 30, 2009 and 2008, respectively.

 

In May 2009, weannounced a restructuring of our sales force that merged our existing primarycare and specialty sales forces into a single specialty salesorganization.  This new sales force willbe focused on targeting those doctors that write the majority of BYETTA andSYMLIN prescriptions. This sales-force restructuring reduced our total numberof sales representatives by approximately 200 employees.  We incurred restructuring charges of $11.4million during the nine months ended September 30, 2009.  Following this restructuring we have a fieldforce of approximately 390 people dedicated to marketing BYETTA and SYMLIN inthe United States.  Our field forceincludes our specialty sales force, and managed care and government affairsorganizations.  Lilly co-promotes BYETTAin the United States.

 

Inaddition to our marketed products, we are working with Lilly and Alkermes, Inc.to develop exenatide once weekly. We are also working with Parsons, Inc.on the construction of a manufacturing facility for exenatide once weekly inOhio. We substantially completed the construction of this facility in 2008. Weare now manufacturing exenatide once weekly at commercial scale in thisfacility and using this material in clinical trials.  In March 2009, we reported that analysisof data from the ongoing extension of our DURATION-1 study designed to providethe data required to demonstrate comparability of commercial and developmentdrug lots to support theregulatory submission of exenatide once weekly have been successfully completedand are part of the NDA submitted to FDA in May 2009.  The FDA filed the NDA submission in July 2009and the application has a ten month review period.  In March 2009, we alsoannounced that a meta-analysis of primary cardiovascular events acrosscontrolled clinical studies of three months or greater, from the BYETTAdatabase, showed no increased risk of cardiovascular events associated withexenatide use and that these findings will be used to support thecardiovascular safety of exenatide once weekly.

 

InMarch 2009 and July 2009, we announced positive results from DURATION-2 andDURATION-3, respectively, the second and third in a series of six of suchstudies designed to test the superiority of exenatide once weekly compared toother diabetes therapies.  In DURATION-2exenatide once weekly demonstrated **superior glucose control withweight loss and no increase in hypoglycemia compared to**maximum dosesof **sitagliptin or pioglitazone.  In DURATION-3**exenatideonce weekly demonstrated **superior glucose control withweight loss and with less hypoglycemia compared to**insulinglargine. During the remainder of 2009, we remain focused on building asuperior profile for exenatide once weekly by conducting clinical studies thatcompare exenatide once weekly against competing products. The objective ofthese studies is to support the launch of exenatide once weekly and demonstratesuperiority and the transformational nature of our exenatide once weekly therapy.

 

In November 2008, weannounced a strategic restructuring and workforce reduction that reduced thesize of our San Diego workforce by approximately 25%, or 330 employees. Thegoal of the restructuring was to better align our cost structure with anticipatedrevenues and is part of our business plan to achieve positive operating cashflow by the end of 2010. Additionally, in May 2009, we announced therestructuring of our sales force as discussed above.  We continue to believe we have theappropriate resources to market BYETTA and SYMLIN, bring exenatide once weeklyto market as soon as possible, and continue to advance our obesity programs.

 

Our long-term growthstrategy is focused on making prudent investment decisions based on strongclinical data to advance our obesity program and includes our Integrated Neurohormonal Therapies forObesity strategy.  In July 2009, weannounced positive results from a 28-week dose-ranging study ofpramlintide/metreleptin, a combination treatment comprising pramlintide, ananalog of the natural hormone amylin, and metreleptin, an analog of the naturalhormone leptin, in overweight and obese patients. This Phase 2 studysuccessfully characterized patients who responded best to treatment and alsoprovided important information to inform dose selection.  In 2009, we plan to continue the developmentof a potential obesity medicine that is a combination of pramlintide andmetreleptin and the development of a second generation amylinomimetic, nowknown as davalintide (formerly known as AC2307). Davalintide is now in aPhase 2 clinical study and we expect to report data from this study by theend of 2009.

 

In October 2009, weentered into a worldwide, exclusive license, development and commercializationagreement with Takeda  to co-develop andcommercialize pharmaceutical products for the treatment of obesity and otherindications.  The agreement includes 

 

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pramlintide/metreleptin, davalintide and additionalcompounds from both companies’ obesity research programs.  We will receive a one-time up-front paymentof $75 million from Takeda and, in relation to the compounds under the agreement,are eligible to receive additional payments upon achieving certain development,commercialization and sales-based milestones that could exceed $1 billion.  The agreement also provides for us to receivefuture tiered, double-digit royalty payments based on global product sales.

 

Although our efforts willremain primarily focused on our near-term opportunities including BYETTA,SYMLIN, exenatide once weekly and select investments in our obesity programs,we also maintain an active discovery research program focused on novel peptideand protein therapeutics and are actively seeking to in-license additional drugcandidates.

 

We have also made a numberof strategic investments and collaborations for the potential development ofadditional drug candidates.

 

Since our inception in September 1987, we havedevoted substantially all of our resources to our research and developmentprograms and, more recently, to the commercialization of our products. All ofour revenues prior to May 2005 were derived from fees and expensereimbursements under our BYETTA collaboration agreement with Lilly, previousSYMLIN collaborative agreements and previous co-promotion agreements. Duringthe second quarter of 2005, we began to derive revenues from product sales ofBYETTA and SYMLIN.  At September 30, 2009, our accumulateddeficit was approximately $1.9 billion.

 

At September 30,2009, we had $619.7 million in cash, cash equivalents and short-terminvestments.  Additionally we have futureavailability of an additional $165 million of cash beginning December 1,2009 pursuant to a credit facility with Lilly. Although we may not generatepositive operating cash flows in the near term, we intend to improve ouroperating results and reduce our use of cash for operating activities to achieveour goal to be operating cash flow positive on a sustainable basis by the endof 2010. Refer to the discussions under the headings “*Liquidity and Capital Resources*” below and“*Cautionary Factors That May AffectFuture Results*” in Part I, Item 1A for further discussionregarding our anticipated future capital requirements.

 

**Applicationof Critical Accounting Policies**

 

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

 

Therewere no significant changes in critical accounting policies from those at December 31,2008, other than the adoption of new authoritative guidance related toconvertible debt instruments that may be settled in cash upon conversion andwhich required the estimation of the non-convertible borrowing rate for our2007 Notes.  The financial information asof September 30, 2009 should be read in conjunction with the financialstatements for the year ended December 31, 2008, contained in our annualreport on Form 10-K filed 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 September 30, 2009 to Three Months Ended September 30,2008**

 

***Net Product Sales***

 

Netproduct sales for the three months ended September 30, 2009 and 2008 were$192.9 million and $201.4 million, respectively, and consisted of shipmentsof BYETTA and SYMLIN, less allowances for product returns, rebates, wholesalerchargebacks, wholesaler discounts and prescription vouchers.

 

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

 
| ** ** | ** ** | **Three months ended  September 30,** | ** ** |
|------------|------------|------------------------------------------------------|------------|
| ** ** | ** ** | **2009**                                             | ** ** | **2008** | ** ** |
| BYETTA     |       | $                                                    | 171.1      |   | $ | 179.9 |   |
| SYMLIN     |       | 21.8                                                 |       | 21.5 |   |
|       |       | $                                                    | 192.9      |   | $ | 201.4 |   |

 

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The decrease in netproduct sales for BYETTA in the current period primarily reflects a reductionin prescription demand following an August 2008 FDA update to a prioralert referencing pancreatitis, partially offset by higher prices in the threemonths ended September 30, 2009 compared to the same period in 2008.  We believe that prescription demand continuedto stabilize in the three months ended September 30, 2009.

 

Net product sales forSYMLIN in the current period remained largely unchanged from the same period in2008 due to a reduction in prescription demand partially offset by higherprices in the quarter ended September 30, 2009 compared to the same periodin 2008.  We believe that with theincreased promotion for SYMLIN with our new specialty sales force discussedabove, we have an opportunity to increase SYMLIN demand in the near term.

 

Sales of our products infuture periods may be impacted by numerous factors, including potentialcompetition, the potential approval of additional products including exenatideonce weekly, regulatory matters, including expected label changes for BYETTA,economic factors and other environmental factors.

