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

 

----

 

**FORM 10-Q**

** **

----

 

**(MarkOne)**

 

| **x**                                                  | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934**  |
|--------------------------------------------------------|----------------------------------------------------------------------------------------------------------|
| ** **                                             | ** **                                                                                               |
| **For the quarterly period ended June 30,  2008** |
| ** **                                             | ** **                                                                                               |
| **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.**(Exactname of registrant as specified in its charter)

 

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

 

**(858) 552-2200**(Registrant’s telephone number, 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 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 of shares outstanding of each ofthe issuer’s classes of common stock, as of the latest practicable date.

 

| Class                         | ** ** | **Outstanding on July 25, 2008** |
|-------------------------------|------------|------------------------------------------------------|
| Common Stock, $.001 par value |       | 137,241,585                                          |

** **

** **

** **

----

** **

**AMYLIN PHARMACEUTICALS,INC.**

** **

**TABLE OF CONTENTS**

 
| COVER PAGE                             |                                                                                                              |       |
|----------------------------------------|-------------------------------------------------------------------------------------------------------------------|------------|
| ** **                             | ** **                                                                                                        | ** ** |
| TABLE  OF CONTENTS                     |                                                                                                              | 2          |
|                                   |                                                                                                              |       |
| **PART I. FINANCIAL INFORMATION** |
|                                   |                                                                                                              |       |
| ITEM 1.                                | Financial Statements                                                                                              |       |
|                                   |                                                                                                              |       |
|                                   | Consolidated Balance Sheets as of June 30, 2008  (unaudited) and December 31, 2007                      | 3          |
|                                   |                                                                                                              |       |
|                                   | Consolidated Statements of Operations for the three  and six months ended June 30, 2008 and 2007 (unaudited) | 4          |
|                                   |                                                                                                              |       |
|                                   | Consolidated Statements of Cash Flows for the six  months ended June 30, 2008 and 2007 (unaudited)           | 5          |
|                                   |                                                                                                              |       |
|                                   | Notes to Consolidated Financial Statements (unaudited)                                                            | 6          |
|                                   |                                                                                                              |       |
| ITEM 2.                                | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                       | 12         |
|                                   |                                                                                                              |       |
| ITEM 3.                                | Quantitative and Qualitative Disclosures about Market  Risk                                                       | 21         |
|                                   |                                                                                                              |       |
| ITEM 4.                                | Controls and  Procedures                                                                                          | 21         |
|                                   |                                                                                                              |       |
| **PART II.  OTHER INFORMATION**   |
|                                   |                                                                                                              |       |
| ITEM  1A.                              | Risk  Factors                                                                                                     | 21         |
|                                   |                                                                                                              |       |
| ITEM 4.                                | Submission  of Matters to a Vote of Security Holders                                                              | 33         |
|                                   |                                                                                                              |       |
| ITEM 6.                                | Exhibits                                                                                                          | 34         |
|                                   |                                                                                                              |       |
| SIGNATURE                              | 36                                                                                                                |
|                                        |                                                                                                                   |            |  |  |

** **

**2**

----

** **

**PART I. FINANCIAL INFORMATION**

** **

**ITEM 1. Financial Statements**

** **

**AMYLIN PHARMACEUTICALS, INC.**

** **

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

 
| ** **                                                                                                                                                            | ** ** | **June 30,  2008** | ** ** | **December 31,  2007** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                            | ** ** | **(unaudited)**         | ** ** | **(Note 1)**           | ** ** |
| Assets                                                                                                                                                                |       |                    |       |                        |       |
| Current assets:                                                                                                                                                       |       |                    |       |                        |       |
| Cash and cash equivalents                                                                                                                                             |       | $                       | 130,818    |                        | $          | 422,232 |   |
| Short-term investments                                                                                                                                                |       | 760,046                 |       | 708,183                     |       |
| Accounts receivable, net                                                                                                                                              |       | 65,638                  |       | 73,579                      |       |
| Inventories, net                                                                                                                                                      |       | 100,166                 |       | 100,214                     |       |
| Other current assets                                                                                                                                                  |       | 33,480                  |       | 32,100                      |       |
| Total current assets                                                                                                                                                  |       | 1,090,148               |       | 1,336,308                   |       |
|                                                                                                                                                                  |       |                    |       |                        |       |
| Property, plant and equipment, net                                                                                                                                    |       | 548,290                 |       | 390,301                     |       |
| Other long-term assets, net                                                                                                                                           |       | 27,049                  |       | 28,082                      |       |
| Debt issuance costs, net                                                                                                                                              |       | 17,781                  |       | 19,520                      |       |
|                                                                                                                                                                  |       | $                       | 1,683,268  |                        | $          | 1,774,211 |   |
|                                                                                                                                                                  |       |                    |       |                        |       |
| Liabilities and  Stockholders’ Equity                                                                                                                            |       |                    |       |                        |       |
|                                                                                                                                                                  |       |                    |       |                        |       |
| Current liabilities:                                                                                                                                                  |       |                    |       |                        |       |
| Accounts payable                                                                                                                                                      |       | $                       | 41,202     |                        | $          | 37,530 |   |
| Accrued compensation                                                                                                                                                  |       | 48,369                  |       | 56,428                      |       |
| Payable to collaborative partner                                                                                                                                      |       | 61,429                  |       | 66,116                      |       |
| Other current liabilities                                                                                                                                             |       | 89,296                  |       | 122,924                     |       |
| Current portion of deferred revenue                                                                                                                                   |       | 4,286                   |       | 4,286                       |       |
| Current portion of long-term note payable                                                                                                                             |       | 15,625                  |       | —                      |       |
| Total current liabilities                                                                                                                                             |       | 260,207                 |       | 287,284                     |       |
|                                                                                                                                                                  |       |                    |       |                        |       |
| Other long-term obligations, net of current  portion                                                                                                                  |       | 32,270                  |       | 31,023                      |       |
|                                                                                                                                                                  |       |                    |       |                        |       |
| Deferred revenue, net of current portion                                                                                                                              |       | 943                     |       | 3,086                       |       |
|                                                                                                                                                                  |       |                    |       |                        |       |
| Long-term note payable, net of current portion                                                                                                                        |       | 109,375                 |       | 125,000                     |       |
|                                                                                                                                                                  |       |                    |       |                        |       |
| Convertible senior notes                                                                                                                                              |       | 775,000                 |       | 775,000                     |       |
|                                                                                                                                                                  |       |                    |       |                        |       |
| Commitments and contingencies (Note 10)                                                                                                                               |       |                    |       |                        |       |
|                                                                                                                                                                  |       |                    |       |                        |       |
| Stockholders’ equity:                                                                                                                                            |       |                    |       |                        |       |
| Common stock, $.001 par value, 450,000 shares  authorized, 137,221 and 135,044 issued and outstanding at June 30, 2008  and December 31, 2007, respectively |       | 137                     |       | 135                         |       |
| Additional paid-in capital                                                                                                                                            |       | 2,077,357               |       | 1,987,453                   |       |
| Accumulated deficit                                                                                                                                                   |       | (1,567,933              | )          | (1,434,320                  | )          |
| Accumulated other comprehensive loss                                                                                                                                  |       | (4,088                  | )          | (450                        | )          |
| Total stockholders’ equity                                                                                                                                       |       | 505,473                 |       | 552,818                     |       |
|                                                                                                                                                                  |       | $                       | 1,683,268  |                        | $          | 1,774,211 |   |

 

See accompanying notes toconsolidated financial statements.

 

3

----

** **

**AMYLIN PHARMACEUTICALS, INC.**

** **

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

 
| ** **                                                      | ** ** | **Three months ended  June 30,** | ** ** | **Six months ended  June 30,** | ** ** |
|-----------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                      | ** ** | **2008**                                        | ** ** | **2007**                                      | ** ** | **2008** | ** ** | **2007** | ** ** |
| Revenues:                                                       |       |                                            |       |                                          |       |   |   |   |   |
| Net product sales                                               |       | $                                               | 200,335    |                                          | $          | 167,337 |   | $ | 379,056 |   | $ | 329,340 |   |
| Revenues under collaborative agreements                         |       | 21,684                                          |       | 29,616                                        |       | 40,200 |   | 39,591 |   |
| Total revenues                                                  |       | 222,019                                         |       | 196,953                                       |       | 419,256 |   | 368,931 |   |
|                                                            |       |                                            |       |                                          |       |   |   |   |   |
| Costs and expenses:                                             |       |                                            |       |                                          |       |   |   |   |   |
| Cost of goods sold                                              |       | 24,682                                          |       | 14,362                                        |       | 46,706 |   | 29,572 |   |
| Selling, general and administrative                             |       | 111,088                                         |       | 93,121                                        |       | 209,331 |   | 180,908 |   |
| Research and development                                        |       | 75,401                                          |       | 71,691                                        |       | 152,607 |   | 131,255 |   |
| Collaborative profit sharing                                    |       | 78,950                                          |       | 70,355                                        |       | 148,851 |   | 137,302 |   |
| Total costs and expenses                                        |       | 290,121                                         |       | 249,529                                       |       | 557,495 |   | 479,037 |   |
|                                                            |       |                                            |       |                                          |       |   |   |   |   |
| Operating loss                                                  |       | (68,102                                         | )          | (52,576                                       | )          | (138,239 | ) | (110,106 | ) |
|                                                            |       |                                            |       |                                          |       |   |   |   |   |
| Interest and other income                                       |       | 6,974                                           |       | 9,918                                         |       | 18,004 |   | 19,322 |   |
| Interest and other expense                                      |       | (3,688                                          | )          | (2,365                                        | )          | (13,378 | ) | (3,653 | ) |
| Net loss                                                        |       | $                                               | (64,816    | )                                             | $          | (45,023 | ) | $ | (133,613 | ) | $ | (94,437 | ) |
|                                                            |       |                                            |       |                                          |       |   |   |   |   |
| Net loss per share, basic and diluted                           |       | $                                               | (0.47      | )                                             | $          | (0.34 | ) | $ | (0.98 | ) | $ | (0.72 | ) |
|                                                            |       |                                            |       |                                          |       |   |   |   |   |
| Shares used in computing net loss per share, basic  and diluted |       | 137,142                                         |       | 131,774                                       |       | 136,500 |   | 131,416 |   |

 

See accompanying notes to condensed consolidated financial statements.

 

4

----

** **

**AMYLIN PHARMACEUTICALS, INC.**

** **

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

 
| ** **                                                                    | ** ** | **Six months ended  June 30,** | ** ** |
|-------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                    | ** ** | **2008**                                      | ** ** | **2007** | ** ** |
| Operating activities:                                                         |       |                                          |       |   |   |
| Net loss                                                                      |       | $                                             | (133,613   | ) | $ | (94,437 | ) |
| Adjustments to reconcile net loss to net cash used  for operating activities: |       |                                          |       |   |   |
| Depreciation and amortization                                                 |       | 15,639                                        |       | 9,042 |   |
| Stock-based compensation                                                      |       | 29,002                                        |       | 29,056 |   |
| Other non-cash expenses, net                                                  |       | 2,124                                         |       | 899 |   |
| Changes in operating assets and liabilities:                                  |       |                                          |       |   |   |
| Accounts receivable, net                                                      |       | 7,941                                         |       | 3,809 |   |
| Inventories                                                                   |       | 48                                            |       | (18,877 | ) |
| Other current assets                                                          |       | (2,557                                        | )          | (10,784 | ) |
| Accounts payable and accrued liabilities                                      |       | 1,902                                         |       | 21,664 |   |
| Accrued compensation                                                          |       | 13,220                                        |       | (4,172 | ) |
| Payable to collaborative partner                                              |       | (4,687                                        | )          | 5,893 |   |
| Deferred revenue                                                              |       | (2,143                                        | )          | (2,143 | ) |
| Other assets and liabilities, net                                             |       | 438                                           |       | 5,832 |   |
| Net cash flows used for operating activities                                  |       | (72,686                                       | )          | (54,218 | ) |
|                                                                          |       |                                          |       |   |   |
| Investing activities:                                                         |       |                                          |       |   |   |
| Purchases of short-term investments                                           |       | (642,520                                      | )          | (291,494 | ) |
| Sales and maturities of short-term investments                                |       | 588,196                                       |       | 231,016 |   |
| Purchase of property, plant and equipment, net                                |       | (173,403                                      | )          | (141,979 | ) |
| Increase in other long-term assets                                            |       | (510                                          | )          | (12,720 | ) |
| Net cash flows used for investing activities                                  |       | (228,237                                      | )          | (215,177 | ) |
|                                                                          |       |                                          |       |   |   |
| Financing activities:                                                         |       |                                          |       |   |   |
| Issuance of common stock, net                                                 |       | 9,509                                         |       | 23,357 |   |
| Issuance of convertible senior notes, net                                     |       | —                                        |       | 558,797 |   |
| Net cash flows provided by financing activities                               |       | 9,509                                         |       | 582,154 |   |
|                                                                          |       |                                          |       |   |   |
| Change in cash and cash equivalents                                           |       | (291,414                                      | )          | 312,759 |   |
|                                                                          |       |                                          |       |   |   |
| Cash and cash equivalents at beginning of period                              |       | 422,232                                       |       | 66,640 |   |
| Cash and cash equivalents at end of period                                    |       | $                                             | 130,818    |   | $ | 379,399 |   |
|                                                                          |       |                                          |       |   |   |
| **Supplemental disclosure of cash  flow information:**                        | ** ** | ** **                                    | ** ** | ** ** | ** ** |
| Property, plant and equipment additions in other  current liabilities         |       | $                                             | 13,702     |   | $ | 2,759 |   |
|                                                                          |       |                                          |       |   |   |
| **Non-cash financing activities:**                                            | ** ** | ** **                                    | ** ** | ** ** | ** ** |
| Issuance of common stock for contingent share  settled obligation             |       | $                                             | 30,000     |   | $ | — |   |
| Shares contributed as employer 401(k) match                              |       | $                                             | 4,284      |   | $ | 5,819 |   |
| Shares contributed to employee stock ownership  plan                          |       | $                                             | 16,996     |   | $ | — |   |
|                                                                               |            |                                               |            |  |  |  |  |  |  |

 

See accompanying notes to consolidated financial statements.

