**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

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**FORM 10-Q**

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**(Mark One)**

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

 

**CommissionFile Number: 0-19700**

**AMYLINPHARMACEUTICALS, INC.**

(Exact name of registrantas 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 telephonenumber, including area code)

**Not Applicable**

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

Indicate by check mark whether the registrant(1) has filed all reports required to be filed by Section 13 or 15(d) ofthe Securities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and(2) has been subject to such filing requirements for the past 90 days.

Yes x     No o

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, or a non-accelerated filer. Seedefinition of “accelerated filer and large accelerated filer” in Rule 12b-2 ofthe Exchange Act (check one):
| Large accelerated filer x |   | Accelerated filer o |   | Non-accelerated filer o |
|---------------------------|--------|---------------------|--------|-------------------------|

 

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

Yes o     No x

Indicate the number of shares outstanding of each of theissuer’s classes of common stock, as of the latest practicable date.
| Class                          | ** ** | **Outstanding on July  20, 2007** |
|--------------------------------|------------|--------------------------------------------------|
| Common Stock,  $.001 par value |       | 132,177,748                                      |

 

 

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**AMYLINPHARMACEUTICALS, INC.**

**TABLEOF CONTENTS**
| COVER PAGE        | ** ** |
|-------------------|------------|
| ** **        | ** ** |
| TABLE OF CONTENTS |       |

 
| **PART I. FINANCIAL  INFORMATION** | ** **                                                                                                    |
|-----------------------------------------|---------------------------------------------------------------------------------------------------------------|
|                                    |                                                                                                          |   |
| ITEM 1.                                 | Financial Statements                                                                                          |   |
|                                    |                                                                                                          |   |
|                                    | Consolidated  Balance Sheets as of June 30, 2007 (unaudited) and December 31, 2006                       |   |
|                                    |                                                                                                          |   |
|                                    | Consolidated  Statements of Operations for the three and six months ended June 30, 2007 and  2006 (unaudited) |   |
|                                    |                                                                                                          |   |
|                                    | Consolidated  Statements of Cash Flows for the six months ended June 30, 2007 and 2006  (unaudited)           |   |
|                                    |                                                                                                          |   |
|                                    | Notes to  Consolidated Financial Statements (unaudited)                                                       |   |
|                                    |                                                                                                          |   |
| ITEM  2.                                | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                   |   |
|                                    |                                                                                                          |   |
| ITEM  3.                                | Quantitative  and Qualitative Disclosures about Market Risk                                                   |   |
|                                    |                                                                                                          |   |
| ITEM  4.                                | Controls and  Procedures                                                                                      |   |
|                                    |                                                                                                          |   |
| **PART II. OTHER  INFORMATION**    |                                                                                                          |
|                                    |                                                                                                          |   |
| ITEM 1A.                                | Risk Factors                                                                                                  |   |
|                                    |                                                                                                          |   |
| ITEM  4.                                | Submission  of Matters to a Vote of Security Holders                                                          |   |
|                                    |                                                                                                          |   |
| ITEM 5.                                 | Other Information                                                                                             |   |
|                                    |                                                                                                          |   |
| ITEM 6.                                 | Exhibits                                                                                                      |   |
|                                    |                                                                                                          |   |
| SIGNATURE                               |                                                                                                          |

 

2

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**PART I.FINANCIAL INFORMATION**

**ITEM 1. FinancialStatements**

**AMYLIN PHARMACEUTICALS,INC.**

**Consolidated Balance Sheets(in thousands, except per share data)**
| ** **                                                                                                                                                                    | ** ** | **June 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                                    | ** ** | **(unaudited)**         | ** ** | **(Note 1)**           | ** ** |
| Assets                                                                                                                                                                        |       |                    |       |                        |       |
| Current assets:                                                                                                                                                               |       |                    |       |                        |       |
| Cash  and cash equivalents                                                                                                                                                    |       | $                       | 379,399    |                        | $          | 66,640 |   |
| Short-term  investments                                                                                                                                                       |       | 761,172                 |       | 700,691                     |       |
| Accounts  receivable, net                                                                                                                                                     |       | 54,280                  |       | 58,089                      |       |
| Inventories,  net                                                                                                                                                             |       | 78,176                  |       | 59,299                      |       |
| Other  current assets                                                                                                                                                         |       | 33,507                  |       | 22,098                      |       |
| Total current assets                                                                                                                                                          |       | 1,306,534               |       | 906,817                     |       |
|                                                                                                                                                                          |       |                    |       |                        |       |
| Property, plant and  equipment, net                                                                                                                                           |       | 271,937                 |       | 146,779                     |       |
| Other long-term assets,  net                                                                                                                                                  |       | 15,498                  |       | 2,870                       |       |
| Debt issuance costs,  net                                                                                                                                                     |       | 19,525                  |       | 3,920                       |       |
|                                                                                                                                                                          |       | $                       | 1,613,494  |                        | $          | 1,060,386 |   |
|                                                                                                                                                                          |       |                    |       |                        |       |
| Liabilities and Stockholders’ Equity                                                                                                                                     |       |                    |       |                        |       |
|                                                                                                                                                                          |       |                    |       |                        |       |
| Current liabilities:                                                                                                                                                          |       |                    |       |                        |       |
| Accounts  payable                                                                                                                                                             |       | $                       | 51,256     |                        | $          | 36,834 |   |
| Accrued  compensation                                                                                                                                                         |       | 29,260                  |       | 39,251                      |       |
| Payable  to collaborative partner                                                                                                                                             |       | 58,231                  |       | 52,338                      |       |
| Other  current liabilities                                                                                                                                                    |       | 69,960                  |       | 71,178                      |       |
| Current  portion of deferred revenue                                                                                                                                          |       | 4,286                   |       | 4,286                       |       |
| Total current  liabilities                                                                                                                                                    |       | 212,993                 |       | 203,887                     |       |
|                                                                                                                                                                          |       |                    |       |                        |       |
| Other long-term  obligations, net of current portion                                                                                                                          |       | 20,241                  |       | 13,836                      |       |
|                                                                                                                                                                          |       |                    |       |                        |       |
| Deferred revenue, net  of current portion                                                                                                                                     |       | 5,229                   |       | 7,372                       |       |
|                                                                                                                                                                          |       |                    |       |                        |       |
| Convertible senior  notes                                                                                                                                                     |       | 775,000                 |       | 200,000                     |       |
|                                                                                                                                                                          |       |                    |       |                        |       |
| Commitments and  contingencies (Note 8)                                                                                                                                       |       |                    |       |                        |       |
|                                                                                                                                                                          |       |                    |       |                        |       |
| Stockholders’ equity:                                                                                                                                                    |       |                    |       |                        |       |
| Common  stock, $.001 par value, 450,000 and 200,000 shares authorized, 132,081 and  130,458 issued and outstanding at June 30, 2007 and December 31, 2006,  respectively |       | 132                     |       | 130                         |       |
| Additional  paid-in capital                                                                                                                                                   |       | 1,915,741               |       | 1,857,194                   |       |
| Accumulated  deficit                                                                                                                                                          |       | (1,317,621              | )          | (1,223,184                  | )          |
| Accumulated  other comprehensive income                                                                                                                                       |       | 1,779                   |       | 1,151                       |       |
| Total stockholders’  equity                                                                                                                                              |       | 600,031                 |       | 635,291                     |       |
|                                                                                                                                                                          |       | $                       | 1,613,494  |                        | $          | 1,060,386 |   |