 

***Revenues Under Collaborative Agreements***

 

Revenues undercollaborative agreements for the three months ended September 30, 2009were $18.3****million, compared to $17.0 million forthe same period in 2008. Substantially all of the revenue recorded in theseperiods consists of amounts earned pursuant to our BYETTA collaborationagreement with Lilly. The $1.3 million increase in revenues under collaborativeagreements in the current quarter compared to the same period in 2008 reflectshigher cost-sharing payments from Lilly for exenatide once weekly manufacturingdevelopment expenses due to the amended cost sharing provisions contained inour collaboration agreement with Lilly mentioned above.  The increase in revenues due to the increasedcost-sharing ratio is partially offset by lower development expenses.

 

The following table summarizes the components ofrevenues under collaborative agreements for the three months ended September 30,2009 and 2008 (in millions):

 
| ** **                         | ** ** | **Three months ended  September 30,** | ** ** |
|------------------------------------|------------|------------------------------------------------------|------------|
| ** **                         | ** ** | **2009**                                             | ** ** | **2008** | ** ** |
| Amortization of up-front  payments |       | $                                                    | 1.0        |   | $ | 1.1 |   |
| Cost-sharing payments              |       | 17.3                                                 |       | 15.9 |   |
|                               |       | $                                                    | 18.3       |   | $ | 17.0 |   |

 

In future periods, we expect that revenues undercollaborative agreements will consist of ongoing cost-sharing payments from Lillyfor sharing of development costs, possible future milestone payments, theamortization of the $75 million cash payment received in connection with theTakeda agreement discussed above and, following the commercial launch ofexenatide once weekly, the amortization of a portion of the $125 millioncash payment received in connection with the exenatide once weekly supplyagreement discussed above. Future cost-sharing revenue recorded will bedependent on the timing, extent and relative proportion of total developmentcosts for the exenatide once weekly and BYETTA development programs incurred byus and by Lilly. The receipt and recognition as revenue of future milestonepayments is subject to the achievement of performance requirements underlyingsuch milestone payments.

 

***Cost of Goods Sold***

 

Costof goods sold was $22.6 million and $23.4 million, for the three months ended September 30,2009 and 2008, respectively, representing a gross margin of 88% in bothperiods, and is comprised primarily of manufacturing costs associated withBYETTA and SYMLIN. Quarterly fluctuations in gross margins may be influenced byproduct mix, pricing and the level of sales allowances.

 

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

 

Selling, general andadministrative expenses decreased to $80.1 million for the three months ended September 30,2009 from $99.7 million for the same period in 2008. The decrease primarilyreflects efficiencies driven by our reduced cost structure following our recentrestructurings.  We expect that selling,general and administrative expenses for the remainder of 2009 will increasemodestly from current levels as we invest to support the planned launch ofexenatide once weekly in 2010.

 

We, along with Lilly, arejointly responsible for the co-promotion of BYETTA within the United States,and share equally in sales force costs and external marketing expenses.Accordingly, our selling, general and administrative expenses include our 50%share of these costs in the United States.

 

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***Research and Development Expenses***

 

Our research and development costs are comprised ofcash compensation, benefits and non-cash stock-based compensation; licensefees, milestones under license agreements and costs paid to third-partycontractors to perform research, conduct clinical trials and develop drugmaterials and delivery devices.  Alsoincluded are overhead expenses and facilities costs. We charge direct internaland external program costs to the respective development programs. We alsoincur indirect costs that are not allocated to specific programs because suchcosts benefit multiple development programs and allow us to increase ourpharmaceutical development capabilities. These consist primarily of facilitiescosts and other internal shared resources related to the development andmaintenance of systems and processes applicable to all of our programs.

 

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

 

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

 
| ** **                        | ** ** | **Three months ended September 30,** | ** ** |
|-----------------------------------|------------|----------------------------------------------------------|------------|
| ** **                        | ** ** | **2009**                                                 | ** ** | **2008** | ** ** | **Increase/(Decrease)** | ** ** |
| Diabetes (1)                      |       | $                                                        | 27.5       |   | $ | 37.8 |   | $ | (10.3 | ) |
| Obesity                           |       | 6.0                                                      |       | 14.1 |   | (8.1 | ) |
| Research and early-stage programs |       | 6.0                                                      |       | 8.1 |   | (2.1 | ) |
| Indirect costs                    |       | 13.2                                                     |       | 13.5 |   | (0.3 | ) |
|                              |       |                                                     |       |   |   |   |   |
|                              |       | $                                                        | 52.7       |   | $ | 73.5 |   | $ | (20.8 | ) |

 

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(1)          Research and development expenses for our diabetesprograms consist primarily of costs associated with BYETTA and exenatide onceweekly which are shared by Lilly pursuant to our collaboration agreement.  Cost-sharing payments received from Lilly areincluded in revenues under collaborative agreements.  Expenditures for our diabetes developmentprograms are generally partially offset by an increase in cost-sharing paymentsfrom Lilly.  Cost-sharing payments fromLilly for BYETTA and exenatide once weekly development expenses were $17.0million and $15.7 million for the three months ended September 30, 2009and 2008, respectively.

 

The $20.8 million decrease in research anddevelopment expenses for the three months ended September 30, 2009compared to the same period in 2008 primarily reflects decreased expenses of$10.3 million for our diabetes programs and decreased expenses of $8.1 millionfor our obesity development programs. The decrease in expenses for our research and development programsprimarily reflects lower development expenses for exenatide once weekly and ourobesity programs following the completion of our Duration-2, Duration-3 andpramlintide/leptin clinical trials, as well as efficiencies driven by ourreduced cost structure.  We expect research and developmentexpenses for the remainder of 2009 to increase from current levels due to costsassociated with pre-launch manufacturing activities at our Ohio manufacturingfacility for the planned launch of exenatide once weekly in 2010, and theinitiation of a cardiovascular outcomes study in the fourth quarter of 2009.

 

***Collaborative Profit Sharing***

 

Collaborativeprofit sharing was $78.3 million and $80.6 million for the three months ended September 30,2009 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 consists primarily of interest income from investment of cashand other investments. Interest and other income decreased to $1.4 million forthe three months ended September 30, 2009 from $3.3 million for the sameperiod in 2008.  The decrease primarilyreflects lower average balances available for investment, lower interest ratesearned on our short-term investments in the three months ended September 30,2009 compared to the same period in 2008.

 

Interest and other expenseconsists primarily of interest expense resulting from our long-term debtobligations. Interest expense in the three months ended September 30, 2009consists of interest on our $775 million par value of outstanding convertiblesenior notes and our $101.6 million of outstanding long-term note payable, theamortization of associated debt issuance costs and recognized gains 

 

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and losses associated withrecording economic hedge transactions at fair value. Interest and other expense was $5.7million and $8.6 million for the three months ended September 30, 2009 and2008, respectively.  The decrease ininterest and other expense for the three months ended September 30, 2009primarily reflects an increase in capitalized interest associated with our Ohiomanufacturing facility and an increase in recognized gains 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 the three months ended September 30,2009 was $26.7 million compared to a net loss of $79.0 million for the sameperiod in 2008. The decrease in net loss primarily reflects the decreasedselling, general and administrative expenses, decreased research anddevelopment expenses, decreased collaborative profit-sharing, decreasedimpairment loss and increased revenues under collaborative agreements,partially offset by decreased net product sales.  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 on asustainable basis by the end of 2010 and in May 2009, we announced therestructuring of our sales force as discussed above.  However, our ability to reach profitabilityin the future will be heavily dependent upon product sales that we achieve forBYETTA, 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 early-stage development programs and related support infrastructure. Ouroperating results may fluctuate from quarter to quarter as a result ofdifferences in the timing of expenses incurred and revenues recognized.

 

**Comparisonof Nine Months Ended September 30, 2009 to Nine Months Ended September 30,2008**

 

***Net Product Sales***

 

Netproduct sales for the nine months ended September 30, 2009 and 2008 were$569.7 million and $580.4 million, respectively, and consisted of shipmentsof BYETTA and SYMLIN, less allowances for product returns, rebates, wholesalerchargebacks, wholesaler discounts and prescription vouchers.