 

5

----

** **

**AMYLIN PHARMACEUTICALS, INC.**

** **

**Notes to Consolidated Financial StatementsJune 30, 2008(unaudited)**

** **

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

 

**Basis of Presentation**

** **

The information contained herein has been prepared inaccordance with instructions for Form 10-Q and Article 10 ofRegulation S-X. The information as of June 30, 2008, and for the threemonth and six month periods ended June 30, 2008 and 2007, are unaudited.In the opinion of management, the information reflects all adjustmentsnecessary to make the results of operations for the interim periods a fairstatement of such operations. All such adjustments are of a normal recurringnature. Interim results are not necessarily indicative of results for a fullyear. The balance sheet at December 31, 2007, has been derived from theaudited consolidated financial statements at that date but does not include allinformation and footnotes required by U.S. generally accepted accountingprinciples for complete financial statements. For more complete financialinformation, these financial statements should be read in conjunction with theaudited consolidated financial statements included in Amylin Pharmaceuticals, Inc.’s(referred to as the Company or Amylin) Annual Report on Form 10-K for theyear ended December 31, 2007.

 

**Revenue Recognition**

** **

***Net Product Sales***

*** ***

The Company sells BYETTA® (exenatide) injectionand SYMLIN® (pramlintide acetate) injection primarily to wholesaledistributors, who, in turn, sell to retail pharmacies and government entities.Product sales are recognized when delivery of the products has occurred,title has passed to the customer, the selling price is fixed or determinable,collectability is reasonably assured and the Company has no furtherobligations. The Company records allowances for product returns, rebates andwholesaler chargebacks, wholesaler discounts, and prescription vouchers at thetime of sale and reports product sales net of such allowances. The Company mustmake significant judgments in determining these allowances. If actual resultsdiffer from the Company’s estimates, the Company will be required to makeadjustments to these allowances in the future.

 

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

 

***Revenues UnderCollaborative Agreements***

*** ***

Amounts received forupfront product and technology license fees under multiple-element arrangementsare deferred and recognized over the period of such services or performance ifsuch arrangements require on-going services or performance. Non-refundableamounts received for substantive milestones are recognized upon achievement ofthe milestone. Amounts received for sharing of development expenses arerecognized in the period in which the related expenses are incurred. Anyamounts received prior to satisfying these revenue recognition criteria will berecorded as deferred revenue.

 

***Collaborative Profit-Sharing***

*** ***

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

 

***Accounts***Receivable

#  

Trade accounts receivableare recorded net of allowances for cash discounts for prompt payment, doubtfulaccounts, product returns and chargebacks. Allowances for rebate discounts anddistribution fees are included in other current liabilities in the accompanyingconsolidated balance sheets. Estimates for allowances for doubtful accounts aredetermined based on existing contractual obligations, historical paymentpatterns and individual customer circumstances.  The allowance fordoubtful accounts was $0.3 million and $0.2 million at June 30, 2008 and December 31,2007, respectively.

 

6

----

 

# **Research and DevelopmentExpenses**

#  

# Research and development costs are expensedas incurred and include salaries and bonuses, benefits, non-cashstock-based compensation, license fees, milestones under license agreements,costs paid to third-party contractors to perform research, conduct clinicaltrials, and develop drug materials and delivery devices; and associatedoverhead expenses and facilities costs.Clinical trial costs, including costs associated with third-party contractors,are a significant component of research and development expenses. Invoicingfrom third-party contractors for services performed can lag several months. TheCompany accrues the costs of services rendered in connection with suchactivities based on its estimate of management fees, site management andmonitoring costs, and data management costs. Actual clinical trial costs maydiffer from estimates and are adjusted in the period in which they becomeknown.

#  

**Per Share Data**

** **

Basic and diluted net loss applicable to commonstock per share is computed using the weighted average number of common sharesoutstanding during the period. Common stock equivalents from stock options andwarrants of 3.2 million for both the three and six months ended June 30,2008, and common stock equivalents of 8.1 million and 7.9 million from stockoptions and warrants for the three and six months ended June 30, 2007,respectively, are excluded from the calculation of diluted loss per share forall periods presented because the effect is antidilutive. Common stockequivalents from shares underlying our convertible senior notes of 15.2 millionfor the three and six months ended June 30, 2008, and 8.1 million and 7.0million for the three and six months ended June 30, 2007, respectively,are also excluded from the calculation of diluted loss per share because theeffect is antidilutive. In future periods,if the Company reports net income and the common share equivalents for ourconvertible senior notes are dilutive, the common stock equivalents will beincluded in the weighted average shares computation and interest expenserelated to the notes will be added back to net income to calculate dilutedearnings per share.

 

# **Accounting for Stock-Based Compensation**

#  

Effective January 1,2006, the Company adopted the fair value method of accounting for stock-basedcompensation arrangements in accordance with Financial Accounting Standards Board (FASB)revised Statement of Financial Accounting Standards (SFAS) No. 123 (SFAS123R), “*Share-Based Payment,”*whichestablishes accounting for non-cash, stock-based awards exchanged for employeeservices and requires companies to expense the estimated fair value of theseawards over the requisite employee service period, which for the Company isgenerally the vesting period. The Company adopted SFAS 123R using the modifiedprospective method. Under the modified prospective method, prior periods arenot revised for comparative purposes. The valuation provisions of SFAS 123R applyto new awards and to awards that are outstanding on the effective date andsubsequently modified or cancelled. Estimated non-cash, compensation expensefor awards outstanding at the effective date will be recognized over theremaining service period using the compensation cost calculated for pro-formadisclosure purposes under SFAS 123, *“Accountingfor Stock-Based Compensation.”*

 

Total estimatedstock-based compensation was as follows (in thousands, except per share data):

 
| ** **                                               | ** ** | **Three months ended  June 30,** | ** ** | **Six months ended  June 30,** | ** ** |
|----------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                               | ** ** | **2008**                                        | ** ** | **2007**                                      | ** ** | **2008** | ** ** | **2007** | ** ** |
| Selling, general and administrative expenses             |       | $                                               | 9,054      |                                          | $          | 9,539 |   | $ | 17,386 |   | $ | 17,520 |   |
| Research and development expenses                        |       | 5,886                                           |       | 6,200                                         |       | 11,616 |   | 11,536 |   |
|                                                     |       | $                                               | 14,940     |                                          | $          | 15,739 |   | $ | 29,002 |   | $ | 29,056 |   |
|                                                     |       |                                            |       |                                          |       |   |   |   |   |
| Net stock-based compensation expense, per common  share: |       |                                            |       |                                          |       |   |   |   |   |
| Basic                                                    |       | $                                               | 0.11       |                                          | $          | 0.12 |   | $ | 0.21 |   | $ | 0.22 |   |
| Diluted                                                  |       | $                                               | 0.11       |                                          | $          | 0.12 |   | $ | 0.21 |   | $ | 0.22 |   |

 

The Company recorded$14.9 million and $15.7 million of total non-cash, stock-based compensation expenseduring the three months ended June 30, 2008 and 2007, respectively, and$29.0 million and $29.1 million of total non-cash, stock-based compensationexpense during the six months ended June 30, 2008 and 2007, respectively,in all cases related to stock-based awards consisting of stock options andemployee stock purchase rights.  At June 30,2008, total unrecognized estimated compensation cost related to non-vestedstock-based awards granted prior to that date was $112.3 million, which isexpected to be recognized over a weighted-average period of 2.5 years.  The Company issued 0.2 million and 0.4million shares upon the exercise of stock options in the three and six monthsended June 30, 2008, respectively.

 

7

----

 

Inaddition to the stock-based compensation discussed above, the Company alsorecorded $5.3 million, of which $3.0 million is including in selling generaland administrative expenses, and $2.3 million is included in research anddevelopment expenses, and $10.7 million, of which $5.8 million is included inselling general and administrative expenses, and $4.9 million is included inresearch and development expenses, of expense associated with its EmployeeStock Ownership Plan, or ESOP, during the three months and six months ended June 30,2008, respectively.  There was no expensefor the ESOP during the three and six months ended June 30, 2007 as theESOP was not adopted until December 2007.

 

**Consolidation**

 

The consolidatedfinancial statements include the accounts of the Company and its wholly ownedsubsidiaries, Amylin Europe Limited, Amylin Puerto Rico LLC, Amylin Ohio LLC,and Amylin Investments LLC. All significant intercompany transactions andbalances have been eliminated in consolidation.

 

**Recently Issued Accounting Pronouncements**

** **

InMay 2008, the FASB issued FASB Staff Position (FSP) No. APB 14-1 (FSPNo. APB 14-1), “*Accounting for ConvertibleDebt Instruments that may be Settled in Cash Upon Conversion (Including PartialCash Settlement).*”  FSP No. APB14-1 establishes that the liability and equity components of convertible debtinstruments within the scope of FSP APB No. 14-1 shall be separatelyaccounted for in a manner that will reflect the entity’s nonconvertible debtborrowing rate when interest cost is recognized in subsequent periods.  The carrying amount of the liabilitycomponent of the convertible debt instrument will be determined by measuringthe fair value of a similar liability that does not have an associated equitycomponent.  The carrying value of theequity component will be determined by deducting the fair value of theliability component from the initial proceeds ascribed to the convertible debtinstrument as a whole.  Relatedtransaction costs shall be allocated to the liability and equity components inproportion to the allocation of proceeds and accounted for as debt issuancecosts and equity issuance costs, respectively. The excess of the principal amount of the liability component over itscarrying amount shall be amortized to interest cost using the interestmethod.  FSP No. APB 14-1 iseffective for the Company  on January 1,2009 and shall be 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.  Early adoption is notpermitted.  The Company expects that theadoption of FSP No. APB 14-1 will have a material impact on itsconsolidated financial statements.

 

InDecember 2007, the FASB issued SFAS No. 141 (revised 2007), “*Business Combinations*” and SFAS No. 160, “*Noncontrolling Interests in Consolidated Financial Statements, anamendment of Accounting Research Bulletin No. 51.*”  SFAS No. 141R will change howbusiness acquisitions are accounted for and will impact financial statementsboth on the acquisition date and in subsequent periods.  SFAS No. 160 will change theaccounting and reporting for minority interests, which will be recharacterizedas noncontrolling interests and classified as a component of equity.  SFAS No. 141R and SFAS No. 160are effective for the Company on January 1, 2009.  Early adoption is not permitted.  The Company is currently evaluating theimpact that adoption of SFAS No. 141R and SFAS No. 160 willhave on its consolidated financial statements.

 

InJune 2007, the FASB ratified the EITF consensus on EITF Issue No. 07-3,*“Accounting for Nonrefundable Advance Payments forGoods or Services Received for Use in Future Research and Development Activities.”*  EITF Issue No. 07-3requires that nonrefundable advance payments for goods or services that will beused or rendered for future research and development activities should bedeferred and capitalized.  Such amountsshould be recognized as an expense as the related goods are delivered or therelated services are performed.  Entitiesshould continue to evaluate whether they expect the goods to be delivered orservices to be rendered.  If an entitydoes not expect the goods to be delivered or services to be rendered, thecapitalized advance payment should be charged to expense.  The Company adopted EITF Issue No. 07-3on January 1, 2008.  The adoption ofEITF Issue No. 07-3 did not have a material impact on the Company’sconsolidated financial statements.

 

InFebruary 2007, the FASB issued SFAS No. 159, *“The FairValue Option for Financial Assets and Financial Liabilities.”* SFAS No. 159gives the Company the irrevocable option to carry many financial assets andliabilities at fair values, with changes in fair value recognized inearnings.  The Company adopted SFAS No. 159on January 1, 2008.  The adoption ofSFAS No. 159 did not have a material impact on the Company’s consolidatedfinancial statements.

 

8

----

 

InSeptember 2006, the FASB issued SFAS No. 157, “*Fair ValueMeasurements*,” which defines fair value, establishes guidelines formeasuring fair value and expands disclosures regarding fair valuemeasurements.  SFAS No. 157does not require any new fair value measurements but rather eliminatesinconsistencies in guidance found in various prior accountingpronouncements.  SFAS No. 157prioritizes the inputs used in measuring fair value into the followinghierarchy:

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

 

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

 

**2.     Short-term Investment**s

 

TheCompany’s short-term investments, consisting principally of debt securities,are classified as available-for-sale and are stated at fair value based uponobserved market prices (Level 1 in the fair value hierarchy). Unrealized holding gains or losses on these securities are included in othercomprehensive income. The amortized cost of debt securities in this category isadjusted for amortization of premiums and accretion of discounts to maturity. ****For investments inmortgage-backed securities, amortization of premiums and accretion of discountsare recognized in interest income using the interest method, adjusted foranticipated prepayments as applicable. Estimates of expected cash flows are updated periodically and changesare recognized in the calculated effective yield prospectively****** ******as appropriate. ****Such amortization is included in interest income.Realized gains and losses and declines in value judged to beother-than-temporary (of which there have been none to date) onavailable-for-sale securities are included in interest income. Inassessing potential impairment of its short-term investments, the Companyevaluates the impact of interest rates, potential prepayments onmortgage-backed securities, changes in credit quality, the length of time andextent to which the market value has been less than cost, and the Company’sintent and ability to retain the security in order to allow for an anticipatedrecovery in fair value. The cost of securitiessold is based on the specific-identification method.

 

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

 

Inventoriesare stated at the lower of cost (FIFO) or market and net of a valuationallowance for potential excess and/or obsolete material of $8.4 million and$5.3 million at June 30, 2008 and December 31, 2007, respectively.Raw materials consists of bulk drug material for BYETTA and SYMLIN,work-in-process consists of in-process BYETTA cartridges, in-process SYMLINcartridges and in-process Symlin vials, and finished goods consists of BYETTAdrug product in a disposable pen/cartridge delivery system,  finished SYMLIN drug product in vials forsyringe administration, and finished SYMLIN drug product in a disposablepen/cartridge delivery system.