 

See accompanyingnotes to consolidated financial statements.

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**AMYLIN PHARMACEUTICALS,INC.**

**ConsolidatedStatements of Operations(in thousands, except per share data)(unaudited)**
| ** **                                                      | ** ** | **Three months ended  June 30,** | ** ** | **Six months ended  June 30,** | ** ** |
|-----------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                      | ** ** | **2007**                                        | ** ** | **2006**                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
| Revenues:                                                       |       |                                            |       |                                          |       |   |   |   |   |
| Net product sales                                               |       | $                                               | 167,337    |                                          | $          | 108,787 |   | $ | 329,340 |   | $ | 184,659 |   |
| Revenues under collaborative agreements                         |       | 29,616                                          |       | 9,362                                         |       | 39,591 |   | 15,836 |   |
| Total revenues                                                  |       | 196,953                                         |       | 118,149                                       |       | 368,931 |   | 200,495 |   |
|                                                            |       |                                            |       |                                          |       |   |   |   |   |
| Costs and  expenses:                                            |       |                                            |       |                                          |       |   |   |   |   |
| Cost of goods sold                                              |       | 14,362                                          |       | 14,685                                        |       | 29,572 |   | 24,429 |   |
| Selling, general and administrative                             |       | 93,121                                          |       | 63,488                                        |       | 180,908 |   | 123,351 |   |
| Research and development                                        |       | 71,691                                          |       | 50,409                                        |       | 131,255 |   | 102,183 |   |
| Collaborative profit sharing                                    |       | 70,355                                          |       | 43,386                                        |       | 137,302 |   | 73,356 |   |
| Total costs and  expenses                                       |       | 249,529                                         |       | 171,968                                       |       | 479,037 |   | 323,319 |   |
|                                                            |       |                                            |       |                                          |       |   |   |   |   |
| Operating loss                                                  |       | (52,576                                         | )          | (53,819                                       | )          | (110,106 | ) | (122,824 | ) |
|                                                            |       |                                            |       |                                          |       |   |   |   |   |
| Interest and  other income                                      |       | 9,918                                           |       | 10,071                                        |       | 19,322 |   | 13,857 |   |
| Interest and  other expense                                     |       | (2,365                                          | )          | (2,646                                        | )          | (3,653 | ) | (5,328 | ) |
| Net loss                                                        |       | $                                               | (45,023    | )                                             | $          | (46,394 | ) | $ | (94,437 | ) | $ | (114,295 | ) |
|                                                            |       |                                            |       |                                          |       |   |   |   |   |
| Net loss per  share, basic and diluted                          |       | $                                               | (0.34      | )                                             | $          | (0.38 | ) | $ | (0.72 | ) | $ | (0.97 | ) |
|                                                            |       |                                            |       |                                          |       |   |   |   |   |
| Shares used in  computing net loss per share, basic and diluted |       | 131,774                                         |       | 122,675                                       |       | 131,416 |   | 117,293 |   |

 

See accompanying notes to condensed consolidatedfinancial statements.

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**AMYLIN PHARMACEUTICALS,INC.**