 

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

 
| ** ** | ** ** | **Nine months ended  September 30,** | ** ** |
|------------|------------|-----------------------------------------------------|------------|
| ** ** | ** ** | **2009**                                            | ** ** | **2008** | ** ** |
| BYETTA     |       | $                                                   | 503.9      |   | $ | 515.9 |   |
| SYMLIN     |       | 65.8                                                |       | 64.5 |   |
|       |       | $                                                   | 569.7      |   | $ | 580.4 |   |

 

The decrease in netproduct sales for BYETTA in the current period primarily reflects decreasedprescription demand following an August 2008 FDA update on a prior alertreferencing pancreatitis and an allowance for rebates related to the U.S.Department of Defense’s (DOD) Tricare Retail Pharmacy program discussed below,including $4.4 million for a retroactive rebate assessment for sales during2008, partially offset by higher prices in the nine months ended September 30,2009 compared to the same period in 2008. We believe that prescription demandhas stabilized in the nine months ended September 30, 2009.

 

The slight increase innet product sales for SYMLIN in the current period primarily reflects higherprices partially offset by a reserve for the DOD’s Tricare Retail Pharmacyprogram discussed below, including $0.4 million for a retroactive rebateassessment for sales during 2008 and a reduction in prescription demand. Webelieve our increased SYMLIN  promotionalefforts using our new specialty sales force discussed above will create theopportunity to increase SYMLIN demand over time.

 

We recorded an allowancerelated 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 clarified the DOD’sinterpretation 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 $7.5 millionfor such rebates in the nine months ended September 30, 2009, of which$4.8 million represents a retroactive rebate assessment for sales made during2008.

 

Sales of our products infuture periods may be impacted by numerous factors, including potentialcompetition, the potential approval of additional products including exenatideonce weekly, regulatory matters including expected label changes for BYETTA,economic factors and other environmental factors.

 

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***Revenues Under Collaborative Agreements***

 

Revenues under collaborative agreements for the ninemonths ended September 30, 2009 were $44.6****million,compared to $57.2 million for the same period in 2008. Substantially all of therevenue recorded in these periods consists of amounts earned pursuant to ourexenatide collaboration agreement with Lilly. The $12.6 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 partially offset by an increase in Lilly’sshare of the exenatide once weekly manufacturing development expenses due tothe amended cost sharing provisions contained in our collaboration agreementwith Lilly mentioned above.

 

The following table summarizes the components ofrevenues under collaborative agreements for the nine months ended September 30,2009 and 2008 (in millions):

 
| ** **                         | ** ** | **Nine months ended  September 30,** | ** ** |
|------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                         | ** ** | **2009**                                            | ** ** | **2008** | ** ** |
| Amortization of up-front  payments |       | $                                                   | 3.2        |   | $ | 3.2 |   |
| Cost-sharing payments              |       | 41.4                                                |       | 54.0 |   |
|                               |       | $                                                   | 44.6       |   | $ | 57.2 |   |

 

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, theamortization of the $75 million cash payment received in connection with theTakeda agreement discussed above and, following the commercial launch ofexenatide once weekly, the amortization of a portion of the $125 millioncash payment received in connection with the exenatide once weekly supplyagreement discussed above. Future cost-sharing revenue recorded will bedependent on the timing, extent and relative proportion of total developmentcosts for the exenatide once weekly and BYETTA development programs incurred byus and by Lilly. The receipt and recognition as revenue of future milestonepayments is subject to the achievement of performance requirements underlyingsuch milestone payments.

 

***Cost of Goods Sold***

 

Costof goods sold was $65.5 million and $70.1 million for the nine months ended September 30,2009 and 2008, respectively, representing a gross margin of 88% in bothperiods, and is comprised primarily of manufacturing costs associated withBYETTA 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 andadministrative expenses decreased to $259.7 million for the nine months ended September 30,2009 from $309.0 million for the same period in 2008. The decrease primarilyreflects efficiencies driven by the Company’s reduced cost structure followingour recent restructurings partially offset by costs associated with our recentproxy contest.  We expect that selling,general and administrative expenses for the remainder of 2009 will increasemodestly from current levels as we invest to support the planned launch ofexenatide once weekly in 2010.

 

We, along with Lilly, arejointly responsible for the co-promotion of BYETTA within the United States,and share equally in sales force costs and external marketing expenses.Accordingly, our selling, general and administrative expenses include our 50%share of these costs in the United States.

 

***Research and Development Expenses***

 

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

 
| ** **                        | ** ** | **Nine months ended September 30,** | ** ** |
|-----------------------------------|------------|---------------------------------------------------------|------------|
| ** **                        | ** ** | **2009**                                                | ** ** | **2008** | ** ** | **Increase/(Decrease)** | ** ** |
| Diabetes  (1)                     |       | $                                                       | 93.8       |   | $ | 119.5 |   | $ | (25.7 | ) |
| Obesity                           |       | 22.3                                                    |       | 43.4 |   | (21.1 | ) |
| Research and early-stage programs |       | 18.7                                                    |       | 24.6 |   | (5.9 | ) |
| Indirect costs                    |       | 41.5                                                    |       | 38.6 |   | 2.9 |   |
|                              |       | $                                                       | 176.3      |   | $ | 226.1 |   | $ | (49.8 | ) |

 

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(1)  Research and development expenses for our diabetes programsconsist primarily of costs associated with BYETTA and exenatide once weeklywhich are shared by Lilly pursuant to our collaboration agreement.  Cost-sharing payments received from Lilly areincluded in revenues under collaborative agreements.  Expenditures for our diabetes developmentprograms are generally partially offset by an increase in cost-sharing paymentsfrom Lilly.  Cost-sharing payments fromLilly for BYETTA and exenatide once weekly development expenses were $40.6million and $53.1 million for the nine months ended September 30, 2009 and2008, respectively.

 

The $49.8 million decrease in research anddevelopment expenses for the nine months ended September 30, 2009 comparedto the same period in 2008 primarily reflects decreased expenses of $25.7million for our diabetes programs and decreased expenses of $21.1 million forour obesity development programs.  Thedecrease in expenses for our research and development programs primarilyreflects lower development expenses for exenatide once weekly and our obesityprograms following the completion of our Duration-2, Duration-3 andpramlintide/leptin clinical trials, as well as efficiencies driven by ourreduced cost structure following our recent restructurings.  We expect research and development expenses for theremainder of 2009 to increase from current levels due to costs associated withpre-launch manufacturing activities at our Ohio manufacturing facility for theplanned launch of exenatide once weekly in 2010, if approved, and theinitiation of a cardiovascular outcomes study in the fourth quarter of 2009.

 

***Collaborative Profit Sharing***

 

Collaborativeprofit sharing was $227.5 million and $229.4 million for the nine months ended September 30,2009 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 consists primarily of interest income from investment of cashand other investments. Interest and other income decreased to $6.5 million forthe nine months ended September 30, 2009 from $21.3 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 nine months ended September 30,2009 compared to the same period in 2008.

 

Interest and other expenseconsists primarily of interest expense resulting from our long-term debtobligations. Interest expense in the nine months ended September 30, 2009consists of interest on our $775 million par value of outstanding convertible seniornotes and our $101.6 million of outstanding long-term note payable, theamortization of associated debt issuance costs and recognized gains and lossesassociated with recording economic hedge transactions at fair value. Interest and other expense was $15.0million and $26.1 million for the nine months ended September 30, 2009 and2008, respectively.  The decrease ininterest and other expense for the nine months ended September 30, 2009primarily reflects an increase in capitalized interest associated with our Ohiomanufacturing facility and an increase in recognized gains 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.

 

***Loss on impairment of investments***

 

We recognized a loss onimpairment of investments of $1.4 million for the nine months ended September 30,2009 for credit-related losses for two securities in our short-term investmentportfolio.  The impairment loss was basedupon the difference between the cost basis and the observed market prices forthe securities as of the date of the impairment.