 

Inventoriesconsist of the following (in thousands):

 

| ** **      | ** ** | **June 30,  2008** | ** ** | **December 31,  2007** | ** ** |
|-----------------|------------|-------------------------|------------|-----------------------------|------------|
| Raw materials   |       | $                       | 60,159     |                        | $          | 55,706 |   |
| Work-in-process |       | 26,709                  |       | 24,463                      |       |
| Finished goods  |       | 13,298                  |       | 20,045                      |       |
|            |       | $                       | 100,166    |                        | $          | 100,214 |   |

 

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

 

Debtissuance costs relate to the $200 million principalamount of 2.5% convertible senior notes, due April 15, 2011, issued in April 2004,referred to as the 2004 Notes, the $575 million principal amount of 3.0%convertible senior notes, due June 15, 2014, issued in June 2007,referred to as the 2007 Notes, and a $125 million term loan entered into in December 2007,referred to as the Term Loan. Amortization of debt issuance costs are recorded as interest expense inthe consolidated statement of operations on a straight-line basis, whichapproximates the interest method over the contractual term of the related debt.The Company incurred total debt issuance costs of $24.3 million in connectionwith the 2004 Notes, the 2007 Notes and the Term Loan. Amortization expense of$0.9 million and $0.4 million was recorded in each of the three months ended June 30,2008 and 2007, respectively. Amortization expense of $1.9 and $0.6 million wasrecorded in each of the six months ended June 30, 2008 and 2007,respectively.

 

9

----

** **

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

 

Othercurrent liabilities consist of the following (in thousands):

 

| ** **                                         | ** ** | **June 30,****2008** | ** ** | **December 31,****2007** | ** ** |
|----------------------------------------------------|------------|---------------------------|------------|-------------------------------|------------|
| Contingent share-settled obligation (1)            |       | $                         | —     |                          | $          | 30,000 |   |
| Accrued contract research and development expenses |       | 11,956                    |       | 20,107                        |       |
| Accrued rebate discounts                           |       | 24,773                    |       | 19,673                        |       |
| Accrued property, plant and equipment additions    |       | 13,702                    |       | 15,559                        |       |
| Other accrued sales allowances                     |       | 13,130                    |       | 13,989                        |       |
| Other current liabilities                          |       | 25,735                    |       | 23,596                        |       |
|                                               |       | $                         | 89,296     |                          | $          | 122,924 |   |

 

----

(1)      Represents aliability for $30 million in convertible milestone payments received from Lillythat converted into approximately 0.8 million shares of the Company’s commonstock during the three months ended March 31, 2008.

 

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

 

SFAS No. 130 (SFAS130), “*Reporting Comprehensive Income,”*requires reporting and displaying comprehensive income (loss) and itscomponents, which, for the Company, includes net loss and unrealized gains andlosses on investments. In accordance with SFAS 130, the accumulated balance ofother comprehensive income (loss) is disclosed as a separate component ofstockholders’ equity. For the three and six months ended June 30, 2008 and2007, the comprehensive loss consisted of (in thousands):

 

| ** **                            | ** ** | **Three months ended June 30,** | ** ** | **Six months ended June 30,** | ** ** |
|---------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                            | ** ** | **2008**                                            | ** ** | **2007**                                          | ** ** | **2008** | ** ** | **2007** | ** ** |
| Net loss                              |       | $                                                   | (64,816    | )                                                 | $          | (45,023 | ) | $ | (133,613 | ) | $ | (94,437 | ) |
| Other comprehensive loss:             |       |                                                |       |                                              |       |   |   |   |   |
| Unrealized (loss) gain on investments |       | (493                                                | )          | 390                                               |       | (3,638 | ) | 628 |   |
| Comprehensive loss                    |       | $                                                   | (65,309    | )                                                 | $          | (44,633 | ) | $ | (137,251 | ) | $ | (93,809 | ) |

 

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

 

In June 2007, the Company issued the 2007Notes, which have an aggregate principal amount of $575 million, and are due June 15,2014, in a private placement. The 2007 Notes are senior unsecured obligationsand rank equally with all other existing and future senior unsecured debt. The2007 Notes bear interest at 3.0% per year, payable in cash semi-annually, andare initially convertible into a total of up to 9.4 million shares of commonstock at a conversion price of $61.07 per share, subject to the customaryadjustment for stock dividends and other dilutive transactions. In addition, ifa “fundamental change” (as defined in the associated indenture agreement)occurs prior to the maturity date, the Company will in some cases increase theconversion rate for a holder of notes that elects to convert its notes inconnection with such fundamental change. The maximum conversion rate is22.9252, which would result in a maximum issuance of 13.2 million shares ofcommon stock if all holders converted at the maximum conversion rate.

 

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

 

10

----

 

Subject to certain exceptions, if the Companyundergoes a “designated event” (as defined in the associated indentureagreement) including a “fundamental change,” holders of the 2007 Notes will,for the duration of the 2007 Notes, have the option to require the Company torepurchase all or any portion of their 2007 Notes. The designated eventrepurchase price will be 100% of the principal amount of the 2007 Notes to bepurchased plus any accrued interest up to but excluding the relevant repurchasedate. The Company will pay cash for all 2007 Notes so repurchased. The Companymay not redeem the Notes prior to maturity.

 

The 2007 Notes have been registered under theSecurities Act of 1933, as amended, to permit registered resale of the 2007Notes and of the common stock issuable upon conversion of the 2007 Notes.  Subject to certain limitations, the Companywill be required to pay the holders of the 2007 Notes special interest on the2007 Notes if the Company fails to keep such registration statement effectiveduring specified time periods.

 

In April 2004, the Company issued the 2004 Notes,which have an aggregate principal amount of $200 million, and are due April 15,2011, in a private placement. The 2004 Notes are senior unsecured obligationsand rank equally with all other existing and future senior unsecured debt. The2004 Notes bear interest at 2.5% per year, payable in cash semi-annually andare convertible into a total of up to 5.8 million shares of common stock at aconversion price of $34.35 per share, subject to customary adjustments forstock dividends and other dilutive transactions. The Company may not redeem the2004 Notes prior to maturity.

 

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

 

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

 

In December 2007, the Company****entered into a$140 million credit agreement with Bank of America, N.A., as administrativeagent, collateral agent and letter of credit issuer, Silicon Valley Bank andRBS Asset Finance, Inc., as syndication agents, and Comerica Bank and BMOCapital Markets Financing, Inc., as documentation agents.  The creditagreement provides for a $125 million term loan and a $15 million revolvingcredit facility.  The proceeds of both loans will be used for generalcorporate purposes.  The revolving creditfacility also provides for the issuance of letters of credit and foreignexchange hedging up to the $15 million borrowing limit.  The Company had an outstanding balance of$125.0 million under the term loan and had issued $5.6 million and $5.2 millionof stand-by letters of credit under the revolving credit facility,respectively, primarily in connection with office leases, at June 30, 2008and December 31, 2007.

 

The Company’sdomestic subsidiaries, Amylin Ohio LLC and Amylin Investments LLC, areco-borrowers under the credit agreement.  The loans under the revolvingcredit facility are secured by substantially all of the Company’s and the twodomestic subsidiaries’ assets (other than intellectual property and certainother excluded collateral).  The term loan is repayable on aquarterly basis, with no principal payments due quarters one through four,6.25% of the outstanding principal due quarters five through eleven, and 56.25%of the outstanding principal due in quarter twelve.  Interest on the term loan will be paidquarterly on the unpaid principal balance at 1.75% above the London InterbankOffered Rate, or LIBOR, based on the Company’s election of either one, two,three or six months LIBOR term, and payable at the end of the selected interestperiod but no less frequently than quarterly as of the first business day ofthe quarter prior to the period in which the quarterly installment is due.  The Company has elected to use the threemonth LIBOR rate, which was 2.78% and 4.85% at June 30, 2008 and December 31,2007, respectively.  Interest periods onthe revolving credit facility may be either one, two, three or six months, andpayable at the end of the selected interest period but no less frequently thanquarterly, and the interest rate will be either LIBOR plus 1.0% or the Bank ofAmerica prime rate, as selected by the Company. Both loans have a final maturity date of December 21, 2010.

 

The creditagreement contains certain covenants, including a requirement to maintainminimum unrestricted cash and cash equivalents, as defined in the agreement, inexcess of $400 million, and events of default that permit the administrativeagent to accelerate the Company’s outstanding obligations if not cured withinapplicable grace periods, including nonpayment of principal, interest, fees orother amounts, violation of covenants, inaccuracy of representations andwarranties, and default under other indebtedness.  In addition, the creditagreement provides for automatic acceleration upon the occurrence of bankruptcyand other insolvency events.  There is anannual commitment fee associated with the revolving credit facility of 0.25%.

 

11

----

 

Maturities of long-term notepayable for years ending after June 30, 2008 are as follows (inthousands):

 

| 2008                                  |   | $      | —  |   |
|---------------------------------------|--------|--------|---------|--------|
| 2009                                  |   | 31,250 |    |
| 2010                                  |   | 93,750 |    |
| Thereafter                            |   | — |    |
| Total minimum long-term debt payments |   | $      | 125,000 |   |

 

In connection with theexecution of the term loan, the Company entered into an interest rate swap withan initial notional amount of $125 million on December 21, 2007.  The Company will make payments to acounter-party at 3.967% and receive payments at LIBOR which is reset everythree months, the first reset date being March 21, 2008.  Payments will be made on the 21stof each March, June, September and December, commencing on March 21,2008 for the period December 21, 2007 through March 21, 2008, andcontinuing in similar fashion throughout the maturity of the swap, whichmaturity is coincident with the term loan maturity.  The Company determined that the interest rateswap agreement is defined as Level 2 in the fair value hierarchy. As of June 30,2008, the fair value of the interest rate swap agreement was a liability of$1.0 million and the recognized loss on the interest rate swap for the sixmonths ended June 30, 2008 was $0.7 million.  The interest rate swap has resulted in afixed rate of 5.717% for net interest receipts and payments for the term loanand interest rate swap transactions.

 

**9.     Stockholders’ Equity**

 

InMarch 2008, the Company contributed approximately 0.7 million newly issuedshares of its common stock, valued at $24.87 per share, to the Company’s ESOPfor amounts earned by participants during the year ended December 31,2007.

 

InFebruary 2008, the Company contributed approximately 0.1 million newlyissued shares of its common stock, at $37.00 per share, to the Company’s 401(k) planfor amounts earned by participants during the year ended December 31,2007.

 

InFebruary 2008, the Company issued approximately 0.8 million shares of itscommon stock to Lilly, upon Lilly’s election to convert $30 million ofdevelopment milestone payments related to exenatide once weekly, received in2007 at aconversion price of $37.95, which represents the immediatelypreceding twenty day average closing market price of the Company’s common stockon December 31, 2007 in accordance with the Company’s exenatidecollaboration agreement with Lilly.

 

**10.  Commitments and Contingencies**

 

# **Other Commitments**

#  

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

 

As of June 30,2008, if all such milestones are successfully achieved, the potential futuremilestone and other contingency payments due under certain contractualagreements are approximately $312.4 million in aggregate, of which $1.8 millionare expected to be paid over the next twelve months.

 

Wehave committed to make future minimum payments to third parties for certaininventories in the normal course of business. The minimum purchase commitmentstotal approximately $44.0 million as of June 30, 2008.

 

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

 

Exceptfor the historical information herein, the discussion in this quarterly reporton Form 10-Q contains forward-looking statements that involve risks anduncertainties. These statements include projections about our accounting and 

 

12

----

 

finances, plans andobjectives for the future, future operating and economic performance and otherstatements regarding future performance. These statements are not guarantees offuture performance or events. Our actual results may differ materially fromthose discussed here. Factors that could cause or contribute to differences inour actual results include those discussed under the caption “CautionaryFactors That May Affect Future Results,” as well as those discussedelsewhere in this quarterly report on Form 10-Q or in our other publicdisclosures. You should consider carefully those cautionary factors, togetherwith all of the other information included in this quarterly report on Form 10-Q.Each of the cautionary factors, either alone or taken together, could adverselyaffect our business, operating results and financial condition, as well asadversely affect the value of an investment in our common stock. There may beadditional risks that we are not presently aware of or that we currentlybelieve are immaterial which could also impair our business and financialposition. We disclaim any obligation to update these forward-lookingstatements.

 

**Overview**

 

AmylinPharmaceuticals, Inc. is a biopharmaceutical company committed toimproving the lives of people with diabetes, obesity and other diseases throughthe discovery, development and commercialization of innovative medicines. Wehave developed and gained approval for two first-in-class medicines to treatdiabetes, BYETTA® (exenatide) injection and SYMLIN®(pramlintide acetate) injection, both of which were commercially launched inthe United States during the second quarter of 2005.  BYETTA has also been approved in the EuropeanUnion, or EU, and our collaboration partner Eli Lilly and Company, or Lilly,has commercially launched BYETTA in more than 30 countries as of June 30,2008.  We expect Lilly to continue tolaunch BYETTA in additional EU member states and other countries during 2008.

 

BYETTAis the first and only approved medicine in a new class of compounds calledincretin mimetics. We began selling BYETTA in the United States in June 2005.  BYETTA is approved in the United States forthe treatment of patients with type 2 diabetes who have not achieved adequateglycemic control and are using metformin, sulfonylurea and/or athiazolidinedone, or TZD, three common oral therapies for type 2 diabetes.  Net product sales of BYETTA were $177.5million and $152.1 million for the three months ended June 30, 2008 and2007, respectively, and $336.0 million and $298.6 million for the six monthsended June 30, 2008 and 2007, respectively.

 

Wehave an agreement with Lilly for the global development and commercializationof exenatide. This agreement includes BYETTA and any sustained-releaseformulations of exenatide such as exenatide once weekly, our once weeklyformulation of exenatide for the treatment of type 2 diabetes. Under the termsof the agreement, operating profits from products sold in the United States areshared equally between Lilly and us.  Theagreement provides for tiered royalties payable to us by Lilly based upon theannual gross margin for all exenatide product sales, including any long-actingrelease formulations, outside of the United States.  Royalty payments for exenatide product salesoutside of the United States will commence after a one-time cumulative grossmargin threshold amount has been met.  Weexpect royalty payments to commence in 2009. Lilly is responsible for 100% of the costs related to development oftwice-daily BYETTA for sale outside of the United States.  Development costs related to all otherexenatide products for sale outside of the United States will continue to beallocated 80% to Lilly and 20% to us. Lilly will continue to be responsible for commercialization and all ofthe costs related to commercialization of all exenatide products for saleoutside of the United States.

 

SYMLIN is the first and only approved medicine in anew class of compounds called amylinomimetics. We began selling SYMLIN in the United States in April 2005.  SYMLIN is approved in the United States forthe treatment of patients with either type 1 or type 2 diabetes who are treatedwith mealtime insulin but who have not achieved adequate glycemic control.  In January 2008, we commerciallylaunched the SymlinPenTM 120 and SymlinPenTM 60 peninjector devices in the United States. These new pre-filled pen-injector devices feature simple, fixed dosingto improve mealtime glucose control.  Net product sales of SYMLIN were $22.8million and $15.2 million for the three months ended June 30, 2008 and2007, respectively, and $43.1 million and $30.7 million for the six monthsended June 30, 2008 and 2007, respectively.