**ConsolidatedStatements of Cash Flows(in thousands)(unaudited)**
| ** **                                                                    | ** ** | **Six months ended  June 30,** | ** ** |
|-------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                    | ** ** | **2007**                                      | ** ** | **2006** | ** ** |
| Operating  activities:                                                        |       |                                          |       |   |   |
| Net loss                                                                      |       | $                                             | (94,437    | ) | $ | (114,295 | ) |
| Adjustments to  reconcile net loss to net cash used for operating activities: |       |                                          |       |   |   |
| Depreciation and amortization                                                 |       | 9,042                                         |       | 6,737 |   |
| Stock-based compensation                                                      |       | 29,056                                        |       | 23,293 |   |
| Shares contributed as employer 401(k) match                                   |       | 5,819                                         |       | 2,811 |   |
| Other non-cash expenses, net                                                  |       | 899                                           |       | 942 |   |
| Changes in operating assets and liabilities:                                  |       |                                          |       |   |   |
| Accounts receivable, net                                                      |       | 3,809                                         |       | (26,779 | ) |
| Inventories                                                                   |       | (18,877                                       | )          | (11,824 | ) |
| Other current assets                                                          |       | (10,784                                       | )          | 372 |   |
| Accounts payable and accrued liabilities                                      |       | 21,664                                        |       | 11,032 |   |
| Accrued compensation                                                          |       | (9,991                                        | )          | (3,308 | ) |
| Payable to collaborative partner                                              |       | 5,893                                         |       | 21,023 |   |
| Deferred revenue                                                              |       | (2,143                                        | )          | (2,143 | ) |
| Other assets and liabilities, net                                             |       | 5,832                                         |       | 1,704 |   |
| Net cash flows used for operating activities                                  |       | (54,218                                       | )          | (90,435 | ) |
|                                                                          |       |                                          |       |   |   |
| Investing  activities:                                                        |       |                                          |       |   |   |
| Purchases of short-term investments                                           |       | (291,494                                      | )          | (816,054 | ) |
| Sales and maturities of short-term investments                                |       | 231,016                                       |       | 429,475 |   |
| Purchase of property, plant and equipment, net                                |       | (141,979                                      | )          | (26,399 | ) |
| Increase in other long-term assets                                            |       | (12,720                                       | )          | (71 | ) |
| Net cash flows used for investing activities                                  |       | (215,177                                      | )          | (413,049 | ) |
|                                                                          |       |                                          |       |   |   |
| Financing  activities:                                                        |       |                                          |       |   |   |
| Issuance of common stock, net                                                 |       | 23,357                                        |       | 529,575 |   |
| Issuance of convertible senior notes, net                                     |       | 558,797                                       |       | — |   |
| Net cash flows provided by financing activities                               |       | 582,154                                       |       | 529,575 |   |
|                                                                          |       |                                          |       |   |   |
| Increase in cash  and cash equivalents                                        |       | 312,759                                       |       | 26,091 |   |
|                                                                          |       |                                          |       |   |   |
| Cash and cash  equivalents at beginning of period                             |       | 66,640                                        |       | 72,026 |   |
| Cash and cash  equivalents at end of period                                   |       | $                                             | 379,399    |   | $ | 98,117 |   |
|                                                                          |       |                                          |       |   |   |
| Supplemental  disclosure on cash flow information:                            |       |                                          |       |   |   |
| Property, plant and  equipment additions in other current liabilities         |       | $                                             | 12,759     |   | $ | 5,654 |   |

 

See accompanying notes to consolidated financialstatements.

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**AMYLIN PHARMACEUTICALS,INC.**

**Notes toConsolidated Financial StatementsJune 30, 2007(unaudited)**

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

**Basis of Presentation**

The information containedherein has been prepared in accordance with instructions for Form 10-Q andArticle 10 of Regulation S-X. The information as of June 30, 2007, and forthe three month and six month periods ended June 30, 2007 and 2006, areunaudited. In the opinion of management, the information reflects alladjustments necessary to make the results of operations for the interim periodsa fair statement of such operations. All such adjustments are of a normalrecurring nature. Interim results are not necessarily indicative of results fora full year. The balance sheet at December 31, 2006, has been derived fromthe audited consolidated financial statements at that date but does not includeall information and footnotes required by accounting principles generallyaccepted in the United States for complete financial statements. For more completefinancial information, these financial statements should be read in conjunctionwith the audited consolidated financial statements included in our AnnualReport on Form 10-K for the year ended December 31, 2006.

**Revenue Recognition**

***Net Product Sales***

AmylinPharmaceuticals, Inc. (referred to as the Company or Amylin) sells BYETTA® (exenatide) injection and SYMLIN® (pramlintide acetate) injection primarily towholesale distributors, who, in turn, sell to retail pharmacies and governmententities. Product sales are recognized when delivery of the products hasoccurred, title has passed to the customer, the selling price is fixed ordeterminable, collectibility is reasonably assured and the Company has nofurther obligations. The Company records allowances for product returns,rebates and wholesaler chargebacks, wholesaler discounts, and prescriptionvouchers at the time of sale and reports product sales net of such allowances.The Company must make significant judgments in determining these allowances. Ifactual results differ from the Company’s estimates, the Company will berequired to make adjustments to these allowances in the future.

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

***Revenues Under Collaborative Agreements***

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

***CollaborativeProfit-Sharing***

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

6

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# **AccountsReceivable**

Tradeaccounts receivable are recorded net of allowances for cash discounts forprompt payment, doubtful accounts, product returns and chargebacks. Allowancesfor rebate discounts and distribution fees are included in other currentliabilities in the accompanying consolidated balance sheets. Estimates forallowances for doubtful accounts are determined based on existing contractualobligations, historical payment patterns and individual customercircumstances.  The allowance for doubtful accounts was $0.2 million atJune 30, 2007 and December 31, 2006, respectively.

# **Researchand Development Expenses**

Research and developmentcosts are expensed as incurred and include salaries, benefits and non-cashstock-based compensation, a portion of facilities costs; costs paid tothird-party contractors to perform research, conduct clinical trials, developand manufacture drug materials and delivery devices; and milestones underlicense agreements. Clinical trial costs, including costs associated withthird-party contractors, are a significant component of research anddevelopment expenses. Invoicing from third-party contractors for servicesperformed can lag several months. The Company accrues the costs of servicesrendered in connection with such activities based on its estimate of managementfees, site management and monitoring costs, and data management costs. Actualclinical trial costs may differ from estimates and are adjusted in the periodin which they become known. Payments made under certain license andcollaboration agreements for milestones achieved are recorded as a liabilitywhen the obligation is incurred.  TheCompany recorded milestones of $10.0 million at June 30, 2007 for adevelopment milestone associated with leptin.  Therewere not any recorded milestones at December 31, 2006.