 

We recognized a loss onimpairment of investments of $14.9 million for the nine months ended September 30,2008 which was comprised of a recognized $9.0 million other-than-temporaryimpairment loss on an equity investment in a privately held entity and a $5.9million other-than-temporary impairment loss on a corporate debt security inour investment portfolio.  The impairmentloss on the equity investment was based upon our assessment of the entity’sfinancial and technical performance and the entity’s ability to raiseadditional capital.  The impairment losson the corporate debt security was based upon our assessment of the impact ofbankruptcy proceedings of the issuer on the recoverability of ourinvestment.  At September 30, 2009,gross unrealized losses on our short-term investments were $1.6 million, all ofwhich we determined to be temporary.

 

***Net Loss***

 

Ournet loss for the nine months ended September 30, 2009 was $136.0 millioncompared to a net loss of $216.7 million for the same period in 2008. Thedecrease in net loss primarily reflects the decreased selling, general and administrativeexpenses, decreased research and development expenses and decreasedcollaborative profit-sharing, partially offset by decreased net product sales,decreased revenue under collaborative agreements and the restructuring chargediscussed above under the heading “*Restructuring.*”  We may incur operatinglosses for the next few years. In November 2008 we announced ourrestructuring and our business plan to 

 

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becomeoperating cash flow positive on a sustainable basis by the end of 2010, and in May 2009we announced the restructuring of our sales force as discussed above.  However, our ability to reach profitabilityin the future will be heavily dependent upon the product sales that we achievefor 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.

 

# **Liquidityand 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 exenatide collaboration with Lilly,reimbursement of SYMLIN development expenses through earlier collaborationagreements and, since the second quarter of 2005, through product sales ofBYETTA and SYMLIN.

 

At September 30,2009, we had approximately $619.7 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 on a sustainable basis by the end of 2010.  In addition, in May 2009, we implementeda restructuring of our sales force.  Ouruse of cash for capital expenditures decreased in 2009 compared to 2008following the substantial completion of our manufacturing facility in Ohio in2008, partially offset by additional capital expenditures for the developmentof a pen device for exenatide once weekly.  Our current business plan does not contemplate a need to raiseadditional funds from outside sources, however, we may evaluate opportunitiesto refinance existing indebtedness from time to time. If we require additionalfinancing in the future, we cannot assure you that it will be available to us onfavorable terms, or at all. Although we have previously been successful inobtaining financing through our debt and equity securities offerings, there canbe no assurance that we will be able to do so in the future, especially giventhe current adverse economic and credit conditions.

 

Weused cash of $71.6 million and $88.9 million for our operating activities inthe nine months ended September 30, 2009 and 2008, respectively.  Our cash used for operating activities in thenine months ended September 30, 2009 includes a net use of cash of $23.8million for changes in operating assets and liabilities.  This includes uses of cash due to increasesin other current assets and accounts receivable of $29.0 million and $14.7million, respectively, and decreases in accounts payable and accruedliabilities and restructuring liabilities of $3.1 million and $17.5 million,respectively.  This also includes sourcesof cash for increases in payable to collaborative partner and deferredcollaborative profit-sharing of $1.3 million, $40.1 million, respectively, anda decrease in inventories of $12.0 million. The increase in other current assets reflects prepayments for rawmaterial inventory and the increase in accounts receivable is primarily due tothe timing of sales during the quarter ended September 30, 2009.  The decrease in accounts payable and accruedliabilities primarily reflects lower expense levels. The decrease inrestructuring liabilities reflects payments made in relation to our recentrestructuring activities.  The increasein deferred collaborative profit-sharing reflects payments from Lilly for its60% share of the capital expenditures we have made for the exenatide onceweekly pen device.  The decrease ininventories primarily reflects reduction in finished goods due to the timingand volume of production.  Workingcapital changes may fluctuate from quarter to quarter due to timing ofinventory and other current asset purchases and the timing of payments ofaccounts payable, accrued compensation and other current liabilities.

 

Ourinvesting activities used cash of $41.9 million and $153.3 million for the ninemonths ended September 30, 2009 and 2008, respectively. Investingactivities for both periods consisted primarily of purchases and sales ofshort-term investments and purchases of property, plant and equipment andincreases in other long-term assets. Purchases of property, plant and equipment decreased to $119.1 millionfor the nine months ended September 30, 2009 from $237.8 million for thenine months ended September 30, 2008. The decrease in purchases of property, plant and equipment primarilyreflects reduced expenditures for our Ohio manufacturing facility following itssubstantial completion in the year ended December 31, 2008. Through September 30,2009, we had expended approximately $663.4 million associated with theconstruction of this facility, including the exenatide once weekly pen devicediscussed below, which includes costs associated with the construction of thefacility, purchase and installation of equipment and capitalized labor andmaterials required to validate the facility. Our use of cash for capital expenditures decreased in 2009 compared to2008 following the substantial completion of our manufacturing facility in Ohioin 2008, partially offset by capital investments associated with the exenatideonce weekly pen device discussed above. The initial capital investment for the pen is expected to be $216.0million over the next few years, which will be funded 60% by Lilly and 40% byus. Through September 30, 2009, we had incurred $69.5 million in capitalexpenditures associated with the exenatide once weekly pen device. We havebilled Lilly $40.1 million for these expenditures, of which $32.6 million hasbeen received to date, and is included in cash used for operating activities asdiscussed above.  We will continue toevaluate potential additional investments in our Ohio manufacturing facilityduring the product lifecycle for exenatide once weekly.

 

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Financing activities used cash of $12.5 million andprovided cash of $16.6 million for the nine months ended September 30,2009 and 2008, respectively.  Financingactivities in the nine months ended September 30, 2009 include $23.4million in principal payments on our term loan, partially offset by proceedsfrom the exercise of stock options and proceeds from our employee stockpurchase plan. Financing activities for the nine months ended September 30,2008 include proceeds from the exercise of stock options and proceeds from ouremployee stock purchase plan.

 

At December 31, 2008,we had $200 million in aggregate principal amount of convertible seniornotes due 2011, or the 2004 Notes, and $575 million of the convertiblesenior notes due 2014, or the 2007 Notes, outstanding. The 2004 Notes arecurrently convertible into a total of up to 5.8 million shares of ourcommon stock at approximately $34.35 per share and are not redeemable at ouroption. The 2007 Notes are currently convertible into a total of up to9.4 million shares of our common stock at approximately $61.07 per shareand are not redeemable at our option.  Subject to certain exceptions, if weundergo a “designated event” (as defined in the associated indenture agreement)including a “fundamental change,” such as if a majority of our Board ofDirectors ceases to be composed of the existing directors or other individualsapproved by a majority of the existing directors, holders of the 2007 Noteswill, for the duration of the notes, have the option to require us torepurchase all or any portion of their 2007 Notes.

 

In December 2007, weentered into a $140 million credit agreement. The credit agreementprovides for a $125 million term loan and a $15 million revolvingcredit facility. The revolving credit facility also provides for the issuanceof letters of credit and foreign exchange hedging up to the $15 millionborrowing limit. The term loan is repayable on a quarterly basis, with nopayments due quarters one through four, 6.25% of the outstanding principal duequarters five through eleven, and 56.25% of the outstanding principal due inquarter twelve. At September 30, 2009 we had an outstanding balance of$101.6 million under the term loan and had issued $8.9 million ofstandby letters of credit under the revolving credit facility. Both loans havea final maturity date of December 21, 2010. Interest on the term loan ispayable quarterly in arrears at a rate equal to 1.75% above the LondonInterbank Offered Rate, or LIBOR, of either one, two, three or six months LIBORterm at our election. We have entered into an interest rate swap agreementwhich resulted in a net fixed interest rate of 5.717% under the term loan. Theinterest rate on the revolving credit facility is LIBOR plus 1.0% or the Bankof America prime rate, at our election. The credit agreement provides for automatic acceleration upon the occurrenceof bankruptcy, other insolvency events and a change in control as defined inthe credit agreement, as amended.

 

In October 2008, weentered into a loan agreement with Lilly pursuant to which Lilly will makeavailable to us a $165 million unsecured line of credit that we can drawupon from time to time beginning on December 1, 2009 and ending on June 30,2011. Any interest due under this credit facility will bear interest at thefive-day average three-month LIBOR rate immediately prior to the date of theadvance plus 5.25% and shall be due and payable quarterly in arrears on thefirst business day of each quarter. All outstanding principal, together withall accrued 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.