 

Wehave a field force of approximately 650 people, after our recent expansiondiscussed below, dedicated to marketing BYETTA and SYMLIN in the UnitedStates.  Our field force includes ourspecialty and primary care sales forces, a managed care and government affairsorganization, a medical science organization and diabetes carespecialists.  In addition, Lillyco-promotes BYETTA in the United States.  In May 2008,we amended our United States co-promotion agreement with Lilly, resulting in a40% increase in the total number of sales representatives promoting BYETTAbeginning July 1, 2008.  To achievethis increase, Lilly’s existing third party sales force for Cialis® (tidalafil)will co-promote BYETTA in the United States and Amylin increased the number ofsales representatives in its existing primary care sales force by approximately15%.   In exchange for Lilly sharing in50% of the costs related to the additional Amylin sales representatives andpaying 100% of the costs of the third party sales force discussed above, ourprimary care sales force will co-promote Cialis in the United States.

 

13

----

 

In addition to our marketed products, we are workingwith Lilly and Alkermes, Inc., or Alkermes, to develop exenatide onceweekly.  We are also working withAlkermes and Parsons, Inc., or Parsons, on the construction of amanufacturing facility for exenatide once weekly in Ohio.  We are now manufacturing exenatide onceweekly at commercial scale in our facility in Ohio and we plan to beginsupplying ongoing and planned clinical trials with this material in the thirdquarter of 2008.  During the secondquarter of 2008, we held our pre-NDA meeting with the United States Food andDrug Administration, or FDA, to discuss open items for our exenatide onceweekly regulatory submission.  We remainon track to submit our NDA for exenatide once weekly to the FDA by the end ofthe first half of 2009 and we are working aggressively to provide sufficientdata to the FDA to demonstrate comparability between exenatide once weeklyclinical trial material manufactured by our partner, Alkermes, in its facilityand exenatide once weekly produced in our Ohio facility that could allow for anacceleration of the NDA submission.

 

We also have other early stage programs fordiabetes, obesity, and other therapeutic areas. We have a number of compounds in development for the potential treatmentof obesity, which are part of a broader clinical strategy which we refer to asINTO: Integrated Neurohormonal Therapies for Obesity.  In March 2008, we licensed rights tosustained release technology from Pacira Pharmaceuticals, Inc. for thepotential development of sustained release formulations of our early stageobesity and other potential product candidates.

 

We also maintain an active discovery researchprogram focused on novel peptide therapeutics. We are actively seeking to in-license additional drug candidates and wehave made a number of strategic investments and collaborations for thepotential development of additional drug candidates.

 

Since our inception in September 1987, we havedevoted substantially all of our resources to our research and developmentprograms and, more recently, to the commercialization of our products. All ofour revenues prior to May 2005 were derived from fees and expensereimbursements under our BYETTA collaboration agreement with Lilly, previousSYMLIN collaborative agreements and previous co-promotion agreements. Duringthe second quarter of 2005, we began to derive revenues from product sales ofBYETTA and SYMLIN.  At June 30, 2008, our accumulated deficitwas approximately $1.6 billion.

 

At June 30,2008, we had approximately $890.9 million in cash, cash equivalents andshort-term investments.  We may notgenerate positive operating cash flows for at least the next few years and accordingly, we may need to raiseadditional funds from outside sources. Refer to the discussions underthe headings “Liquidity and Capital Resources” below and “Cautionary FactorsThat May Affect Future Results” in Part II, Item 1A for furtherdiscussion regarding our anticipated future capital requirements.

 

**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 31,2007.  The financial information as of June 30,2008, should be read in conjunction with the financial statements for the yearended December 31, 2007, contained in our annual report on Form 10-Kfiled on February 27, 2008.

 

For adiscussion of the Company’s critical accounting policies, see “Item 7.Management’s Discussion and Analysis of Financial Condition and Results ofOperations” in our annual report on Form 10-K filed on February 27,2008.

 

**Resultsof Operations**

 

**Comparisonof Three Months Ended June 30, 2008 to Three Months Ended June 30,2007**

 

***Net Product Sales***

 

Netproduct sales for the three months ended June 30, 2008 and 2007 were$200.3 million and $167.3 million, respectively, and consisted of shipmentsof BYETTA and SYMLIN, less allowances for product returns, rebates andwholesaler chargebacks, wholesaler discounts and prescription vouchers.

 

14

----

 

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

 

| ** ** | ** ** | **Three months ended June 30,** | ** ** |
|------------|------------|-----------------------------------------------------|------------|
| ** ** | ** ** | **2008**                                            | ** ** | **2007** | ** ** |
| BYETTA     |       | $                                                   | 177.5      |   | $ | 152.1 |   |
| SYMLIN     |       | 22.8                                                |       | 15.2 |   |
|       |       | $                                                   | 200.3      |   | $ | 167.3 |   |

 

Theincreases in net product sales for BYETTA and SYMLIN in the current periodreflect continued growth in patient demand.

 

***Revenues Under Collaborative Agreements***

 

Revenues under collaborative agreements for the threemonths ended June 30, 2008, were $21.7****millioncompared to $29.6 million for the same period in 2007. Substantially all of therevenue recorded in these periods consists of amounts earned pursuant to ourBYETTA collaboration agreement with Lilly. The $7.9 million decrease in revenuesunder collaborative agreements in the current quarter compared to the sameperiod in 2007 reflects a reduction in milestone revenues partially offset byhigher cost-sharing payments from Lilly due primarily to increased developmentexpenses for exenatide once weekly and a higher proportion of total shareddevelopment expenses incurred by us. Milestone revenues for the three months ended June 30, 2007consisted of $15.0million in milestones associated primarily with Lilly’s launch of BYETTA in theEU.  There were no milestones earned inthe three months ended June 30, 2008.

 

 The followingtable summarizes the components of revenues under collaborative agreements forthe three months ended June 30, 2008 and 2007 (in millions):

 

| ** **                             | ** ** | **Three months ended  June 30,** | ** ** |
|----------------------------------------|------------|-------------------------------------------------|------------|
| ** **                             | ** ** | **2008**                                        | ** ** | **2007** | ** ** |
| Amortization of up-front payments      |       | $                                               | 1.1        |   | $ | 1.1 |   |
| Milestones                             |       | —                                          |       | 15.0 |   |
| Cost-sharing and co-promotion payments |       | 20.6                                            |       | 13.5 |   |
|                                   |       | $                                               | 21.7       |   | $ | 29.6 |   |

 

In future periods, revenuesunder collaborative agreements will consist of ongoing cost-sharing paymentsfrom Lilly for sharing of development costs, possible future milestone paymentsand the continued amortization of the $30 million portion of the up-frontpayment received from Lilly upon signing of our collaboration agreement in2002. The amount of cost-sharing revenue recorded will be dependent on thetiming, extent and relative proportion of total development costs for theexenatide once weekly and BYETTA development programs incurred by us and byLilly. The receipt and recognition as revenue of future milestone payments issubject to the achievement of performance requirements underlying suchmilestone payments.

 

***Cost of Goods Sold***

 

Costof goods sold for the three months ended June 30, 2008 and 2007 was $24.7million, representing a gross margin of 88%, and $14.4 million, representing agross margin of 91%, respectively, and is comprised primarily of manufacturingcosts associated with BYETTA and SYMLIN sales during the period.  The decrease in gross marginfor the three months ended June 30, 2008, compared to the same period in2007, primarily reflects increased product costs for BYETTA due to lowerproduction volumes, and product mix, including the introduction of the SymlinPen, partially offset by higher net sales prices per unit for BYETTA andSYMLIN. Quarterlyfluctuations in gross margins may be influenced by product mix, pricing and thelevel of sales allowances.

 

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

 

Selling,general and administrative expenses increased to $111.1 million for the threemonths ended June 30, 2008, from $93.1 million for the same period in2007. The increase primarily reflects expenses associated with the recentexpansion of our sales force, increased promotional expenses for BYETTA andSYMLIN, expenses associated with pre-launch education activities for exenatideonce weekly and increases in business infrastructure to support our growth.

 

15

----

 

***Research and Development Expenses***

 

Ourresearch and development costs are comprised of salaries and bonuses,benefits, non-cash stock-based compensation, license fees, milestones underlicense agreements, costs paid to third-party contractors to perform research,conduct clinical trials, and develop drug materials and delivery devices; andassociated overhead expenses and facilities costs. We charge direct internal and external program costs to the respectivedevelopment programs. We also incur indirect costs that are not allocated tospecific programs because such costs benefit multiple development programs andallow us to increase our pharmaceutical development capabilities. These consistprimarily of facilities costs and other internal shared resources related tothe development and maintenance of systems and processes applicable to all ofour programs.

 

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

 

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

 

| ** **                         | ** ** | **Three months ended June 30,** | ** ** |
|------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                         | ** ** | **2008**                                            | ** ** | **2007** | ** ** | **Increase/(Decrease)** | ** ** |
| Diabetes (1)                       |       | $                                                   | 41.2       |   | $ | 35.5 |   | $ | 5.7 |   |
| Obesity                            |       | 12.3                                                |       | 19.7 |   | (7.4 | ) |
| Research and early-stage  programs |       | 9.1                                                 |       | 7.1 |   | 2.0 |   |
| Indirect costs                     |       | 12.8                                                |       | 9.4 |   | 3.4 |   |
|                               |       | $                                                   | 75.4       |   | $ | 71.7 |   | $ | 3.7 |   |

 

----

(1)  Researchand development expenses consist primarily of costs associated with BYETTA andexenatide once weekly which are shared by Lilly pursuant to our collaborationagreement.  Cost-sharing paymentsreceived by Lilly are included in revenues under collaborative agreements.  Increased expenditures for our diabetesdevelopment programs are generally partially offset by an increase incost-sharing payments from Lilly.  Cost-sharingpayments were $20.6 million and $13.5 million for the three months ended June 30,2008 and 2007, respectively.

 

The $3.7 million increase in research and developmentexpenses for the three months ended June 30, 2008 as compared to the sameperiod in 2007 primarily reflects increased expenses of $5.7 million for ourdiabetes programs, increased expenses of $3.4 million for indirect costs andincreased expenses of $2.0 million for our research and early-stage programs,partially offset by a $7.4 million reduction in our obesity programs. Theincrease in expenses for our diabetes programs primarily reflects increasedexpenses for exenatide once weekly associated with manufacturing scale-up andon-going clinical trials.  The increasein indirect costs primarily reflects increased facilities costs, a portion ofwhich are allocated to research and development expenses.  The increase in expenses for our research andearly-stage programs primarily reflects investments in drug deliveryplatforms.  The decrease in expenses forour obesity programs primarily reflects the fact that expenses for our obesityprograms for the three months ended June 30, 2007 included a developmentmilestone for Leptin. There was no comparable expense in the three months endedJune 30, 2008.

 

***Collaborative Profit Sharing***

 

Collaborativeprofit sharing was $79.0 million and $70.4 million for the three months ended June 30,2008 and 2007, respectively, and consists of Lilly’s 50% share of the grossmargin for BYETTA in the United States.

 

***Interestand Other Income and Expense***

 

Interestand other income consist primarily of interest income from investment of cashand other investments. Interest and other income decreased to $7.0 million forthe three months ended June 30, 2008, from $9.9 million for the sameperiod in 2007.  The decrease primarilyreflects lower interest rates earned on our short-term investments partiallyoffset by higher average short-term investment balances during the three monthsended June 30, 2008 as compared to the same period in 2007.

 

16

----

 

Interest and other expenseconsist primarily of interest expense resulting from our long-term debtobligations. Interest expense in the three months ended June 30, 2008consists of interest on our $775 million of outstanding convertible seniornotes and our $125 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. Interestand other expense was $3.7 million and $2.4 million for the three months ended June 30,2008 and 2007, respectively.  Theincrease in interest and other expense for the three months ended June 30,2008 reflects additional interest expense for our convertible senior notesissued in June 2007 and long-term note payable entered into in December 2007,partially offset by a recognized gain of approximately $3 million associatedwith the interest rate swap related to the term loan.  There was no comparable gain in the threemonths ended June 30, 2007.

 

***Net Loss***

 

Ournet loss for the three months ended June 30, 2008 was $64.8 millioncompared to a net loss of $45.0 million for the same period in 2007. Theincrease in net loss primarily reflects the increased selling, general andadministrative expenses, increased collaborative profit-sharing, the decreasedrevenues under collaborative arrangements and the increased research anddevelopment expenses discussed above, partially offset by increased net productsales discussed above. We may incur operating losses for the next fewyears.  Our ability to reachprofitability in the future will be heavily dependent upon the amount ofproduct sales that we achieve for BYETTA and SYMLIN. In addition, ongoing andpotential increased expenses associated with the continued commercialization ofBYETTA and SYMLIN, costs associated with the development and commercializationof exenatide once weekly, if approved, and expenses associated with potentialexpansion of our research and development programs, including our obesity andour early-stage development programs, and related support infrastructure, mayimpact our ability to reach profitability in the future. Our operating resultsmay fluctuate from quarter to quarter as a result of differences in the timingof expenses incurred and revenues recognized.

 

**Comparisonof Six Months Ended June 30, 2008 to Six Months Ended June 30, 2007**

 

***Net Product Sales***

 

Netproduct sales for the six months ended June 30, 2008 and 2007 were $379.1million and $329.3 million, respectively, and consisted of shipmentsof BYETTA and SYMLIN, less allowances for product returns, rebates andwholesaler chargebacks, wholesaler discounts, and prescription vouchers.

 

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

 

| ** ** | ** ** | **Six months ended June 30,** | ** ** |
|------------|------------|---------------------------------------------------|------------|
| ** ** | ** ** | **2008**                                          | ** ** | **2007** | ** ** |
| BYETTA     |       | $                                                 | 336.0      |   | $ | 298.6 |   |
| SYMLIN     |       | 43.1                                              |       | 30.7 |   |
|       |       | $                                                 | 379.1      |   | $ | 329.3 |   |

 

The increases in net product sales for BYETTA andSYMLIN in the current period reflect continued growth in patient demand.