**Per Share Data**

Basic and diluted netloss applicable to common stock per share is computed using the weightedaverage number of common shares outstanding during the period. Common stockequivalents from stock options and warrants of 8.1 million and 7.9 million for the three and six months ended June 30,2007, respectively, and common stock equivalents of 8.1 million from stockoptions and warrants for each of the three and six months ended June 30, 2006,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 8.1 millionand 7.0 million for the three and six months ended June 30, 2007, respectively,and 11.2 million for each of the three and six months ended June 30, 2006,respectively, are also excluded from the calculation of diluted loss per sharebecause the effect is antidilutive. Infuture periods, if the Company reports net income and the common shareequivalents for our convertible senior notes are dilutive, the common stock equivalentswill be included in the weighted average shares computation and interestexpense related to the notes will be added back to net income to calculatediluted earnings per share.

# **Accounting for Stock-BasedCompensation**

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

7

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Totalestimated stock-based compensation was as follows (in thousands, except pershare data):
|                                                          | ** ** | **Three months ended  June 30,** | ** ** | **Six months ended  June 30,** | ** ** |
|----------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                               | ** ** | **2007**                                        | ** ** | **2006**                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
| Selling, general  and administrative expenses            |       | $                                               | 9,539      |                                          | $          | 6,825 |   | $ | 17,520 |   | $ | 12,664 |   |
| Research and  development expenses                       |       | 6,200                                           |       | 5,590                                         |       | 11,536 |   | 10,629 |   |
|                                                     |       | $                                               | 15,739     |                                          | $          | 12,415 |   | $ | 29,056 |   | $ | 23,293 |   |
|                                                     |       |                                            |       |                                          |       |   |   |   |   |
| Net stock-based  compensation expense, per common share: |       |                                            |       |                                          |       |   |   |   |   |
| Basic                                                    |       | $                                               | 0.12       |                                          | $          | 0.10 |   | $ | 0.22 |   | $ | 0.20 |   |
| Diluted                                                  |       | $                                               | 0.12       |                                          | $          | 0.10 |   | $ | 0.22 |   | $ | 0.20 |   |

 

TheCompany recorded $15.7 million and $12.4 million of total non-cash, stock basedcompensation expense during the three months ended June 30, 2007 and 2006,respectively, and $29.1 million and $23.3 million of total non-cash,stock-based compensation expense during the six months ended June 30, 2007and  2006, respectively, related tostock-based awards, consisting of stock options and employee stock purchaserights, during those periods.  At June30, 2007, total unrecognized estimated compensation cost related to non-vestedshare based awards granted prior to that date was $134.9 million, which isexpected to be recognized over a weighted-average period of 2.7 years.  The Company issued 0.6 million and 1.3million shares upon the exercise of stock options and warrants in the three andsix months ended June 30, 2007, respectively.

**Consolidation**

Theconsolidated financial statements include the accounts of the Company and itswholly owned subsidiaries, Amylin Europe Limited, Amylin Puerto Rico LLC,Amylin Ohio LLC, and Amylin Investments LLC. All significant intercompanytransactions and balances have been eliminated in consolidation.

# **Income Taxes**

InJuly 2006, the FASB issued Interpretation No. 48 (FIN 48) “*Accountingfor Uncertainty in Income Taxes* - *AnInterpretation of FASB Statement No. 109.”*FIN 48 clarifies theaccounting for uncertainty in income taxes recognized in an entity’s financialstatements in accordance with FASB Statement No. 109, “*Accountingfor Income Taxes,*” and prescribes a recognition threshold andmeasurement attributes for financial statement disclosure of tax positionstaken or expected to be taken on a tax return. Under FIN 48, the impact of an uncertain income tax position on theincome tax return must be recognized at the largest amount that ismore-likely-than-not to be sustained upon audit by the relevant taxingauthority.  An uncertain income taxposition will not be recognized if it has less than a 50% likelihood of beingsustained.  Additionally, FIN 48 providesguidance on derecognition, classification, interest and penalties, accountingin interim periods, disclosure and transition.

The Companyadopted the provisions of FIN 48 on January 1, 2007.  No unrecognized tax benefits were recorded asof the date of adoption.  As a result ofthe implementation of FIN 48, the Company recognized a $23.6 million increasein unrecognized tax benefits which was accounted for as a reduction to deferredtax assets (primarily related to reductions in tax credits) and a correspondingreduction to the valuation allowance, resulting in no net effect on accumulateddeficit.

Thebalance of unrecognized tax benefits at January 1, 2007 of $23.6 million aretax benefits that, if recognized, would not affect the Company’s effective taxrate since they are subject to a full valuation allowance.  The Company has not recognized any accruedinterest and penalties related to unrecognized tax benefits during the yearsended December 31, 2006 and 2005.  TheCompany is subject to taxation in the United States and various states andforeign jurisdictions.  Effectively, allof the Company’s historical tax years are subject to examination by theInternal Revenue Service and various state and foreign jurisdictions due to thegeneration of net operating loss and credit carryforwards.  The Company does not foresee any materialchanges to unrecognized tax benefits within the next twelve months. The Companywill elect a treatment for interest and penalties when they occur.

**Recently IssuedAccounting Pronouncements**

InFebruary 2007, the FASB issued SFAS No. 159 “*The FairValue Option for Financial Assets and Financial Liabilities*.”  SFAS No. 159 permits entities to choose tomeasure many financial instruments and certain other items at fair value.  The provisions of SFAS No. 159 will beeffective for the Company beginning January 1, 2008.  The Company is in the process of determiningthe effect, if any, the adoption of SFAS No. 159 will have on its financialstatements.