 

Thefollowing table summarizes our contractual obligations and maturity dates as ofSeptember 30, 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                                |       | 96,250                                    |       | 22,250 |   | 39,500 |   | 34,500 |   | — |   |
| Long-term  note payable                                                |       | 101,563                                   |       | 31,250 |   | 70,313 |   | — |   | — |   |
| Interest  on long-term note payable, net of swap transactions (1) |       | 6,141                                     |       | 5,136 |   | 1,005 |   | — |   | — |   |
| Inventory  purchase obligations(2)                                     |       | 114,514                                   |       | 43,897 |   | 61,440 |   | 9,177 |   | — |   |
| Construction  contracts                                                |       | 74,300                                    |       | 34,300 |   | 40,000 |   | — |   | — |   |
| Operating  lease obligations                                           |       | 193,141                                   |       | 22,982 |   | 47,909 |   | 50,456 |   | 71,794 |   |
| Total(3)                                                               |       | $                                         | 1,360,909  |   | $ | 159,815 |   | $ | 460,167 |   | $ | 669,133 |   | $ | 71,794 |   |

 

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(1)   The interest payments shown were calculated using arate of 5.717%, the combined net rate of the term loan and interest rate swap,on the outstanding principal balance of the term loan.

 

(2)   Includes $30.9 million of outstanding purchase orders, cancelableby us upon 30 days’ written notice, subject to reimbursement of costs incurredthrough the date of cancellation.

 

(3)   Excludes long-term obligation of $8.8 million related to deferredcompensation, the payment of which is subject to elections made by participantsthat are subject to change.

 

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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 milestone orother payments up to $5.5 million associated with licensing agreements in thenext 12 months.  Additional milestones ofup to approximately $287.4 million could be paid over the next 10 to 15 yearsif development and commercialization of all our early stage programs continueand are successful.  The significantmajority of these milestones relate to potential future regulatory approvalsand subsequent sales thresholds.  Giventhe inherent risk in pharmaceutical development, it is highly unlikely that wewill ultimately make all of these milestone payments; however, we wouldconsider these payments as positive because they would signify that the relatedproducts are moving successfully through development and commercialization.

 

Our future capitalrequirements will depend on many factors, including: product sales of BYETTAand exenatide once weekly, if approved, net of profit sharing payments toLilly, and product sales for SYMLIN; costs associated with the continuedcommercialization of BYETTA and SYMLIN; costs associated with the operation ofour exenatide once weekly manufacturing facility; costs of potential licensesor acquisitions; the potential need to repay existing indebtedness; our abilityto receive or need to make milestone payments; our ability, and the extent towhich we establish collaborative arrangements for SYMLIN or any of our productcandidates; progress in our research and development programs and the magnitudeof these programs; costs involved in preparing, filing, prosecuting,maintaining, enforcing or defending our patents; competing technological andmarket developments; and costs of manufacturing, including costs associatedwith establishing our own manufacturing capabilities or obtaining andvalidating additional manufacturers of our products; and scale-up costs for ourdrug candidates.

 

**Off-BalanceSheet Arrangements**

 

We do not have anyoff-balance sheet arrangements that are currently or reasonably likely to bematerial to our consolidated financial position or results of operations.

 

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**ITEM 3.              Quantitative and Qualitative Disclosures about MarketRisk**

 

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. Although we do utilizederivative financial instruments, derivative commodity instruments or othermarket risk sensitive instruments, positions or transactions, we do not do soin any material fashion. Accordingly, we believe that, while the instrumentsheld are subject to changes in the financial standing of the issuer of suchsecurities, we are not subject to any material risks arising from changes ininterest rates, foreign currency exchange rates, commodity prices, equityprices or other market changes that affect market risk sensitive investments.Our debt is not subject to significant swings in valuation due to changes ininterest rates as interest rates on our debt are fixed.  The fair value of our 2004 Notesand 2007 Notes at September 30, 2009 was approximately $186.5 million and$443.1 million, respectively.  We have enteredinto an interest rate swap in connection with our $125 million termloan.  The fair value of the interestrate swap at September 30, 2009 was a liability of $3.6 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 September 30,2009, 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 September 30, 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 andrefine our disclosure controls and procedures and internal control overfinancial reporting.

 

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

 

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**PART II. OTHER INFORMATION**

 

**Item 1.  Legal Proceedings**

 

Product Liability and Other Claims

 

From time to time in the ordinary course ofbusiness, 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.  Since August 2008, we and Lilly havebeen named as defendants in 39 separate product liability cases involvingapproximately 208 plaintiffs in various courts in the United States.  These cases have been brought by individualswho allege they have used BYETTA.  Theygenerally seek compensatory and punitive damages for alleged injuries,consisting primarily of pancreatitis, and in some cases, wrongful death.  Most of the cases are pending in Californiastate court, where the Judicial Council has granted our petition for a “coordinatedproceeding” for all California state court cases alleging harm allegedly as aresult of BYETTA use.  We also have received notice from plaintiff’scounsel of additional claims by individuals who have not filed suit.  While we cannot predict the outcome of anylawsuit, claim or proceeding, we and Lilly intend to vigorously defend thesematters.

 

StockholderLitigation

 

On March 24, 2009, a putative class actiontitled San Antonio Fire & Police Fund v. Bradbury et al. (Case No. 4446-VCL)was filed by a stockholder of ours in the Court of Chancery of the State ofDelaware.  The original complaintasserted claims for breach of fiduciary duty against us and our currentdirectors arising out of certain provisions contained in our outstanding debtinstruments relating to a change in a majority of the directors of theBoard.  The plaintiff subsequentlyamended the complaint adding the indenture trustee under the 2007 Notes and theadministrative agent under the Credit Agreement as defendants.  The complaint sought 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.

 

On May 6, 2009, we entered into an amendment ofthe Credit Agreement.  The amendmentprovides that lenders under the Credit Agreement agree to consent to theelection of six or more stockholder nominees to our Board at our 2009 annualmeeting of stockholders upon payment of a fee and the satisfaction of certainconditions as set forth in the amendment. A hearing of this case was held on May 4, 2009.  On May 12, 2009 the court (i) entereda judgment in favor of the defendants for a claim alleging breach of the dutyof care by defendant directors; (ii) rendered moot a claim seekingdeclaration of the invalidity and unenforceability of a continuing directors’provision in a credit agreement with Bank of America and (iii) declaredthat our Board was entitled to approve dissident nominees for purposes of itsindenture with Bank of New York, dismissing without prejudice other claims asbeing unripe for adjudication.  On June 5,2009, the plaintiff appealed the court’s decision and on October 5, 2009,the Delaware Supreme Court affirmed the order and judgment of the Court ofChancery.

 

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

 

**CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS**

 

The following sets forthcautionary factors that may affect our future results, including clarificationsto the cautionary factors included in our Annual Report on Form 10-K forthe fiscal year ended December 31, 2008.

 

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

 

We have experiencedsignificant operating losses since our inception in 1987, including losses of$136 million for the nine months ended September 30, 2009,$321.9 million in 2008, $216.5 million in 2007 and$218.9 million in 2006. As of September 30, 2009, we had anaccumulated deficit of approximately $1.9 billion. The extent of ourfuture losses and the timing of potential profitability are uncertain, and wemay never achieve profitable operations. We have been engaged in discoveringand developing drugs since inception, which has required, and will continue torequire, significant research and development expenditures. We derivedsubstantially all of our revenues prior to 2005 from development funding, feesand milestone payments under collaborative agreements and from interest income.BYETTA and SYMLIN may not be as commercially successful as we expect and we maynot succeed in commercializing any of our other drug candidates. We may incursubstantial operating losses for at least the next few years. These losses,among other things, have had and will have an adverse effect on ourstockholders’ equity and working capital. Even if we become profitable, we maynot remain profitable.