 

***Revenues Under Collaborative Agreements***

 

Revenuesunder collaborative agreements for the six months ended June 30, 2008 were$40.2 million compared to $39.6 million for the same period in 2007. Substantiallyall of the revenue recorded in these periods consists of amounts earnedpursuant to our BYETTA collaboration agreement with Lilly. The $0.6 millionincrease in revenues under collaborative agreements in the six months ended June 30,2008 compared to the same period in 2007 reflects higher cost-sharingpayments from Lilly due primarily to increased development expenses forexenatide once weekly and a higher proportion of total shared developmentexpenses incurred by us, partially off-set by a reduction in milestone revenues.  Milestone revenues for the six monthsended June 30, 2007 consisted of $15.0 million in milestones associated primarilywith Lilly’s launch of BYETTA in the EU. There were no milestones earned in the six months ended June 30,2008.

 

17

----

 

Thefollowing table summarizes the components of revenues under collaborativeagreements for the six months ended June 30, 2008 and 2007 (in millions):

 

| ** **                             | ** ** | **Six months ended  June 30,** | ** ** |
|----------------------------------------|------------|-----------------------------------------------|------------|
| ** **                             | ** ** | **2008**                                      | ** ** | **2007** | ** ** |
| Amortization of up-front payments      |       | $                                             | 2.1        |   | $ | 2.1 |   |
| Milestones                             |       | —                                        |       | 15.0 |   |
| Cost-sharing and co-promotion payments |       | 38.1                                          |       | 22.5 |   |
|                                   |       | $                                             | 40.2       |   | $ | 39.6 |   |

 

***Cost of Goods Sold***

 

Costof goods sold for the six months ended June 30, 2008 and 2007 was $46.7million, representing a gross margin of 88%, and $29.6 million, representing agross margin of 91%, respectively, and is comprised primarily of manufacturingcosts associated with BYETTA and SYMLIN sales during the period.  The decrease in gross margin for the sixmonths ended June 30, 2008 compared to the same period in 2007 reflects the same factorsthat influenced similar fluctuations in the three months ended June 30,2008 discussed above.

 

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

 

Selling,general and administrative expenses increased to $209.3 million for the sixmonths ended June 30, 2008, from $180.9 million for the same period in2007. The increase primarily reflects the same factors that influenced similarfluctuations in the three months ended June 30, 2008 discussed above.

 

***Research and Development Expenses***

 

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

 

| ** **                         | ** ** | **Six months ended June 31,** | ** ** |
|------------------------------------|------------|---------------------------------------------------|------------|
| ** **                         | ** ** | **2008**                                          | ** ** | **2007** | ** ** | **Increase/(Decrease)** | ** ** |
| Diabetes (1)                       |       | $                                                 | 81.7       |   | $ | 63.8 |   | $ | 17.9 |   |
| Obesity                            |       | 29.3                                              |       | 34.9 |   | (5.6 | ) |
| Research and early-stage  programs |       | 16.5                                              |       | 13.8 |   | 2.7 |   |
| Indirect costs                     |       | 25.1                                              |       | 18.8 |   | 6.3 |   |
|                               |       | $                                                 | 152.6      |   | $ | 131.3 |   | $ | 21.3 |   |

 

----

(1)          Researchand development expenses consist primarily of costs associated with BYETTA andexenatide once weekly which are shared by Lilly pursuant to our collaborationagreement.  Cost-sharing paymentsreceived by Lilly are included in revenues under collaborative agreements.  Increased expenditures for our diabetesdevelopment programs are generally partially offset by an increase incost-sharing payments from Lilly. Cost-sharing payments were $38.1 million and $22.5 million for the sixmonths ended June 30, 2008 and 2007, respectively.

 

The $21.3 million increase in research and developmentexpenses for the six months ended June 30, 2008 as compared to the sameperiod in 2007 primarily reflects increases of $17.9 million for our diabetesprograms, $6.3 million for indirect costs, and $2.7 million for our researchand early-stage programs, partially offset by a reduction of $5.6 million forour obesity programs. The increase in expenses for our diabetes programsprimarily reflects increased expenses for exenatide once weekly associated withmanufacturing scale-up and on-going clinical trials. The increase in indirectcosts primarily reflects increased facilities costs, a portion of which areallocated to research and development expenses. The increase in expenses for our research and early stage programsprimarily reflects investments in drug delivery platforms.  The increase in indirect costs primarilyreflects increased facilities costs to support our growth, a portion of whichis allocated to research and development expenses.  The reduction in expenses for our obesityprograms primarily reflects reduced clinical trial costs following thecompletion of several clinical trials in 2007 conducted as part of our INTOstrategy.

 

18

----

 

 

***CollaborativeProfit Sharing***

 

Collaborative profit sharing was $148.9 million and$137.3 million for the six months ended June 30, 2008 and 2007,respectively, and consists of Lilly’s 50% share of the gross margin for BYETTAin the United States.

 

***Interest and Other Income andExpense***

 

Interest and other income consist primarily ofinterest income from investment of cash and other investments. Interest andother income decreased to $18.0 million for the six months ended June 30,2008, from $19.3 million for the same period in 2007.  The decrease of $1.3 million primarilyreflects lower interest rates, partially offset by higher average investmentbalances during the six months ended June 30, 2008 as compared to the sameperiod in 2007.

 

Interest and other expenseconsist primarily of interest expense resulting from our long-term debtobligations. Interest expense in the six months ended June 30, 2008consists of interest on our $775 million of outstanding convertible seniornotes and our $125 million of outstanding long-term note payable, or our termloan, and the amortization of associated debt issuance costs. Interestand other expense was $13.4 million and $3.7 million for the six months ended June 30,2008 and 2007, respectively.  Theincrease reflects additional interest expense for our convertible senior notesissued in June 2007 and long-term note payable entered into in December 2007.

 

***Net Loss***

 

Our net loss for the six months ended June 30,2008 was $133.6 million compared to a net loss of $94.4 million for the sameperiod in 2007. The increase in net loss primarily reflects the increasedselling, general and administrative expenses, increased research anddevelopment expenses, increased collaborative profit-sharing and increasedinterest and other expense, partially offset by the increased net product salesand revenues under collaborative agreements discussed above.

 

# **Liquidity and Capital Resources**

#  

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

 

At June 30, 2008, we had $890.9 million incash, cash equivalents and short-term investments, compared to $1.1 billion at December 31,2007.  We used cash of $72.7 million and$54.2 million for our operating activities in the six months ended June 30,2008 and 2007, respectively.   Our cashused for operating activities in the six months ended June 30, 2008included a net source of cash of $14.2 million from changes in working capital,due primarily to sources of cash from a decrease in accounts receivable and anincrease in accrued compensation of $7.9 million and $13.2 million,respectively, offset by uses of cash from a decrease in payable tocollaborative partner and an increase in other current assets of $4.7 millionand $2.6 million, respectively.

 

Our investing activities used cash of $228.2 millionand $215.2 million for the six months ended June 30, 2008 and 2007,respectively. Investing activities in both quarters consisted primarily ofpurchases and sales of short-term investments and purchases of property, plantand equipment and increases in other long-term assets.   Purchases of property, plant and equipmentincreased to $173.4 million for the six months ended June 30, 2008 from$142.0 million for the six months ended June 30, 2007.  The increase during the six months ended June 30,2008 primarily reflects costs associated with our manufacturing facility forexenatide once weekly and, to a lesser extent, purchases of tenantimprovements, office equipment and scientific equipment to support our growth.  Weare now manufacturing exenatide once weekly at commercial scale in our facilityin Ohio and we plan to begin supplying ongoing and planned clinical trials withthis material during the third quarter of 2008.  Through June 30, 2008, we had expended in excess of $400million associated with the construction of this facility and we expect thetotal investment to be in excess of $500 million by the end of 2008, whichincludes costs associated with the construction of the facility, purchase andinstallation of equipment and capitalized labor and materials required tovalidate the facility.   We will continueto evaluate potential additional investments in Ohio during the product lifecyclefor exenatide once weekly.

 

Financing activities provided cash of $9.5 millionand $582.2 million for the six months ended June 30, 2008 and 2007,respectively.   Financingactivities in six months ended June 30, 2008 include proceeds from theexercise of stock options and proceeds from our employee stock purchase plan.

 

19

----

 

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

 

In December 2007, we****enteredinto a $140 million credit agreement. The credit agreement provides for a $125 million term loan and a $15million revolving credit facility.  The revolving credit facility alsoprovides for the issuance of letters of credit and foreign exchange hedging upto the $15 million borrowing limit.  Theterm loan is repayable on a quarterly basis, with no principal payments duequarters one through four, 6.25% of the outstanding principal due quarters fivethrough eleven, and 56.25% of the outstanding principal due in quartertwelve.  At June 30, 2008 we had anoutstanding balance of $125.0 million under the term loan and had issued $5.6million of stand-by letters of credit under the revolving credit facility.  Both loans have a final maturity date of December 21,2010.  Interest on the term loan 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 enteredinto an interest rate swap agreement which resulted in a net fixed interestrate of 5.717% under the term loan.  Theinterest rate on the credit facility is either LIBOR plus 1.0% or the Bank ofAmerica prime rate, at our election.

 

Thefollowing table summarizes our contractual obligations and maturity dates as ofJune 30, 2008 (in thousands):

 
| ** **                                                        | ** ** | **Payments Due by Period** | ** ** |
|-------------------------------------------------------------------|------------|-------------------------------------------|------------|
| **Contractual Obligations**                                  | ** ** | **Total**                                 | ** ** | **Less than 1  year** | ** ** | **1-3 years** | ** ** | **4-5 years** | ** ** | **After 5 years** | ** ** |
| Long-term convertible debt                                        |       | $                                         | 775,000    |   | $ | — |   | $ | 200,000 |   | $ | — |   | $ | 575,000 |   |
| Interest payments on long-term  convertible debt                  |       | 118,500                                   |       | 22,250 |   | 44,500 |   | 34,500 |   | 17,250 |   |
| Long-term note payable                                            |       | 125,000                                   |       | 15,625 |   | 109,375 |   | — |   | — |   |
| Interest on long-term note  payable, net of swap transactions (1) |       | 14,740                                    |       | 7,035 |   | 7,705 |   | — |   | — |   |
| Inventory purchase  obligations(2)                                |       | 130,417                                   |       | 86,879 |   | 39,908 |   | 3,630 |   | — |   |
| Operating lease obligations                                       |       | 166,301                                   |       | 18,571 |   | 36,184 |   | 38,408 |   | 73,138 |   |
| Total(3)                                                          |       | $                                         | 1,329,958  |   | $ | 150,360 |   | $ | 437,672 |   | $ | 76,538 |   | $ | 665,388 |   |

 

----

(1)  The interest paymentsshown were calculated using a rate of 5.717%, the combined net rate of the termloan and interest rate swap, on the outstanding principal balance of the termloan

 

(2)          Includes $86.5 million of outstanding purchase orders, cancelable by usupon 30 days’ written notice, subject to reimbursement of costs incurredthrough the date of cancellation.

 

(3)          Excludes long-term obligation of $8.4 million related to deferredcompensation, the payment of which is subject to elections made by participantsthat are subject to change.

 

In addition, under certain license andcollaboration agreements we are required to pay royalties and/or milestonepayments upon the successful development and commercialization of relatedproducts.  We expect to make developmentmilestone payments up to $1.8 million associated with licensing agreements inthe next 12 months.  Additionalmilestones of up to approximately $310.7 million could be paid over the next 10to 15 years if development and commercialization of all our early stageprograms continue and are successful. The significant majority of these milestones relate to potential futureregulatory approvals and subsequent sales thresholds.  Given the inherent risk in pharmaceuticaldevelopment, it is highly unlikely that we will ultimately make all of these milestonepayments; however, we would consider these payments as positive because theywould signify that the related products are moving successfully throughdevelopment and commercialization.

 

Our futurecapital requirements will depend on many factors, including: the amount ofproduct sales we achieve for BYETTA and SYMLIN; costs associated with thecontinued commercialization of BYETTA and SYMLIN; costs associated with theestablishment of our exenatide once weekly manufacturing facility; costs ofpotential licenses or acquisitions; the potential need to repay existingindebtedness; costs associated with an increase in our infrastructure; ourability to receive or need to make milestone payments; our ability, and theextent, to which we establish collaborative arrangements for SYMLIN or any of ourproduct candidates; progress in our research and development programs and themagnitude of these programs; 

 

20

----

 

costs involved in preparing, filing,prosecuting, maintaining, enforcing or defending our patents; competingtechnological and market developments; and costs of manufacturing, includingcosts associated with establishing our own manufacturing capabilities orobtaining and validating additional manufacturers of our products; and scale-upcosts for our drug candidates.

 

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

 

We invest our excess cashprimarily in United States Government securities, asset-backed securities anddebt instruments of financial institutions and corporations with strong creditratings. These instruments have various short-term maturities. We do notutilize derivative financial instruments, derivative commodity instruments orother market risk sensitive instruments, positions or transactions in anymaterial fashion. Accordingly, we believe that, while the instruments held aresubject to changes in the financial standing of the issuer of such securities,we are not subject to any material risks arising from changes in interestrates, foreign currency exchange rates, commodity prices, equity prices orother market changes that affect market risk sensitive investments. Our debt isnot subject to significant swings in valuation as interest rates on our debtare fixed. The fair value of our 2004 Notes and 2007 Notes at June 30,2008 was approximately $206 million and $470 million, respectively. Ahypothetical 1% adverse move in interest rates along the entire interest rateyield curve would not materially affect the fair value of our financialinstruments that are exposed to changes in interest rates.

 

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

 

As of June 30, 2008, an evaluation wasperformed under the supervision and with the participation of our management,including our President and Chief Executive Officer (referred to as our CEO)and our Senior Vice President, Finance and Chief Financial Officer (referred toas our CFO), of the effectiveness of the design and operation of our disclosurecontrols and procedures. In designing and evaluating the disclosure controlsand procedures, management recognizes that any controls and procedures, nomatter how well designed and operated, can provide only reasonable assurance ofachieving the desired control objectives, and management necessarily isrequired to apply its judgment in evaluating the cost-benefit relationship ofpossible controls and procedures. Based on that evaluation, our management,including our CEO and CFO, concluded that our disclosure controls andprocedures were effective at a reasonable level of assurance as of June 30,2008.