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**2.****                 Investment**s

The Company’s investments, consisting principally ofdebt securities are classified as available-for-sale and are stated at fairvalue. Unrealized holding gains orlosses on these securities are included in other comprehensive income. Theamortized cost of debt securities in this category is adjusted for amortizationof 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) on available-for-salesecurities are included in interest income. In assessing potential impairment of itsshort-term investments, the Company evaluates the impact of interest rates,potential prepayments on mortgage-backed securities, changes in credit quality,the length of time and extent to which the market value has been less thancost, and the Company’s intent and ability to retain the security in order toallow for an anticipated recovery in fair value. The cost of securities sold is based on the specific-identificationmethod.

**3.****                 Inventories, net**

Inventories are stated at the lower of cost (FIFO)or market and net of a valuation allowance for potential excess and/or obsoletematerial of $2.3 million and $0.4 million at June 30, 2007 and December 31,2006, respectively. Raw materials consist of bulk drug material,work-in-process primarily consists of in-process SYMLIN vials and in-processBYETTA cartridges, and finished goods consist of finished SYMLIN drug productin vials for syringe administration and BYETTA drug product in cartridges forpen administration.

Inventories consist of the following (in thousands):
|                 | ** ** | **June 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|-----------------|------------|-------------------------|------------|-----------------------------|------------|
| Raw materials   |       | $                       | 39,845     |                        | $          | 37,564 |   |
| Work-in-process |       | 20,520                  |       | 12,589                      |       |
| Finished goods  |       | 17,811                  |       | 9,146                       |       |
|            |       | $                       | 78,176     |                        | $          | 59,299 |   |

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

Debt issuance costs relate to the $200 million principalamount of 2.5% convertible senior notes, due April 15, 2011, issued inApril 2004, and are referred to as the 2004 Notes.  Debt issuance costs also relate to the $575million principal amount of 3.0% convertible senior notes, due June 15, 2014,issued in June 2007, and are referred to as the 2007 Notes.  Amortization of debt issuance costs arerecorded as interest expense in the consolidated statement of operations on astraight-line basis, which approximates the interest method over thecontractual term of the notes. The Company incurred total debt issuance costsof  $22.6 million in connection with the2004 Notes and the 2007 Notes. Amortization expense of $0.4 million and $0.5million was recorded in each of the three months ended June 30, 2007 and 2006,respectively. Amortization expense of $ 0.6 and $1.0 million was recorded ineach of the six months ended June 30, 2007 and 2006, respectively.

**5.****              Other CurrentLiabilities**

Other current liabilities consist of the following (inthousands):
|                                                     | ** ** | **June 30, 2007** | ** ** | **December 31,  2006** | ** ** |
|-----------------------------------------------------|------------|------------------------|------------|-----------------------------|------------|
| Accrued  property, plant and equipment additions    |       | $                      | 12,759     |                        | $          | 21,219 |   |
| Accrued expenses                                    |       | 18,555                 |       | 17,670                      |       |
| Accrued contract  research and development expenses |       | 12,045                 |       | 11,635                      |       |
| Accrued sales  allowances                           |       | 26,601                 |       | 20,654                      |       |
|                                                |       | $                      | 69,960     |                        | $          | 71,178 |   |

 

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

SFASNo. 130, “*Reporting Comprehensive Income,”* requires reporting anddisplaying comprehensive income (loss) and its components, which, for theCompany, includes net loss and unrealized gains and losses on investments. Inaccordance with SFAS No.130, the accumulated balance of other comprehensiveincome (loss) is disclosed as a separate component of stockholders’ equity. Forthe six months ended June 30, 2007 and 2006, the comprehensive loss consistedof (in thousands):
|                                 | ** ** | **Three months ended June 30,** | ** ** | **Six months ended June 30,** | ** ** |
|---------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                      | ** ** | **2007**                                            | ** ** | **2006**                                          | ** ** | **2007** | ** ** | **2006** | ** ** |
| Net loss                        |       | $                                                   | (45,023    | )                                                 | $          | (46,394 | ) | $ | (94,437 | ) | $ | (114,295 | ) |
| Other  comprehensive loss:      |       |                                                |       |                                              |       |   |   |   |   |
| Unrealized gain  on investments |       | 390                                                 |       | 510                                               |       | 628 |   | 456 |   |
| Comprehensive loss              |       | $                                                   | (44,633    | )                                                 | $          | (45,884 | ) | $ | (93,809 | ) | $ | (113,839 | ) |

 

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

InApril 2004, the Company issued the 2004 Notes, which have an aggregateprincipal amount of $200 million, and are due April 15, 2011, in a privateplacement. The 2004 Notes have been registered under the Securities Act of1933, as amended, to permit registered resale of the 2004 Notes and of thecommon stock issuable upon conversion of the 2004 Notes. The 2004 Notes bearinterest at 2.5% per year, payable in cash semi-annually and are convertibleinto a total of up to 5.8 million shares of common stock at a conversion priceof $34.35 per share, subject to customary adjustments for stock dividends andother dilutive transactions. The Company may not redeem the 2004 Notes prior tomaturity.

Upon achange in control, the holders of the 2004 Notes may elect to require theCompany to re-purchase the 2004 Notes. The Company may elect to pay thepurchase price in common stock instead of cash, or a combination thereof. Ifpaid with common stock the number of shares of common stock a holder willreceive will be valued at 95% of the closing prices of the Company’s commonstock for the five-day trading period ending on the third day before thepurchase date.