 

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

 

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

 

·                  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;

 

·                  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 with BYETTA or SYMLIN or any other drugswe market or fail to comply with extensive continuing regulations enforced bydomestic and foreign regulatory authorities, it could cause us to discontinuemarketing those drugs, reduce our revenues and harm our ability to generatefuture revenues, which would negatively impact our financial position.***

 

BYETTA and SYMLIN, inaddition to any other of our drug candidates that may be approved by the FDA,will be subject to continual review by the FDA, and we cannot assure you thatnewly discovered or developed safety issues will not arise. With the use of anyof our marketed drugs by a wide patient population, serious adverse events mayoccur from time to time that initially do not appear to relate to the drugitself, and only if the specific event occurs with some regularity over aperiod of time does the drug become suspect as having a causal relationship tothe adverse event. Some patients taking BYETTA have reported developingpancreatitis. We are working to better understand the relationship betweenBYETTA and pancreatitis described in some spontaneously reported cases. Inkeeping with our focus on patient safety, we continue to pursue our drug safetyprogram that includes thorough investigation of individual spontaneous casereports along with clinical and epidemiologic studies. Within the detectionlimits of an initial epidemiology study which we provided to the FDA, we havenot observed an increased incidence of pancreatitis associated with BYETTAcompared to other treatments for diabetes and thus believe a definite causalrelationship between BYETTA and pancreatitis has not been proved. Any safetyissues could cause us to suspend or cease marketing of our approved products, causeus to modify how we market our approved products, subject us to substantialliabilities, and adversely affect our revenues and financial condition.

 

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Moreover, the marketing ofour approved products will be subject to extensive regulatory requirementsadministered by the FDA and other regulatory bodies, including adverse eventreporting requirements and the FDA’s general prohibition against promotingproducts for unapproved uses. The manufacturing facilities for our approvedproducts are also subject to continual review and periodic inspection andapproval of manufacturing modifications. Manufacturing facilities thatmanufacture drug products for the United States market, whether they arelocated inside or outside the United States, are subject to biennialinspections by the FDA and must comply with the FDA’s current goodmanufacturing practice, or cGMP, regulations. The FDA stringently appliesregulatory standards for manufacturing. Failure to comply with any of thesepost-approval requirements can, among other things, result in warning letters,product seizures, recalls, fines, injunctions, suspensions or revocations ofmarketing licenses, operating restrictions and criminal prosecutions. Any ofthese enforcement actions, any unanticipated changes in existing regulatoryrequirements or the adoption of new requirements, or any safety issues 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 ourproducts and drug candidates also are subject to numerous federal, state, localand foreign laws relating to such matters as safe working conditions,manufacturing practices, environmental protection, fire hazard control andhazardous substance disposal. In the future, our manufacturers may incursignificant costs to comply with those laws and regulations, which couldincrease our manufacturing costs and reduce our ability to operate profitably.

 

***We currently do not manufacture 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 ofsufficient quantities of newly-approved drug products and drug candidates is atime-consuming and complex process. We currently have no manufacturing capabilitiesfor our two marketed drug products. In order to successfully commercialize ourproducts, including BYETTA and SYMLIN, and continue to develop our drugcandidates, including exenatide once weekly, we rely on various third partiesto 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.

 

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 its businesspriorities, at a time that is costly or inconvenient for us. In addition,reliance on single-source suppliers subjects us to the risk of price increasesby these suppliers which could negatively impact our operating margins. If anyof these risks occur, our product supply will be interrupted resulting in lostor delayed revenues and delayed clinical trials. Our reliance on third-partymanufacturers for the production of our two commercial products is described inmore 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 of bulkpramlintide acetate, the active ingredient contained in SYMLIN. In addition, werely on Baxter to manufacture the dosage form of SYMLIN in vials. We rely onWockhardt for the dosage form of SYMLIN in cartridges and Ypsomed AG tomanufacture the components for the SYMLIN disposable pen. We also rely on SharpCorporation for the assembly of the SYMLIN pen.

 

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

 

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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 other manufacturersused for our drug candidates may not be able to produce supplies in commercialquantities if our drug candidates are approved. While we believe that businessrelations between us and our manufacturers are generally good, we cannotpredict whether any of the manufacturers that we may use will meet ourrequirements for quality, quantity or timeliness for the manufacture of bulkexenatide or pramlintide acetate, dosage form of BYETTA or SYMLIN, or pens.Therefore, we may not be able to obtain necessary supplies of products withacceptable quality, on acceptable terms or in sufficient quantities, if at all.Our dependence on third parties for the manufacture of products may also reduceour gross profit margins and our ability to develop and deliver products in atimely manner.

 

In order to manufacture 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 on Alkermesand 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.

 

***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, thereare a number of health care reform proposals under consideration by the Federalgovernment and we expect that there will continue to be a number of federal andstate proposals to implement government control over the pricing ofprescription pharmaceuticals. In addition, increasing emphasis on managed carein the United States will continue to put pressure on the rate of adoption andpricing of pharmaceutical products.

 

Significant uncertainty exists as to the reimbursement status of healthcare products. Third-party payers, including Medicare, are challenging theprices charged for medical products and services. Government and otherthird-party payers increasingly are attempting to contain health care costs bylimiting both coverage and the level of reimbursement for new drugs and byrefusing to provide coverage for uses of approved products for diseaseindications for which the FDA has not granted labeling approval. Third-partyinsurance coverage may not be available to patients for BYETTA and/or SYMLIN orany other products we discover and develop. 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, sales force, human and otherresources than we do and may be better equipped to develop, manufacture andmarket technologically superior products. In addition, many of thesecompetitors have significantly greater experience than we do in undertakingpreclinical testing and human clinical studies of new pharmaceutical productsand in obtaining regulatory approvals of human therapeutic products.Accordingly, our competitors may succeed in obtaining 

 

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FDAapproval for superior products. Furthermore, now that we have received FDAapproval for BYETTA and SYMLIN, we may also be competing against othercompanies with respect to our manufacturing and product distribution efficiencyand sales and marketing capabilities, areas in which we have limited or noexperience as an organization.

 

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

 

·                 sulfonylureas;

 

·                 metformin;

 

·                 insulins,including injectable and inhaled versions;

 

·                 TZDs;

 

·                 glinides;

 

·                 DPP-IV inhibitors;

 

·                 incretin/GLP-1agonists;

 

·                 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.

 

***Delays in the conduct or completionof our clinical trials, the analysis of the data from our clinical trials orour manufacturing scale-up activities may result in delays in our plannedfilings for regulatory approvals of our products, and may adversely affect ourability to enter into new collaborative arrangements.***

 

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

 

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

 

·                 we may be unable to 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;

 

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·                 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.***

 

Wehave entered into a collaborative arrangement with Lilly, who currently marketsdiabetes therapies and is developing additional diabetes drug candidates, tocommercialize BYETTA and further develop sustained-release formulations ofBYETTA, including exenatide once weekly. We entered into this collaboration inorder 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.

 

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 seek additionalsources for funding and may have to delay, reduce or eliminate one or more ofour commercialization and development programs for these compounds. If Lillydoes not successfully commercialize BYETTA outside the United States, we mayreceive limited or no revenues from them. In addition, we are dependent onAlkermes 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 Abbreviated 

 

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NewDrug Applications, or ANDAs, with the FDA requesting approval of genericversions of previously-approved products. For example, generic pharmaceuticalmanufacturers may file an ANDA for SYMLIN as of March 2009 and for BYETTAas of April 2009. If an ANDA is filed for one of our approved productsprior to expiration of the patents covering those products, it could result inour initiating patent infringement litigation to enforce our rights. We canprovide 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 otherjurisdictions, such as Europe and Australia. Furthermore, we may not haveidentified all United States and foreign patents that pose a risk ofinfringement.

 

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

 

***We may be unable to obtainregulatory clearance to market our drug candidates 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 notsatisfied. Regulatory authorities may also require additional testing forsafety and efficacy. Moreover, if the FDA grants regulatory approval of aproduct, the approval may be limited to specific indications or limited withrespect to its distribution, and expanded or additional indications forapproved drugs may not be approved, which could limit our revenues. Foreignregulatory authorities may apply similar limitations or may refuse to grant anyapproval. Unexpected changes to the FDA or foreign regulatory approval processcould also delay or prevent the approval of our drug candidates.

 

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 decline significantly.