 

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

 

An evaluation was also performed under the supervision and with theparticipation of our management, including our CEO and CFO, of any change in ourinternal control over financial reporting that occurred during our last fiscalquarter and that has materially affected, or is reasonably likely to materiallyaffect, our internal control over financial reporting. That evaluation did notidentify any change in our internal control over financial reporting thatoccurred during our latest fiscal quarter and that has materially affected, oris reasonably likely to affect, our internal control over financial reporting.

 

**PART II. OTHER INFORMATION**

 

**Item 1A. Risk Factors**

 

**CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS**

** **

The following sets forth cautionary factors that may affect our futureresults, including clarifications to the cautionary factors included in ourAnnual Report on Form 10-K for the fiscal year ended December 31,2007.

 

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

 

We have experienced significant operating losses since our inception in1987, including losses of $133.6 million for the six months ended June 30,2008, $211.1 million in 2007, $218.9 million in 2006 and $206.8 million in2005.  As of June 30, 2008, we hadan accumulated deficit of approximately $1.6 billion.  The extent of our future losses and thetiming of potential profitability are uncertain, and we may never achieveprofitable operations.  We have beenengaged in discovering and developing drugs since inception, which hasrequired, and will continue to require, significant research and developmentexpenditures.  We derived substantiallyall of our revenues prior to 2005 from development funding, fees and milestonepayments under collaborative agreements and from interest income.  BYETTA and SYMLIN may not be as commercially 

 

21

----

 

successful aswe expect and we may not succeed in commercializing any of our other drugcandidates.  We may incur substantialoperating losses for at least the next few years as we continue to expand ourcommercial function for BYETTA and SYMLIN and our research and developmentactivities for the other drug candidates in our development pipeline.  These losses, among other things, have hadand will have an adverse effect on our stockholders’ equity and workingcapital.  Even if we become profitable,we may not remain profitable.

 

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

 

Prior to the launch of BYETTA and SYMLIN in 2005, we had never sold ormarketed our own products.  Our abilityto generate product revenue for the next few years will depend solely on thesuccess of these products.  The abilityof BYETTA and SYMLIN to generate revenue at the levels we expect will depend onmany factors, including the following:

 

·                                          acceptance ofand ongoing satisfaction with these first-in-class medicines in the UnitedStates and foreign markets by the medical community, patients receiving therapyand third party payors;

 

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

 

·                                          successfullyexpanding and sustaining manufacturing capacity to meet demand;

 

·                                          safetyconcerns in the marketplace for diabetes therapies;

 

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

 

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

 

***If we encountersafety issues with BYETTA or SYMLIN or any other drugs we market or fail tocomply with extensive continuing regulations enforced by domestic and foreignregulatory authorities, it could cause us to discontinue marketing those drugs,reduce our revenues and harm our ability to generate future revenues, whichwould negatively impact our financial position.***

 

BYETTA and SYMLIN, in addition to any other of our drug candidates thatmay be approved by the FDA, will be subject to continual review by the FDA, andwe cannot assure you that newly discovered or developed safety issues will notarise.  With the use of any of ourmarketed drugs by a wide patient population, serious adverse events may occurfrom time to time that initially do not appear to relate to the drug itself,and only if the specific event occurs with some regularity over a period oftime does the drug become suspect as having a causal relationship to theadverse event.  Any safety issues couldcause us to suspend or cease marketing of our approved products, subject us tosubstantial liabilities, and adversely affect our revenues and financial condition.

 

Moreover, the marketing of our approved products will be subject toextensive regulatory requirements administered by the FDA and other regulatorybodies, including adverse event reporting requirements and the FDA’s generalprohibition against promoting products for unapproved uses.  The manufacturing facilities for our approvedproducts are also subject to continual review and periodic inspection andapproval of manufacturing modifications. Manufacturing facilities that manufacture drug products for the UnitedStates market, whether they are located inside or outside the United States,are subject to biennial inspections by the FDA and must comply with the FDA’scurrent good manufacturing practice, or cGMP, regulations.  The FDA stringently applies regulatorystandards for manufacturing.  Failure tocomply with any of these post-approval requirements can, among other things,result in warning letters, product seizures, recalls, fines, injunctions,suspensions or revocations of marketing licenses, operating restrictions andcriminal prosecutions.  Any of theseenforcement actions, any unanticipated changes in existing regulatoryrequirements or the adoption of new requirements, or any safety issues thatarise with any approved products, could adversely affect our ability to marketproducts and generate revenues and thus adversely affect our ability tocontinue our business.

 

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

 

22

----

 

***We currently do notmanufacture our own drug products or drug candidates and may not be able toobtain adequate supplies, which could cause delays, subject us to productshortages, or reduce product sales.***

 

The manufacturing of sufficient quantities of newly-approved drugproducts and drug candidates is a time-consuming and complex process.  We currently have no manufacturingcapabilities.  In order to successfullycommercialize our products, including BYETTA and SYMLIN, and continue todevelop our drug candidates, including exenatide once weekly, we rely onvarious third parties to provide the necessary manufacturing.

 

There are a limited number of manufacturers that operate under the FDA’scGMP regulations capable of manufacturing for us.  In addition, there are a limited number ofbulk drug substance suppliers, cartridge manufacturers and disposable penmanufacturers.  If we are not able toarrange for and maintain third-party manufacturing on commercially reasonableterms, or we lose one of our sole source suppliers used for our existingproducts or for some components of our manufacturing processes for our productsor drug candidates, we may not be able to market our products or completedevelopment of our drug candidates on 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 itsbusiness priorities, at a time that is costly or inconvenient for us.  If any of these risks occur, our productsupply will be interrupted resulting in lost or delayed revenues and delayedclinical trials.  Our reliance onthird-party manufacturers for the production of our two commercial products isdescribed in more detail below.

 

We rely on Bachem California, or Bachem, and Mallinckrodt, Inc.,or Mallinckrodt, to manufacture our long-term commercial supply of bulkexenatide, the active ingredient in BYETTA. In addition, we rely on single-source manufacturers for some of our rawmaterials used by Bachem and Mallinckrodt to produce bulk exenatide.  We also rely on Wockhardt UK (Holdings) Ltd.,or Wockhardt, and Baxter Pharmaceutical Solutions LLC, a subsidiary of Baxter, Inc.,or Baxter, to manufacture the dosage form of BYETTA in cartridges.  We are further dependent upon Lilly to supplypens for delivery of BYETTA in cartridges.

 

We rely on Bachem and Lonza Ltd. to manufacture our commercial supplyof bulk pramlintide acetate, the active ingredient contained in SYMLIN.  In addition, we rely on Baxter to manufacturethe dosage form of SYMLIN in vials.  Werecently received FDA approval of a disposable pen for the delivery of SYMLINin cartridges.  We rely on Wockhardt forthe dosage form of SYMLIN in cartridges and Ypsomed AG to manufacture thecomponents for the SYMLIN disposable pen. We also rely on Hollister-StierLaboratories LLC 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 ordisruption in the manufacturing of bulk product, the dosage form of ourproducts or other product components, including pens for delivery of ourproducts, could also harm our reputation in the medical and patientcommunities.  In addition, we may need toengage additional manufacturers so that we will be able to continue ourcommercialization and development efforts for these products or drugcandidates.  The cost and time toestablish these new manufacturing facilities would be substantial.

 

Our manufacturers have not produced BYETTA or SYMLIN for commercial usefor a sustained period of time.  As such,additional unforeseeable risks may be encountered as we, together with ourmanufacturers, continue to develop familiarity and experience with regard tomanufacturing our products.  Furthermore,we and the other manufacturers used for our drug candidates may not be able toproduce supplies in commercial quantities if our drug candidates areapproved.  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, orpens.  Therefore, we may not be able toobtain necessary supplies of products with acceptable quality, on acceptableterms or in sufficient quantities, if at all. Our dependence on third parties for the manufacture of products may alsoreduce our gross profit margins and our ability to develop and deliver productsin a timely manner.

 

23

----

 

In order to manufacture exenatide once weeklyon a commercial scale, if it is approved by the FDA, we must design, construct,and commission a new facility and validate the manufacturing process.  We are dependent on Alkermes and Parsons toassist us in the design, construction and commissioning of the manufacturingfacility.  We have never established,validated, and operated a manufacturing facility and cannot assure you that wewill be able to successfully establish or operate such a facility in a timelyor economical manner, or at all.  Inaddition, we are dependent on Alkermes to successfully develop and transfer tous its technology for manufacturing exenatide once weekly and to supply us withcommercial quantities of the polymer required to manufacture exenatide onceweekly.  We also will need to obtainsufficient supplies of diluents, solvents, devices, packaging and othercomponents necessary for commercial manufacture of exenatide once weekly.  Although we are working diligently to qualifythe commercial-scale manufacturing process at this facility, we cannot beassured that we will be able to demonstrate comparability of productmanufactured at development scale and product manufactured at commercialscale.  If we are unable to demonstratecomparability of product, we may not be able to commercially launch exenatideonce weekly in a timely manner or at all.

 

***Our ability togenerate revenues will be diminished if we fail to obtain acceptable prices oran adequate level of reimbursement for our products from third-party payors.***

 

The continuing efforts of government, private health insurers and otherthird-party payors 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, we expect that therewill continue to be a number of federal and state proposals to implementgovernment control over the pricing of prescription pharmaceuticals.  In addition, increasing emphasis on managedcare in the United States will continue to put pressure on the rate of adoptionand pricing of pharmaceutical products.

 

Significant uncertainty exists as to the reimbursement status of healthcare products.  Third-party payors,including Medicare, are challenging the prices charged for medical products andservices.  Government and otherthird-party payors 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-party insurance coverage may not beavailable to patients for BYETTA and/or SYMLIN or any other products wediscover and develop.  If government andother third-party payors do not provide adequate coverage and reimbursementlevels for our products, the market acceptance of these products may bereduced.

 

***Competition in thebiotechnology and pharmaceutical industries may result in competing products,superior marketing of 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.  Our competitors include multinationalpharmaceutical and chemical companies, specialized biotechnology firms anduniversities and other research institutions. A number of our largest competitors, including AstraZeneca,Bristol-Myers Squibb, GlaxoSmithKline, Lilly, Merck & Co., Novartis,Novo Nordisk, Pfizer, Sanofi-Aventis and Takeda Pharmaceuticals, are pursuingthe development or marketing of pharmaceuticals that target the same diseasesthat we are targeting, and it is possible that the number of companies seekingto develop products and therapies for the treatment of diabetes, obesity andother metabolic disorders will increase. Many of our competitors have substantially greater financial, technical,human and other resources than we do and may be better equipped to develop,manufacture and market technologically superior products.  In addition, many of these competitors havesignificantly greater experience than we do in undertaking preclinical testingand human clinical studies of new pharmaceutical products and in obtainingregulatory approvals of human therapeutic products.  Accordingly, our competitors may succeed inobtaining FDA approval for superior products. Furthermore, now that we have received FDA approval for BYETTA andSYMLIN, we may also be competing against other companies with respect to ourmanufacturing and product distribution efficiency and sales and marketingcapabilities, areas in which we have limited or no experience as anorganization.

 

Our target patient population for BYETTA includes people with diabeteswho have not achieved adequate glycemic control using metformin, sulfonylureaand/or a TZD, three common oral therapies for type 2 diabetes.  Our target population for SYMLIN is peoplewith either type 2 or type 1 diabetes whose therapy includes multiple mealtimeinsulin injections daily.  Other productsare currently in development or exist in the market that may compete directlywith the products that we are developing or marketing.  Various other products are available or indevelopment to treat type 2 diabetes, including:

 

·                                          sulfonylureas;

 

·                                          metformin;

 

·                                          insulins,including injectable and inhaled versions;

 

24

----

 

·                                          TZDs;

 

·                                          glinides;

 

·                                          DPP-IVinhibitors;

 

·                                          incretin/GLP-1agonists;

 

·                                          CB-1 antagonists;

 

·                                          PPARs; and

 

·                                          alpha-glucosidaseinhibitors.

 

In addition, several companies are developing various approaches,including alternative delivery methods, to improve treatments for type 1 andtype 2 diabetes. We cannot predict whether our products will have sufficientadvantages to cause health care professionals to adopt them over other productsor that our products will offer an economically feasible alternative to otherproducts.  Our products could become obsoletebefore we recover expenses incurred in developing these products.

 

***Delays in theconduct or completion of our clinical trials, the analysis of the data from ourclinical trials or our manufacturing scale-up activities may result in delaysin our planned filings for regulatory approvals, 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 cannot predict whether we willencounter delays or an inability to create manufacturing processes for drugcandidates that allow us to produce drug product in sufficient quantities to beeconomical, otherwise known as manufacturing 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 beunable to complete our development programs for exenatide once weekly or ourobesity clinical trials;

 

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

 

·                                          we may nothave the financial resources to continue research and development of any of ourdrug candidates; and

 

·                                          we may not beable to enter into, if we chose to do so, any additional collaborativearrangements.

 

In addition, Lilly can terminate our collaboration for the developmentand commercialization of BYETTA and sustained-release formulations of exenatideat any time on 60 days’ notice.

 

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

 

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

 

·                                          delaysin enrolling volunteers;

 

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

 

·                                          negativeresults of clinical studies;

 

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

 

25

----

 

·                                          our inabilityto reach agreement with Lilly regarding the scope, design, conduct or costs ofclinical trials with respect to BYETTA, exenatide once weekly or nasalexenatide; or

 

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

 

***We are substantiallydependent on our collaboration with Lilly for the development andcommercialization of BYETTA and dependent on Lilly and Alkermes for thedevelopment of exenatide once weekly.***

 

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

 

·                                          fundsome of our research and development activities;

 

·                                          assistus in seeking and obtaining regulatory approvals; and

 

·                                          assistus in the successful commercialization of BYETTA and exenatide once weekly.

 

In general, we cannot control the amount and timing of resources thatLilly may devote to our collaboration. If Lilly fails to assist in the further development of exenatide onceweekly or the commercialization of BYETTA, or if Lilly’s efforts are noteffective, our business may be negatively affected.  We are relying on Lilly to obtain regulatoryapprovals for and successfully commercialize BYETTA and exenatide once weeklyoutside the United States.  Ourcollaboration with Lilly may not continue or result in additional successfullycommercialized drugs.  Lilly canterminate our collaboration at any time upon 60 days’ notice.  If Lilly ceased funding and/or developing andcommercializing BYETTA or exenatide once weekly, we would have to seekadditional sources for funding and may have to delay, reduce or eliminate oneor more of our commercialization and development programs for thesecompounds.  If Lilly does notsuccessfully commercialize BYETTA outside the United States we may receivelimited or no revenues from them.  Inaddition, we are dependent on Alkermes to successfully develop and transfer tous its technology for manufacturing exenatide once weekly.  If Alkermes’ technology is not successfullydeveloped to effectively deliver exenatide in a sustained release formulation,or Alkermes does not devote sufficient resources to the collaboration, ourefforts to develop sustained release formulations of exenatide could be delayedor curtailed.