InJune 2007, the Company issued the 2007 Notes, which have an aggregate principalamount of $575 million, and are due June 15, 2014, in a private placement.  The 2007 Notes are senior unsecuredobligations and rank equally with all other existing and future seniorunsecured debt.  The 2007 Notes bearinterest at 3.0% per year, payable in cash semi-annually, and are initiallyconvertible into a total of up to 9.4 million shares of common stock at aconversion price of $61.07 per share, subject to the customary adjustment forstock dividends and other dilutive transactions.  In addition, if a “fundamental change” (asdefined in the associated indenture agreement) occurs prior to the maturitydate, the Company will in some cases increase the conversion rate for a holderof notes that elects to convert its notes in connection with such fundamentalchange.  The maximum conversion rate is22.9252, which would result in a maximum issuance 13.2 million shares of commonstock if all holders converted at the maximum conversion rate.

The2007 Notes will be convertible into shares of the Company’s common stock unlessthe Company elects net-share settlement. If net-share settlement is elected bythe Company, the Company will satisfy the accreted value of the obligation incash and will satisfy the excess of conversion value over the accreted value inshares of the Company’s common stock based on a daily conversion value,determined in accordance with the associated indenture agreement, calculated ona proportionate basis for each day of the relevant 20-day observation period.Holders may convert the 2007 Notes only in the following circumstances and tothe following extent: (1) during the five business-day period after anyfive consecutive trading period (the measurement period) in which the tradingprice per note for each day of such measurement period was less than 97% of theproduct of the last reported sale price of the Company’s common stock and theconversion rate on each such day; (2) during any calendar quarter afterthe calendar quarter ending March 31, 2007, if the last reported saleprice of the Company’s common stock for 20 or more trading days in a period of30 consecutive trading days ending on the last trading day of the immediatelypreceding calendar quarter exceeds 130% of the applicable conversion price ineffect on the last trading day of the immediately preceding calendar quarter;(3) upon the occurrence of specified events; and (4) the 2007 Noteswill be convertible at any time on or after April 15, 2014 through thescheduled trading day immediately preceding the maturity date.

Subjectto certain exceptions, if the Company undergoes a “designated event” (asdefined in the associated indenture agreement) including a “fundamental change,”holders of the 2007 Notes will, for the duration of the notes, have the optionto require the Company to repurchase all or any portion of their 2007 Notes.The designated event repurchase price will be 100% of the principal amount ofthe 2007 Notes to be purchased plus any accrued interest up to but excludingthe relevant repurchase date. The Company will pay cash for all notes sorepurchased. The Company may not redeem the Notes prior to maturity.

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The2007 Notes will be registered under the Securities Act of 1933, as amended, topermit registered resale of the 2007 Notes and of the common stock issuableupon conversion of the 2007 Notes.  TheCompany has agreed to use its reasonable efforts to keep the shelf registrationstatement effective until the earliest of (i) the date when all securitiescovered by the registration statement have been sold, or (ii) theexpiration of the applicable holding period with respect to the 2007 Notes andcommon stock issuable upon conversion of the 2007 Notes under Rule 144(k) underthe Securities Act of 1933, or any successor provision. The Company may suspendthe use of the registration statement to resell 2007 Notes or shares of commonstock issued upon conversion of 2007 Notes for reasons relating to acquisitionor divesture of assets, pending corporate developments, and similar events.

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

**8.   Commitments 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 ofJune 30, 2007, if all such milestones are successfully achieved, the potentialfuture milestone and other contingency payments due under certain contractualagreements are approximately $257 million in aggregate, of which $19 millionare expected to be paid over the next twelve months.

We havecommitted to make future minimum payments to third parties for certaininventories in the normal course of business. The minimum purchase commitmentstotal approximately $46.1 million as of June 30, 2007, the majority of whichrelate to BYETTA.

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

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

**Overview**

AmylinPharmaceuticals, Inc. is a biopharmaceutical company committed to improving thelives of people with diabetes, obesity and other diseases through thediscovery, development and commercialization of innovative medicines. We havedeveloped and gained approval for two first-in-class medicines to treatdiabetes, BYETTA® (exenatide) injection and SYMLIN® (pramlintide acetate) injection, both of whichwere commercially launched in the United States during the second quarter of2005.  BYETTA has also been approved inthe European Union, or EU, and the first commercial launch occurred in Germanyin April 2007 through our collaboration partner Eli Lilly and Company, orLilly. Lilly has launched, and we expect Lilly to continue to launch, BYETTA inadditional EU member states and other countries during 2007.  We also have two late-stage programs indevelopment and multiple early-stage programs.

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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 taking metformin, sulfonylurea and/or athiazolidinedone, or TZD, the three most common oral therapies for type 2diabetes.  Net product sales of BYETTAwere $152.1 million and $98.6 million for the three months ended June 30, 2007and 2006, respectively, and $298.6 million and $166.8 million for the sixmonths ended June 30, 2007 and 2006, respectively.

We havean agreement with Lilly for the global development and commercialization ofexenatide. This agreement includes BYETTA and any long-acting releaseformulations of exenatide such as exenatide LAR. Under the terms of theagreement, operating profits from products sold in the United States are sharedequally 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 100% of the costs related tocommercialization of all exenatide products for sale outside of the UnitedStates.

SYMLINis the first and only approved medicine in a new class of compounds called amylinomimetics.We began selling SYMLIN in the United States in April 2005 for thetreatment of patients with either type 1 or type 2 diabetes who are treatedwith mealtime insulin but who have not achieved adequate glycemic control.  Net product sales of SYMLIN were $15.2million and $10.2 million for the three months ended June 30, 2007 and 2006,respectively, and $30.7 million and $17.9 million for the six months ended June30, 2007 and 2006, respectively.

Wehave a field force of approximately 570 people dedicated to marketing BYETTAand SYMLIN in the United States.  Ourfield force includes our specialty and primary care sales forces, a managedcare and government affairs organization, a medical science organization anddiabetes care specialists.  Lilly co-promotesBYETTA in the United States and has primary responsibility for developing andcommercializing BYETTA outside of the United States, including any long-actingrelease formulations.