 

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

 

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

 

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

 

Our success will depend in part on our ability to operate without infringingthe proprietary rights of third parties and preventing others from infringingour patents. Challenges by pharmaceutical companies against the patents ofcompetitors are common. Legal standards relating to the validity of patentscovering pharmaceutical and biotechnological inventions and the scope of claimsmade under these patents are still developing. As a result, our ability toobtain and enforce patents is uncertain and involves complex legal and factualquestions. Third parties may challenge, in courts or through patent officeproceedings, or infringe upon, existing or future patents. In the event that athird party challenges a patent, a court or patent office may invalidate thepatent or determine that the patent is not enforceable. Proceedings involvingour patents or patent applications or those of others could result in adversedecisions about:

 

·                 the patentability of our inventions, productsand drug candidates; and/or

 

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·                 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.

 

***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:

 

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·                 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 development activities;

 

·                 Other operating expenses;

 

·                 Potential acquisitions or investments incomplementary technologies or businesses; and

 

·                 Other general corporate purposes.

 

We may also be required to use our cash to pay principal and intereston outstanding debt, including a term loan with a current balance of $101.6million due in 2010, referred to as the Term Loan, and $775 million inoutstanding principal amount of convertible senior notes, of which$200 million is due in 2011, referred to as the 2004 Notes, and$575 million is due in 2014, referred to 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 rating of our individual holdings which could adverselyaffect their value. Lower credit quality and other market events, such as increasesin interest rates, and further deterioration in the credit markets may have anadverse effect on the fair value of our investment holdings and cash 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.  On March 4, 2009, the Supreme Court heldin *Wyeth v. Levine* that federallaw does not preempt state product liability claims involving pharmaceuticals.  We are currently involved in thirty-eightproduct liability cases which have been brought by individuals who have usedBYETTA and generally seek compensatory and punitive damages for allegedinjuries, consisting primarily of pancreatitis, and in a few cases wrongfuldeath. We have also beennotified of other claims of individuals who have not filed suit. 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.

 

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We may not be able to enter into marketing anddistribution arrangements or find a corporate partner for SYMLIN or our otherdrug candidates as we deem necessary. If we are not able to enter into amarketing or distribution arrangement or find a corporate partner who canprovide support for commercialization of our drug candidates as we deemnecessary, we may not be able to successfully perform these marketing or distributionactivities. Moreover, any new marketer or distributor or corporate partner forour drug candidates, including Lilly, with whom we choose to contract may notestablish adequate sales and distribution capabilities or gain marketacceptance for our products, if any.

 

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

 

In April 2004, we issued $200 million ofthe 2004 Notes and in June 2007, we issued $575 million of the 2007Notes. In December 2007, we entered into the $125 million Term Loandue in December 2010. Our ability to make payments on our debt, includingthe 2004 and 2007 Notes and the Term Loan, will depend on our future operatingperformance and ability to generate cash and may also depend on our ability toobtain additional debt or equity financing. During each of the last five years,our operating cash flows were negative and insufficient to cover our fixedcharges. We may need to use our cash to pay principal and interest on our debt,thereby reducing the funds available to fund our research and developmentprograms, strategic initiatives and working capital requirements. Our ability togenerate sufficient operating cash flow to service our indebtedness, includingthe 2004 and 2007 Notes and the Term Loan, and fund our operating requirementswill depend on our ability, alone or with others, to successfully develop,manufacture, obtain required regulatory approvals for and market our drugcandidates, as well as other factors, including general economic, financial,competitive, legislative and regulatory conditions, some of which are beyondour control. Our debt service obligations increase our vulnerabilities tocompetitive pressures because many of our competitors are less leveraged thanwe are. If we are unable to generate sufficient operating cash flow to serviceour indebtedness and fund our operating requirements, we may be forced to reduceor defer our development programs, sell assets or seek additional debt orequity financing, which may not be available to us on satisfactory terms or atall. Our level of indebtedness may make us more vulnerable to economic orindustry downturns. If we incur new indebtedness, the risks relating to ourbusiness and our ability to service our indebtedness will intensify.

 

***We may be required to redeem our convertible senior notes upon adesignated event or repay the Term Loan upon an event of default.***

 

Holders of the 2004 and 2007 Notes may require us toredeem all or any portion of their notes upon the occurrence of certaindesignated events which generally involve a change in control of our company.The lenders under the Term Loan may require us to repay outstanding principaland accrued interest due under the Term Loan upon the occurrence of an event ofdefault, which could include, among other things, nonpayment of principle andinterest, violation of covenants and a change in control.  We may not have sufficient cash funds toredeem the 2004 and 2007 Notes upon a designated event or repay the Term Loanupon an event of default. We may elect, subject to certain conditions, to paythe redemption price for the 2004 Notes in our common stock or a combination ofcash and our common stock. We may be unable to satisfy the requisite conditionsto enable us to pay some or all of the redemption price for the 2004 Notes inour common stock. If we are prohibited from redeeming the 2004 or 2007 Notes,we could seek consent from our lenders to redeem the 2004 or 2007 notes. If weare unable to obtain their consent, we could attempt to refinance the 2004 or2007 Notes. If we were unable to obtain a consent or refinance, we would beprohibited from redeeming the 2004 or 2007 Notes. If we were unable to redeemthe 2004 or 2007 Notes upon a designated event, it would result in an event ofdefault under the indentures governing the 2004 or 2007 Notes. An event ofdefault under the indentures could result in a further event of default underour other then-existing debt, including the Term Loan. In addition, theoccurrence of a designated event may be an event of default under our otherdebt. Further, an event of default under the Term Loan could result in an eventof default under the indentures governing the 2004 or 2007 Notes.

 

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

 

Certain of our research and development programs fordrug candidates are at an early stage and will require significant research,development, preclinical and clinical testing, manufacturing scale-upactivities, regulatory approval and/or commitments of resources beforecommercialization. We cannot predict whether our research will lead to thediscovery of any additional drug candidates that could generate additionalrevenues for us.

 

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

 

We are highly dependent on our chief executiveofficer, and the other principal members of our executive and scientific teams.The unexpected loss of the services of any of these persons might impede theachievement of our research, development and 

 

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commercializationobjectives. Recruiting and retaining qualified sales, marketing, regulatory, scientificand other personnel and consultants will also be critical to our success. Wemay not be able to attract and retain these personnel and consultants onacceptable terms given the competition between numerous pharmaceutical andbiotechnology companies. We do not maintain “key person” insurance on any ofour employees.

 

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

 

In order to protect our proprietary technology andprocesses, we rely in part on confidentiality agreements with our corporatepartners, employees, consultants, manufacturers, outside scientificcollaborators and sponsored researchers and other advisors. These agreementsmay not effectively prevent disclosure of confidential information and may notprovide an adequate remedy in the event of unauthorized disclosure ofconfidential information. In addition, others may independently discover ourtrade secrets and proprietary information.

 

Costly and time-consuming litigation could be necessaryto enforce and determine the scope of our proprietary rights, and failure toobtain or maintain trade secret protection could adversely affect ourcompetitive business position.

 

***Our research and development activities and planned manufacturingactivities involve the use of hazardous materials, which subject us toregulation, related costs and delays and potential liabilities.***

 

Our research and development and our plannedmanufacturing activities involve the controlled use of hazardous materials,chemicals and various radioactive compounds. Although we believe that ourresearch and development safety procedures for handling and disposing of thesematerials comply with the standards prescribed by state and federalregulations, the risk of accidental contamination or injury from thesematerials cannot be eliminated. In addition, as part of the development of ourplanned manufacturing activities, we will need to develop additional safetyprocedures for the handling and disposing of hazardous materials. If anaccident occurs, we could be held liable for resulting damages, which could besubstantial. We are also subject to numerous environmental, health andworkplace safety laws and regulations, including those governing laboratoryprocedures, exposure to blood-borne pathogens and the handling of biohazardousmaterials. Additional federal, state and local laws and regulations affectingour operations may be adopted in the future. We may incur substantial costs tocomply with, and substantial fines or penalties if we violate any of these lawsor regulations.