 

***Ifour patents are determined to be unenforceable or if we are unable to obtainnew patents based on current patent applications or for future inventions, wemay not be able to prevent others from using our intellectual property.  If we are unable to obtain licenses to thirdparty patent rights for required technologies, we could be adversely affected.***

 

We own or hold exclusive rights to manyissued United States patents and pending United States patent applicationsrelated to the development and commercialization of exenatide, including BYETTAand 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 issuedand pending applications for formulations of BYETTA and exenatide once weekly,but we do not have a composition-of-matter patent covering exenatide.  We also own or hold exclusive rights tovarious foreign patent applications that correspond to issued United Statespatents or pending United States patent applications.

 

Our success will depend in part on our abilityto obtain patent protection for our products and drug candidates andtechnologies both in the United States and other countries.  We cannot guarantee that any patents willissue from any pending or future patent applications owned by or licensed to us.  Alternatively, a third party may successfullychallenge or circumvent our patents.  Ourrights under any issued patents may not provide us with sufficient protectionagainst competitive products or otherwise cover commercially valuable productsor processes.  For example, our SYMLINAND BYETTA products are subject to the provisions of the Drug Price Competitionand Patent Term Restoration Act of 1984, also known as the “Hatch-Waxman Act,”which provides data exclusivity for a certain period of time.  Once this exclusivity period expires, theHatch-Waxman Act allows generic manufacturers to file Abbreviated New DrugApplications, or ANDAs, with the FDA requesting approval of generic versions ofpreviously-approved products.  Forexample, a generic pharmaceutical manufacturer could file an ANDA for SYMLIN asearly as March 2009 and for BYETTA as early as April 2009.  If an ANDA is filed for one of our approvedproducts prior to expiration of the patents covering those products, it couldresult in our initiating patent infringement litigation to enforce ourrights.  We can provide no assurancesthat we would prevail in such an action or in any challenge related to ourpatent rights.

 

26

----

 

 

 

In addition, because patent applications inthe United States are maintained, in general, in secrecy for 18 months afterthe filing of the applications, and publication of discoveries in thescientific or patent literature often lag behind actual discoveries, we cannotbe sure that the inventors of subject matter covered by our patents and patentapplications were the first to invent or the first to file patent applicationsfor these inventions.  Third parties havefiled, and in the future are likely to file, patent applications on inventionssimilar to ours.  From time-to-time wehave participated in, and in the future are likely to participate in,interference proceedings declared by the United States Patent and TrademarkOffice to determine priority of invention, which could result in a loss of ourpatent position.  We have alsoparticipated in, and in the future are likely to participate in, oppositionproceedings against our patents in other jurisdictions, such as Europe andAustralia.  Furthermore, we may not haveidentified all United States and foreign patents that pose a risk ofinfringement.

 

We also rely upon licensing opportunities forsome of our technologies.  We cannot becertain that we will not lose our rights to certain patented technologies underexisting licenses or that we will be able to obtain a license to any requiredthird-party technology.  If we lose ourlicensed technology rights or if we are not able to obtain a required license,we could be adversely affected.

 

***Wemay be unable to obtain regulatory clearance to market our drug candidates inthe United States or foreign countries on a timely basis, or at all.***

 

Our drug candidates are subject to extensivegovernment regulations related to development, clinical trials, manufacturing andcommercialization.  The process ofobtaining FDA and other regulatory approvals is costly, time-consuming,uncertain and subject to unanticipated delays. Regulatory authorities may refuse to approve an application for approvalof a drug candidate if they believe that applicable regulatory criteria are notsatisfied.  Regulatory authorities mayalso require additional testing for safety and efficacy.  Moreover, if the FDA grants regulatoryapproval of a product, the approval may be limited to specific indications orlimited with respect to its distribution, and expanded or additionalindications for approved drugs may not be approved, which could limit ourrevenues.  Foreign regulatory authoritiesmay apply similar limitations or may refuse to grant any approval.  Unexpected changes to the FDA or foreignregulatory approval process could also delay or prevent the approval of ourdrug candidates.

 

The data collected 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 prices have declinedsignificantly in certain instances where companies have failed to meetexpectations with respect to FDA approval or the timing for FDA approval.  If the FDA’s or any foreign regulatoryauthority’s response is delayed or not favorable for any of our drugcandidates, 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 inobtaining these approvals could prohibit or delay us or any of our businesspartners 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 not approved, our ability to generaterevenues may be limited and our business will be adversely affected.

 

***Litigation regardingpatents and other proprietary rights may be expensive, cause delays in bringingproducts to market and harm our ability to operate.***

 

Our successwill depend in part on our ability to operate without infringing theproprietary rights of third parties and preventing others from infringing ourpatents.  Challenges by pharmaceuticalcompanies against the patents of competitors are common.  Legal standards relating to the validity ofpatents covering pharmaceutical and biotechnological inventions and the scopeof claims made under these patents are still developing.  As a result, our ability to obtain andenforce patents is uncertain and involves complex legal and factualquestions.  Third parties may challenge,in courts or through patent office proceedings, or infringe upon, existing orfuture 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 involving our patents or patentapplications or those of others could result in adverse decisions about:

 

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

 

·                                          theenforceability, validity or scope of protection offered by our patents.

 

27

----

 

Themanufacture, use or sale of any of our products or drug candidates may infringeon the patent rights of others.  If weare unable to avoid infringement of the patent rights of others, we may berequired to seek a license, defend an infringement action or challenge thevalidity of the patents in court. Patent litigation is costly and timeconsuming.  We may not have sufficientresources to bring these actions to a successful conclusion.  In addition, if we do not obtain a license,develop or obtain non-infringing technology, fail to successfully defend aninfringement action or have infringing patents declared invalid, we may:

 

·                                          incursubstantial monetary damages;

 

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

 

·                                          be precludedfrom participating in the manufacture, use or sale of our products or drugcandidates or methods of treatment requiring licenses.

 

***Weare subject to “fraud and abuse” and similar laws and regulations, and afailure to comply with such regulations or prevail in any litigation related tononcompliance 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 companieshave faced lawsuits and investigations pertaining to violations of these lawsand 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 actionsare instituted against us, and we are not successful in defending ourselves orasserting our rights, those actions could have a significant impact on ourbusiness, including the imposition of significant fines or other sanctions.

 

***Our financialresults will fluctuate, and these fluctuations may cause our stock price tofall.***

 

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, ourcustomer base is highly concentrated with four customers accounting for most ofour 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 periodbasis.  As a result, it is reasonablylikely that our financial results will fluctuate to an extent that may not meetwith market expectations and that also may adversely affect our stockprice.  There are a number of otherfactors that could cause our financial results to fluctuate unexpectedly, including:

 

·                                          productsales;

 

·                                          cost ofproduct sales;

 

·                                          achievementand timing of research and development milestones;

 

·                                          collaborationrevenues;

 

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

 

·                                          marketing andother expenses;

 

·                                          manufacturingor supply issues; and

 

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

 

28

----

 

***We may requireadditional financing in the future, which may not be available to us onfavorable terms, or at all.***

 

We intend to use our available cash for:

 

·                                          Commercializationof BYETTA and SYMLIN;

 

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

 

·                                          Developmentof exenatide once weekly and other pipeline candidates;

 

·                                          Executing ourINTO strategy;

 

·                                          Our otherresearch and development activities;

 

·                                          Otheroperating expenses;

 

·                                          Potentialacquisitions or investments in complementary technologies or businesses; and

 

·                                          Other generalcorporate purposes.

 

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

 

***Our business has asubstantial risk of product liability claims, and insurance may not be adequateto cover these claims.***

 

Our business exposes us to potential product liability risks that areinherent in the testing, manufacturing and marketing of human therapeuticproducts.  Product liability claims couldresult in the imposition of substantial liability on us, a recall of products,or a change in the indications for which they may be used.  We currently have limited product liabilityinsurance coverage.  We cannot assure youthat our insurance will provide adequate coverage against potentialliabilities.

 

***Our ability to enterinto and maintain third-party relationships is important to our successfuldevelopment and commercialization of BYETTA, SYMLIN and our other drugcandidates and to our potential profitability.***

 

With respect to sales, marketing and distribution outside the UnitedStates, we will be substantially dependent on Lilly for activities relating toBYETTA and sustained-release formulations of BYETTA, including exenatide onceweekly.  We believe that we will likelyneed to enter into marketing and distribution arrangements with third partiesfor, or find a corporate partner who can provide support for, the developmentand commercialization of SYMLIN or our other drug candidates outside the UnitedStates.  We may also enter 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 commercializing BYETTA or, if approved, exenatide onceweekly, for any reason, we would likely need to either enter into a marketingand distribution arrangement with a third party for those products orsignificantly increase our internal sales and commercialization infrastructure.

 

We may not be able to enter into marketing and distributionarrangements or find a corporate partner for SYMLIN or our other drugcandidates as we deem necessary.  If weare not able to enter into a marketing or distribution arrangement or find acorporate partner who can provide support for commercialization of our drugcandidates as we deem necessary, we may not be able to successfully performthese marketing or distribution activities. Moreover, any new marketer or distributor or corporate partner for ourdrug candidates, including Lilly, with whom we choose to contract may notestablish adequate sales and distribution capabilities or gain marketacceptance for our products, if any.

 

***We have asignificant amount of indebtedness.  Wemay not be able to make payments on our indebtedness, and we may incuradditional indebtedness in the future, which could adversely affect ouroperations.***

 

In April 2004, we issued $200 million of the 2004 Notes and in June 2007,we issued $575 million of the 2007 Notes. In December 2007, we entered into a $125 million term loan due in December 2010,or the Term Loan.  Our ability to makepayments on our debt, including the 2004 and 2007 Notes and the Term Loan, willdepend on our future operating performance and ability to generate cash and mayalso depend on our ability to obtain additional debt or equity financing.During each of the last five years, our operating cash flows were negative andinsufficient to cover our fixed charges. We 

 

29

----

 

may need touse our cash to pay principal and interest on our debt, thereby reducing thefunds available to fund our research and development programs, strategicinitiatives and working capital requirements. Our ability to generate sufficient operating cash flow to service ourindebtedness, including the 2004 and 2007 Notes and the Term Loan, and fund ouroperating requirements will depend on our ability, alone or with others, tosuccessfully develop, manufacture, obtain required regulatory approvals for andmarket our drug candidates, as well as other factors, including generaleconomic, financial, competitive, legislative and regulatory conditions, someof which are beyond our control.  Ourdebt service obligations increase our vulnerabilities to competitive pressures,because many of our competitors are less leveraged than we are.  If we are unable to generate sufficientoperating cash flow to service our indebtedness and fund our operatingrequirements, we may be forced to reduce or defer our development programs,sell assets or seek additional debt or equity financing, which may not beavailable to us on satisfactory terms or at all.  Our level of indebtedness may make us morevulnerable to economic or industry downturns. If we incur new indebtedness, the risks relating to our business and ourability to service our indebtedness will intensify.

 

***We may be requiredto redeem our convertible senior notes upon a designated event or repay theTerm Loan upon an event of default.***

 

Holders of the 2004 and 2007 Notes may require us to redeem all or anyportion of their notes upon the occurrence of certain designated events whichgenerally involve a change in control of our company.  The lenders under the Term Loan may requireus to repay outstanding principal and accrued interest due under the Term Loanupon the occurrence of an event of default, which could include, among otherthings, nonpayment of principle and interest, violation of covenants and achange in control.  We may not havesufficient cash funds to redeem the notes upon a designated event or repay theTerm Loan upon an event of default.  Wemay elect, subject to certain conditions, to pay the redemption price for the2004 Notes in our common stock or a combination of cash and our commonstock.  We may be unable to satisfy therequisite conditions to enable us to pay some or all of the redemption pricefor the 2004 Notes in our common stock. In addition, although there are currently no restrictions on our abilityto pay the redemption price under our existing debt agreements, future debtagreements may prohibit us from repaying the redemption price of either of thenotes in either cash or common stock.  Ifwe are prohibited from redeeming the 2004 Notes or 2007 Notes, we could seekconsent from our lenders to redeem the notes. If we are unable to obtain their consent, we could attempt to refinancethe notes.  If we were unable to obtain aconsent or refinance, we would be prohibited from redeeming the notes.  If we were unable to redeem the notes upon adesignated event, it would result in an event of default under the indenturesgoverning the notes.  An event of defaultunder the indentures could result in a further event of default under our otherthen-existing debt including the Term Loan. In addition, the occurrence of a designated event may be an event ofdefault under our other debt.  Further,an event of default under the Term Loan could result in an event of defaultunder the indentures governing the notes.

 

***If our research anddevelopment programs fail to result in additional drug candidates, the growthof our business could be impaired.***

 

Certain of our research and development programs for drug candidatesare at an early stage and will require significant research, development,preclinical and clinical testing, manufacturing scale-up activities, regulatoryapproval and/or commitments of resources before commercialization.  We cannot predict whether our research willlead to the discovery of any additional drug candidates that could generateadditional revenues for us.

 

***Our future successdepends on our chief executive officer, and other key executives and ourability to attract, retain and motivate qualified personnel.***

 

We are highly dependent on our chief executive officer, and the otherprincipal members of our executive and scientific teams.  The unexpected loss of the services of any ofthese persons might impede the achievement of our research, development andcommercialization objectives.  Recruitingand retaining qualified sales, marketing, regulatory, scientific and otherpersonnel and consultants will also be critical to our success.  We may not be able to attract and retainthese personnel and consultants on acceptable terms given the competitionbetween numerous pharmaceutical and biotechnology companies.  We do not maintain “key person” insurance onany of our employees.