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

Indiabetes, we are working with Lilly and Alkermes, Inc., or Alkermes, to developexenatide LAR to enable once-weekly administration of exenatide for thetreatment of type 2 diabetes.   We arecurrently conducting a clinical study evaluating exenatide LAR in patients withtype 2 diabetes that is designed to generate the type of safety and efficacydata that could form the basis of a New Drug Application, or NDA, submission tothe United States Food and Drug Administration, or FDA.  In addition, we and Lilly are working withAlkermes and Parsons, Inc. on the construction of a manufacturing facility forexenatide LAR in Ohio.  We expect tocomplete the commercial scale manufacturing process in this facility in thesecond half of 2008.

Wehave multiple early-stage programs for diabetes and obesity.  We have a number of compounds in developmentfor the potential treatment of obesity which are part of a broader programwhich we refer 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. We also maintain an active discovery research programfocused on novel peptide therapeutics. We are actively seeking to in-license additional drug candidates.  We have partnered with PsychoGenics, Inc., to form PsylinNeurosciences, Inc., or Psylin, a company that will focus on the discovery anddevelopment of peptide hormones for treatment of psychiatric indications.  During the second quarter of 2007, we made astrategic equity investment in BioSeek, Inc., or BioSeek, a company thatspecializes in predictive human cell-based disease models, and contracted withBioSeek to assess the potential utility of Amylin’s peptide hormones inimmune/inflammatory disorders.

Sinceour inception in September 1987, we have devoted substantially all of ourresources to our research and development programs and, more recently, to thecommercialization of our products. All of our revenues prior to May 2005were derived from fees and expense reimbursements under our BYETTAcollaboration agreement with Lilly, previous SYMLIN collaborative agreementsand previous co-promotion agreements. During the second quarter of 2005, webegan to derive revenues from product sales of BYETTA and SYMLIN. We have been unprofitable since inception andmay incur additional operating losses for at least the next few years.At June 30, 2007, our accumulated deficit was approximately $1.3 billion.

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AtJune 30, 2007, we had approximately $1.1 billion 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 further discussionregarding our anticipated future capital requirements.

**Applicationof Critical Accounting Policies**

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

Thefinancial information as of June 30, 2007, should be read in conjunction withthe financial statements for the year ended December 31, 2006, contained in ourannual report on Form 10-K filed on February 26, 2007.

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 26, 2007.

**Resultsof Operations**

**Comparisonof Three Months Ended June 30, 2007 to Three Months Ended June 30, 2006**

***Net Product Sales***

Netproduct sales for the three months ended June 30, 2007 and 2006 were $167.3million and $108.8 million, respectively, and consisted of shipments of BYETTAand SYMLIN, less allowances for prescription coupons, payor discounts,distribution service fees and product returns.

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

|            | ** ** | **Three months ended June 30,** | ** ** |
|------------|------------|-----------------------------------------------------|------------|
| ** ** | ** ** | **2007**                                            | ** ** | **2006** | ** ** |
| BYETTA     |       | $                                                   | 152.1      |   | $ | 98.6 |   |
| SYMLIN     |       | 15.2                                                |       | 10.2 |   |
|       |       | $                                                   | 167.3      |   | $ | 108.8 |   |

 

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

***Revenues Under Collaborative Agreements***

Revenues under collaborative agreements for thethree months ended June 30, 2007, were $29.6****million compared to $9.4 million for the same period in 2006.Substantially all of the revenue recorded in these periods consists of amountsearned pursuant to our BYETTA collaboration agreement with Lilly. The $20.2million increase in revenues under collaborative agreements in the currentquarter compared to the same period in 2006 reflects $15.0 million in milestonerevenue associated primarily with Lilly’s launch of BYETTA in the EU and highercost-sharing payments due to increased development expenses for exenatide LAR.

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The following tablesummarizes the components of revenues under collaborative agreements for thethree months ended June 30, 2007 and 2006 (in millions):
|                                         | ** ** | **Three months ended  June 30,** | ** ** |
|-----------------------------------------|------------|-------------------------------------------------|------------|
| ** **                              | ** ** | **2007**                                        | ** ** | **2006** | ** ** |
| Amortization of  up-front payments      |       | $                                               | 1.1        |   | $ | 1.1 |   |
| Milestones                              |       | 15.0                                            |       | — |   |
| Cost-sharing and  co-promotion payments |       | 13.5                                            |       | 8.3 |   |
|                                    |       | $                                               | 29.6       |   | $ | 9.4 |   |

 

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

***Cost of Goods Sold***

Costof goods sold for the three months ended June 30, 2007 and 2006 was $14.4million, representing a gross margin of 91%, and $14.7 million, representing agross margin of 87%, respectively, and is comprised primarily of manufacturingcosts associated with BYETTA and SYMLIN sales during the period.  The improvement in gross margin for the threemonths ended June 30, 2007 compared to the same period in 2006 reflects ahigher average net sales price per unit for BYETTA and lower unit costs forBYETTA resulting from higher production volumes.  The increase in average net sales price perunit for BYETTA is due to price increases and change in product mix, partiallyoffset by an increase in the impact of sales allowances. Quarterly fluctuationsin gross margins may be influenced by product mix, pricing, and the level ofsales allowances.

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

Selling,general and administrative expenses increased to $93.1 million for the threemonths ended June 30, 2007, from $63.5 million for the same period in 2006. Theincrease primarily reflects expenses associated with the recent expansion ofour sales force, increased promotional expenses for BYETTA and SYMLIN andincreased business infrastructure to support our growth.