 

***We are exposed to potential risks from legislation requiring companiesto evaluate internal control over financial reporting.***

 

The Sarbanes-Oxley Act requires that we reportannually on the effectiveness of our internal control over financial reporting.Among other things, we must perform systems and processes evaluation andtesting. We must also conduct an assessment of our internal control to allowmanagement to report on, and our independent registered public accounting firmto 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 or expend,substantial accounting and other expenses and significant management time andresources. We have implemented certain remediation activities resulting fromour ongoing assessment of internal control over financial reporting. Our futureassessment, or the future assessments by our independent registered publicaccounting firm, may reveal material weaknesses in our internal control. Ifmaterial weaknesses are identified in the future we would be required toconclude that our internal control over financial reporting is ineffective andwe could be subject to sanctions or investigations by the Securities andExchange Commission, the NASDAQ Stock Market or other regulatory authorities,which would require additional financial and management resources and couldadversely affect the market price of our common stock.

 

***We have implemented anti-takeover provisions that could discourage orprevent an acquisition of our company, even if the acquisition would bebeneficial to our stockholders, and as a result our management may becomeentrenched and hard to replace.***

 

Provisions in our certificate of incorporation andbylaws could make it more difficult for a third party to acquire us, even ifdoing so would benefit our 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

 

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

 

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Each of these provisions, as well as selectedprovisions of Delaware law, could discourage potential takeover attempts, couldadversely affect the trading price of our securities and could cause ourmanagement to become entrenched and hard to replace. In addition to provisionsin our charter documents and under Delaware law, an acquisition of our companycould be made more difficult by our employee benefits plans and our employeechange in control severance plan, under which, in connection with a change incontrol and termination of employment, stock options held by our employees maybecome vested and our officers may receive severance benefits. We also haveimplemented a stockholder rights plan, also called a poison pill, which couldmake it uneconomical for a third party to acquire us on a hostile basis.

 

***Our executive officers, directorsand major stockholders control approximately 62% of our common stock.***

 

As of September 30, 2009, executive officers,directors and holders of 5% or more of our outstanding common stock, in theaggregate, owned or controlled approximately 62% of our outstanding commonstock. As a result, these stockholders are able to influence all mattersrequiring approval by our stockholders, including the election of directors andthe approval of corporate transactions. This concentration of ownership mayalso delay, deter or prevent a change in control of our company and may makesome transactions more difficult or impossible to complete without the supportof these stockholders.

 

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

 

Sales by existing stockholders of a large number ofshares of our common stock in the public market or the perception that additionalsales could occur could cause the trading price of our common stock to drop.Likewise, the issuance of shares of common stock upon conversion of ourconvertible notes or redemption of our convertible notes upon a designatedevent, or upon additional convertible debt or equity financings or other shareissuances by us, including shares issued in connection with potential futurestrategic alliances, could adversely affect the trading price of our commonstock. Our convertible notes are currently convertible into a total of up to15.2 million shares. In addition, the existence of these notes mayencourage short selling of our common stock by market participants.

 

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

 

The market prices for securities ofbiopharmaceutical and biotechnology companies, including our common stock, havehistorically been highly volatile, and the market from time to time hasexperienced significant price and volume fluctuations that are unrelated to thequarterly operating performance of these biopharmaceutical and biotechnologycompanies. Since January 1, 2007, the high and low sales price of ourcommon stock varied significantly, as shown in the following table:

 
| ** **                                     | ** ** | **High** | ** ** | **Low** | ** ** |
|------------------------------------------------|------------|----------|------------|---------|------------|
| **Year ending December 31,  2009**        |       |     |       |    |       |
| Fourth Quarter (through October 13, 2009) |       | $        | 14.41      |    | $          | 12.75 |   |
| Third Quarter                                  |       | $        | 15.69      |    | $          | 11.73 |   |
| Second Quarter                                 |       | $        | 14.30      |    | $          | 8.56 |   |
| First Quarter                                  |       | $        | 14.13      |    | $          | 7.89 |   |
| **Year ended December 31,  2008**         |       |     |       |    |       |
| Fourth Quarter                                 |       | $        | 20.47      |    | $          | 5.50 |   |
| Third Quarter                                  |       | $        | 35.00      |    | $          | 18.55 |   |
| Second Quarter                                 |       | $        | 33.22      |    | $          | 25.30 |   |
| First Quarter                                  |       | $        | 37.38      |    | $          | 23.75 |   |
| **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, whetherBYETTA and SYMLIN will meet our expectations, and the regulatory approval ofour other drug candidates, we may continue to experience volatility in ourstock price for the foreseeable future. In addition, the following factors maysignificantly affect the market price of our common stock:

 

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

 

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

 

·                  clinical study results;

 

·                  determinations by regulatoryauthorities with respect to our drug candidates;

 

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·                  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**

 

Thefollowing exhibits are included as part of this report:

 
| **Exhibit  Number** | ** ** | **Description**                                                                                                                                                                                                                                                                                                    |
|---------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |       |                                                                                                                                                                                                                                                                                                               |
| 3.1                 |       | Amended  and Restated Certificate of Incorporation (filed as an exhibit to  Registrant’s registration statement on Form S-1 (File  No. 333-44195) or amendments thereto and incorporated herein by  reference)                                                                                      |
|                |       |                                                                                                                                                                                                                                                                                                               |
| 3.2                 |       | Fourth  Amended and Restated Bylaws (filed as an exhibit to Registrant’s Current  Report on Form 8-K filed on December 8, 2008 and incorporated  herein by reference)                                                                                                                               |
|                |       |                                                                                                                                                                                                                                                                                                               |
| 3.3                 |       | Certificate  of Amendment of Amended and Restated Certificate of Incorporation (filed as  an exhibit to Registrant’s Quarterly Report on Form 10-Q for the quarter  ended September 30, 2001 and incorporated herein by reference)                                                                  |
|                |       |                                                                                                                                                                                                                                                                                                               |
| 3.4                 |       | Certificate  of Amended and Restated Certificate of Incorporation (filed as an exhibit to  Registrant’s Quarterly Report on Form 10-Q for the quarter ended  September 30, 2007 and incorporated herein by reference)                                                                               |
|                |       |                                                                                                                                                                                                                                                                                                               |
| 4.1                 |       | Specimen  Common Stock Certificate (filed as an exhibit to Registrant’s registration  statement on Form S-1 (File No. 333-44195) or amendments thereto  and incorporated herein by reference)                                                                                                       |
|                |       |                                                                                                                                                                                                                                                                                                               |
| 4.2                 |       | Rights  Agreement, dated as of June 17, 2002, between the Registrant and  American Stock Transfer & Trust Company (filed as an exhibit to  Registrant’s Current Report on Form 8-K filed on June 18, 2002 and  incorporated herein by reference)                                      |
|                |       |                                                                                                                                                                                                                                                                                                               |
| 4.3                 |       | First  Amendment to Rights Agreement dated December 13, 2002, between the  Registrant and American Stock Transfer & Trust Company (filed as an  exhibit to Registrant’s Annual Report on Form 10-K for the fiscal year  ended December 31, 2002 and incorporated herein by reference) |
|                |       |                                                                                                                                                                                                                                                                                                               |
| 4.4                 |       | Form of  Rights Certificate (filed as an exhibit to Registrant’s Current Report on  Form 8-K filed on June 18, 2002 and incorporated herein by  reference)                                                                                                                                     |
|                |       |                                                                                                                                                                                                                                                                                                               |
| 4.5                 |       | Certificate  of Designation of Series A Junior Participating Preferred Stock (filed  as an exhibit to Registrant’s Current Report on Form 8-K filed on  June 18, 2002 and incorporated herein by reference)                                                                                    |
|                |       |                                                                                                                                                                                                                                                                                                               |
| 31.1                |       | Certification  of Principal Financial Officer pursuant to Rule 13a-14(a) and  Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended                                                                                                                                                |
|                |       |                                                                                                                                                                                                                                                                                                               |
| 31.2                |       | Certification  of Principal Executive Officer pursuant to Rule 13a-14(a) and  Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended                                                                                                                                                |
|                |       |                                                                                                                                                                                                                                                                                                               |
| 32.1                |       | Certifications  Pursuant to U.S.C. Section 1350, as adopted pursuant to Section 906  of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                   |

 

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**SIGNATURE**

 

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

 

 
|                         | Amylin  Pharmaceuticals, Inc.                               |
|------------------------------|------------------------------------------------------------------|
|                         |                                                             |   |
| Date:  November 5, 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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