 

***We may be unable toadequately prevent disclosure of trade secrets and other proprietaryinformation.***

 

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

 

30

----

 

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

 

***Our research anddevelopment activities and planned manufacturing activities involve the use ofhazardous materials, which subject us to regulation, related costs and delaysand potential liabilities.***

 

Our research and development and our planned manufacturing activitiesinvolve the controlled use of hazardous materials, chemicals and variousradioactive compounds.  Although webelieve that our research and development safety procedures for handling anddisposing of these materials comply with the standards prescribed by state andfederal regulations, the risk of accidental contamination or injury from thesematerials cannot be eliminated.  Inaddition, as part of the development of our planned manufacturing activities,we will need to develop additional safety procedures for the handling anddisposing of hazardous materials.  If anaccident occurs, we could be held liable for resulting damages, which could besubstantial.  We are also subject tonumerous environmental, health and workplace safety laws and regulations,including those governing laboratory procedures, exposure to blood-bornepathogens and the handling of biohazardous materials.  Additional federal, state and local laws andregulations affecting our operations may be adopted in the future.  We may incur substantial costs to complywith, and substantial fines or penalties if we violate, any of these laws orregulations.

 

***We are exposed topotential risks from legislation requiring companies to evaluate internalcontrol over financial reporting.***

 

The Sarbanes-Oxley Act requires that we report annually on theeffectiveness of our internal control over financial reporting.  Among other things, we must perform systemsand processes evaluation and testing.  Wemust also conduct an assessment of our internal control to allow management toreport on, and our independent registered public accounting firm to attest to,our internal control over financial reporting, as required by Section 404of the Sarbanes-Oxley Act.  In connectionwith our Section 404 compliance efforts, we have incurred or expended, andexpect to continue to incur or expend, substantial accounting and otherexpenses and significant management time and resources.  We have implemented certain remediationactivities resulting from our ongoing assessment of internal control overfinancial reporting.  Our futureassessment, or the future assessments by our independent registered publicaccounting firm, may reveal material weaknesses in our internal control.  If material weaknesses are identified in thefuture we would be required to conclude that our internal control overfinancial reporting are ineffective and we could be subject to sanctions orinvestigations by the SEC, the NASDAQ Stock Market or other regulatoryauthorities, which would require additional financial and management resourcesand could adversely affect the market price of our common stock.

 

***We have implementedanti-takeover provisions that could discourage or prevent an acquisition of ourcompany, even if the acquisition would be beneficial to our stockholders, andas a result our management may become entrenched and hard to replace.***

 

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

 

·                                          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 to 5.5 millionshares of preferred stock with terms set by the board of directors;

 

·                                          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.

 

Each of these provisions, as well as selected provisions of Delawarelaw, could discourage potential takeover attempts, could adversely affect thetrading price of our securities and could cause our management to becomeentrenched and hard to replace.  Inaddition to provisions in our charter documents and under Delaware law, an acquisitionof our company could be made more difficult by our employee benefits plans andour employee change in control severance plan, under which, in connection witha change in control and termination of employment, stock options held by ouremployees may become vested and our officers may receive severancebenefits.  We also have implemented astockholder rights plan, also called a poison pill, which could make ituneconomical for a third party to acquire us on a hostile basis.

 

31

----

 

***Our executiveofficers, directors and major stockholders control approximately 78% of ourcommon stock.***

 

As of June 30, 2008, executive officers, directors and holders of5% or more of our outstanding common stock, in the aggregate, owned orcontrolled approximately 78% of our outstanding common stock.  As a result, these stockholders are able toinfluence all matters requiring approval by our stockholders, including theelection of directors and the approval of corporate transactions.  This concentration of ownership may alsodelay, deter or prevent a change in control of our company and may make sometransactions more difficult or impossible to complete without the support ofthese stockholders.

 

***Substantial futuresales of our common stock by us or our existing stockholders or the conversionof our convertible senior notes to common stock could cause the trading priceof our common stock to fall.***

 

Sales by existing stockholders of a large number of shares of ourcommon stock in the public market or the perception that additional sales couldoccur could cause the trading price of our common stock to drop.  Likewise, the issuance of shares of commonstock upon conversion of our convertible notes or redemption of our convertiblenotes upon a designated event, or upon additional convertible debt or equityfinancings or other share issuances by us, including shares issued inconnection with potential future strategic alliances, could adversely affectthe trading price of our common stock. Our convertible notes are currently convertible into a total of up to15.2 million shares. In addition, the existence of these notes may encourageshort selling of our common stock by market participants.

 

***Significantvolatility in the market price for our common stock could expose us to litigationrisk.***

 

The market prices for securities of biopharmaceutical and biotechnologycompanies, including our common stock, have historically been highly volatile,and the market from time to time has experienced significant price and volumefluctuations that are unrelated to the quarterly operating performance of thesebiopharmaceutical and biotechnology companies. Since January 1, 2006, the high and low sales price of our commonstock varied significantly, as shown in the following table:

 
| ** **                                 | ** ** | **High** | ** ** | **Low** | ** ** |
|--------------------------------------------|------------|----------|------------|---------|------------|
| **Year ending December 31, 2008**     |       |     |       |    |       |
| Third Quarter (through July 25, 2008) |       | $        | 29.57      |    | $          | 24.13 |   |
| 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 |   |
| **Year ended December 31, 2006**      |       |     |       |    |       |
| Fourth Quarter                             |       | $        | 48.48      |    | $          | 35.74 |   |
| Third Quarter                              |       | $        | 51.54      |    | $          | 40.76 |   |
| Second Quarter                             |       | $        | 49.37      |    | $          | 38.16 |   |
| First Quarter                              |       | $        | 49.08      |    | $          | 35.58 |   |

 

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

 

·                                          our financialresults and/or fluctuations in our financial results;

 

·                                          safety issueswith BYETTA, SYMLIN or our product candidates;

 

·                                          clinicalstudy results;

 

·                                          determinationsby regulatory authorities with respect to our drug candidates;

 

·                                          our abilityto complete our Ohio manufacturing facility and the commercial manufacturingprocess for exenatide once weekly;

 

32

----

 

·                                          developmentsin our relationships with current or future collaborative partners;

 

·                                          our abilityto successfully execute our commercialization strategies;

 

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

 

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

 

·                                          developmentsin patent or other proprietary rights; and

 

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

 

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

 

**ITEM 4. Submission of Matters to a Vote of Security Holders**

 

Our Annual Meeting of Stockholders was held on May 30,2008.  At the Annual Meeting, thestockholders of the Company (i) elected each of the persons listed belowto serve as a director of Amylin until the next annual meeting or until his/hersuccessor is elected, (ii) approved an increase of 3.5 million shares inthe aggregate number of shares of our common stock authorized for issuanceunder our 2001 Equity Incentive Plan, and (iii) ratified the selection ofErnst & Young LLP as our independent registered public accounting firmfor the fiscal year ending December 31, 2008.

 

We had 137,058,518 shares of common stockoutstanding and entitled to vote as of April 4, 2008, the record date forthe Annual Meeting.  At the AnnualMeeting, 124,341,882 shares of common stock were present in person orrepresented by proxy for the four proposals indicated above.  The following sets forth detailed informationregarding the results of the voting at the Annual Meeting:

 

Proposal 1: Election of Directors.

 
| **Director**                        | ** ** | **Votes in Favor** | ** ** | **Votes Withheld** | ** ** |
|-------------------------------------|------------|------------------------------|------------|-------------------------|------------|
| Adrian Adams                        |       | 116,444,063                  |       | 7,897,818               |       |
| Steven R. Altman                    |       | 116,507,996                  |       | 7,833,885               |       |
| Teresa Beck                         |       | 116,530,336                  |       | 7,811,545               |       |
| Daniel M. Bradbury                  |       | 116,162,509                  |       | 8,179,372               |       |
| Joseph C. Cook, Jr.            |       | 116,263,036                  |       | 8,078,845               |       |
| Karin Eastham                       |       | 116,403,046                  |       | 7,938,835               |       |
| James R. Gavin III, M.D., PhD. |       | 115,234,157                  |       | 9,107,724               |       |
| Ginger L. Graham                    |       | 116,331,797                  |       | 8,010,084               |       |
| Howard E. Greene, Jr.          |       | 116,447,174                  |       | 7,894,707               |       |
| Jay S. Skyler,  M.D., MACP          |       | 114,779,160                  |       | 9,562,721               |       |
| Joseph P. Sullivan                  |       | 116,528,886                  |       | 7,812,995               |       |
| James N. Wilson                     |       | 115,174,305                  |       | 9,167,576               |       |

 

Proposal 2: Approve an increase of 3.5 million shares in the aggregate number ofshares of our common stock authorized for issuance under our 2001 EquityIncentive Plan.

 
| Votes in Favor:  |   | 74,761,567 |   |
|------------------|--------|------------|--------|
| Votes Against:   |   | 26,716,459 |   |
| Abstentions:     |   | 138,064    |   |
| Broker Non Vote: |   | 22,725,792 |   |

 

Proposal 3: Ratification of selection of Ernst & Young LLP as our independentregistered public accounting firm.

 
| Votes in Favor: |   | 116,869,889 |   |
|-----------------|--------|-------------|--------|
| Votes Against:  |   | 862,013     |   |
| Abstentions:    |   | 6,609,980   |   |

** **

33

----

** **

**ITEM 6.  Exhibits**

 

The following exhibits areincluded as part of this report:

 
| **Exhibit   Number** | ** ** | **Description**                                                                                                                                                                                                                                                                                                    |
|---------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                      |       |                                                                                                                                                                                                                                                                                                               |
| 3.1                       |       | Amended and Restated Certificate of Incorporation (filed as an  exhibit to Registrant’s registration statement on Form S-1 (File  No. 333-44195) or amendments thereto and incorporated herein by  reference)                                                                                       |
|                      |       |                                                                                                                                                                                                                                                                                                               |
| 3.2                       |       | Third Amended and Restated Bylaws (filed as an exhibit to  Registrant’s Current Report on Form 8-K filed on October 31, 2007  and incorporated herein by reference)                                                                                                                                 |
|                      |       |                                                                                                                                                                                                                                                                                                               |
| 3.3                       |       | Certificate of Amendment of Amended and Restated Certificate of  Incorporation (filed as an exhibit to Registrant’s Quarterly Report on  Form 10-Q for the quarter ended September 30, 2001 and incorporated  herein by reference)                                                                  |
|                      |       |                                                                                                                                                                                                                                                                                                               |
| 3.4                       |       | Certificate of Amended and Restated Certificate of Incorporation  (filed as an exhibit to Registrant’s Quarterly Report on Form 10-Q for  the quarter ended June 30, 2007 and incorporated herein by reference)                                                                                     |
|                      |       |                                                                                                                                                                                                                                                                                                               |
| 4.1                       |       | Specimen Common Stock Certificate (filed as an exhibit to  Registrant’s registration statement on Form S-1 (File  No. 333-44195) or amendments thereto and incorporated herein by  reference)                                                                                                       |
|                      |       |                                                                                                                                                                                                                                                                                                               |
| 4.2                       |       | Rights Agreement, dated as of June 17, 2002, between the Registrant  and American Stock Transfer & Trust Company (filed as an exhibit to  Registrant’s Current Report on Form 8-K filed on June 18, 2002 and  incorporated herein by reference)                                       |
|                      |       |                                                                                                                                                                                                                                                                                                               |
| 4.3                       |       | First Amendment to Rights Agreement dated December 13, 2002,  between the Registrant and American Stock Transfer & Trust Company  (filed as an exhibit to Registrant’s Annual Report on Form 10-K for the  fiscal year ended December 31, 2002 and incorporated herein by  reference) |
|                      |       |                                                                                                                                                                                                                                                                                                               |
| 4.4                       |       | Second Amendment to Rights Agreement, dated March 31, 2008,  between the Registrant and American Stock Transfer and Trust Company (filed  as an exhibit to Registrant’s Current Report on Form 8-K filed on  March 13, 2008 and incorporated herein by reference)                              |
|                      |       |                                                                                                                                                                                                                                                                                                               |
| 4.5                       |       | Form of Rights Certificate (filed as an exhibit to Registrant’s  Current Report on Form 8-K filed on June 18, 2002 and incorporated  herein by reference)                                                                                                                                      |
|                      |       |                                                                                                                                                                                                                                                                                                               |
| 4.6                       |       | Certificate of Designation of Series A Junior Participating  Preferred Stock (filed as an exhibit to Registrant’s Current Report on  Form 8-K filed on June 18, 2002 and incorporated herein by  reference)                                                                                    |
|                      |       |                                                                                                                                                                                                                                                                                                               |
| 10.1                      |       | First Amendment to Exenatide Manufacturing Agreement, dated January  6, 2006, between the Registrant and Mallinckrodt Inc.                                                                                                                                                                                         |
|                      |       |                                                                                                                                                                                                                                                                                                               |
| 10.2                      |       | Amended and Restated Commercial Supply Agreement, dated April 1,  2008, between the Registrant and Wockhardt UK (Holdings) Ltd.*                                                                                                                                                                              |
|                      |       |                                                                                                                                                                                                                                                                                                               |
| 10.3                      |       | Addendum to U.S. Co-Promotion Agreement, dated May 8, 2008,  between the Registrant and Eli Lilly and Company*                                                                                                                                                                                                |
|                      |       |                                                                                                                                                                                                                                                                                                               |
| 10.4                      |       | Consulting Agreement, dated June 1, 2008, between the Registrant  and Alain D. Baron+                                                                                                                                                                                                                         |
|                      |       |                                                                                                                                                                                                                                                                                                               |
| 10.5                      |       | Third Amendment to Exenatide Manufacturing Agreement, dated  June 16, 2008, between the Registrant and Mallinckrodt Inc.*                                                                                                                                                                                     |
|                      |       |                                                                                                                                                                                                                                                                                                               |
| 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                                                                                                                                                 |

 

34

----

 
| 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                                     |

 

----

* Confidential treatment has been requestedwith respect to certain portions of this exhibit. Omitted portions have beenfiled separately with the Securities and Exchange Commission.

 

+ Indicates a management contract orcompensatory plan.

 

35

----

 

**SIGNATURE**

 

Pursuant to the requirements of theSecurities Exchange Act of 1934, the registrant has duly caused this report tobe signed on its behalf by the undersigned thereunto duly authorized.

 

 
|                          | Amylin Pharmaceuticals, Inc.                                                                                                                                                      |
|--------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                     |                                                                                                                                                                                   |
| Date: July 31, 2008 | By:                                                                                                                                                                                    | /S/ MARK G. FOLETTA |
|                     | Mark G. Foletta,*Senior Vice President, Finance and  Chief Financial Officer  (on behalf of the registrant and as the  registrant’s principal financial and accounting  officer)* |

 

36

----