Selling,general and administrative expenses are expected to continue to increase duringthe remainder of 2007, which reflects the planned expansion of ourmanufacturing capabilities in support of our facility in Ohio, increases inbusiness infrastructure to support our growth and additional marketingactivities.

***Research and Development Expenses***

Ourresearch and development expenses are comprised of salaries, benefits andstock-based compensation, license fees, costs paid to third-party contractorsto perform research, milestones under license agreements, conduct clinicaltrials, and develop and manufacture drug materials and delivery devices, and aportion of our facilities costs. We charge direct internal and external programcosts to the respective development programs. We also incur indirect costs thatare not allocated to specific programs because such costs benefit multipledevelopment programs and allow us to increase our pharmaceutical developmentcapabilities. These consist primarily of facilities costs and other internalshared resources related to the development and maintenance of systems andprocesses applicable to all of our programs.

Ourresearch and development efforts are focused on diabetes, obesity, and otherdiseases.  We also maintain an activediscovery research program.  In diabetes,we have two approved products, BYETTA and SYMLIN, and we are developingexenatide LAR, a long acting release formulation of exenatide, the activepharmaceutical ingredient in BYETTA.  Inobesity, we have a number of compounds in development for the potentialtreatment of obesity which are part of a broader program which we refer to asINTO: 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.

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The following table provides information regarding ourresearch and development expenses for our major projects (in millions):
|                                   | ** ** | **Three months ended June 31,** | ** ** |
|-----------------------------------|------------|-----------------------------------------------------|------------|
| ** **                        | ** ** | **2007**                                            | ** ** | **2006** | ** ** | **Increase** | ** ** |
| Diabetes                          |       | $                                                   | 35.0       |   | $ | 26.5 |   | $ | 8.5 |   |
| Obesity                           |       | 17.8                                                |       | 7.4 |   | 10.4 |   |
| Research and early-stage programs |       | 10.1                                                |       | 9.4 |   | 0.7 |   |
| Indirect costs                    |       | 8.8                                                 |       | 7.1 |   | 1.7 |   |
|                              |       | $                                                   | 71.7       |   | $ | 50.4 |   | $ | 21.3 |   |

 

The $21.3 million increase in research and developmentexpenses for the three months ended June 30, 2007 as compared to the same periodin 2006 primarily reflects increased expenses of $10.4 million for our obesityprograms and $8.5 million for our diabetes programs. The increase in expensesfor our obesity programs primarily reflects the recognition of a $10.0 milliondevelopment milestone associated with leptin. The increase in expenses for ourdiabetes programs primarily reflects increased expenses for exenatide LARassociated with manufacturing scale-up and the on-going clinical studydiscussed above.

***CollaborativeProfit Sharing***

Collaborative profit sharing was $70.4 million  and $43.4 million for the three months endedJune 30, 2007 and 2006, respectively, and consists of Lilly’s 50% share of thegross margin for BYETTA in the United States.

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

Interest and other income consist primarily ofinterest income from investment of cash and other investments. Interest andother income decreased to $9.9 million for the three months ended June 30,2007, from $10.1 million for the same period in 2006.

Interest and other expenseconsist primarily of interest expense resulting from our long-term debtobligations. Interest expense in the three months ended June 30, 2007 consistsof interest on our $775 million of outstanding convertible senior notes and theamortization of associated debt issuance costs. Interest and otherexpense was $2.4 million and $2.6 million for the three months ended June 30,2007 and 2006, respectively.

***Net Loss***

Our net loss for the three months ended June 30, 2007was $45.0 million compared to a net loss of $46.4 million for the same periodin 2006. The decrease in net loss primarily reflects the increased net productsales and revenues under collaborative agreements, partially offset by theincreased selling, general and administrative expenses, increased research anddevelopment expenses and increased collaborative profit-sharing discussedabove.

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, and expenses associated with the continuation and potentialexpansion of our research and development programs, including our late-stageprograms and our early-stage development programs, and related supportinfrastructure, may impact our ability to reach profitability in the future.Our operating results may fluctuate from quarter to quarter as a result ofdifferences in the timing of expenses incurred and revenues recognized.

**Comparison of Six Months Ended June 30, 2007 to Six MonthsEnded June 30, 2006**

***Net Product Sales***

Net product sales for the six months ended June 30,2007 and 2006 were $329.3 million and $184.7 million, respectively, andconsisted of shipments of BYETTA and SYMLIN, less allowances for prescriptioncoupons, payor discounts, distribution service fees and product returns.

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The following tableprovides information regarding net product sales (in millions):
|            | ** ** | **Six months ended June 30,** | ** ** |
|------------|------------|---------------------------------------------------|------------|
| ** ** | ** ** | **2007**                                          | ** ** | **2006** | ** ** |
| BYETTA     |       | $                                                 | 298.6      |   | $ | 166.8 |   |
| SYMLIN     |       | 30.7                                              |       | 17.9 |   |
|       |       | $                                                 | 329.3      |   | $ | 184.7 |   |

 

The increases in netproduct sales for BYETTA and SYMLIN in the current period, both of which werelaunched in the United States during the second quarter of 2005, reflectcontinued growth in patient demand.

***Revenues UnderCollaborative Agreements***

Revenues undercollaborative agreements for the six months ended June 30, 2007 were $39.6****million compared to $15.8 million for the sameperiod in 2006. Substantially all of the revenue recorded in these periodsconsists of amounts earned pursuant to our BYETTA collaboration agreement withLilly. The $23.8 million increase in revenues under collaborative agreements inthe six months ended June 30, 2007 compared to the same period in 2006 reflectsthe same factors that influenced similar fluctuations in the three months endedJune 30, 2007 discussed above.

The following table summarizes the components ofrevenues under collaborative agreements for the six months ended June 30, 2007and 2006 (in millions):
|                                         | ** ** | **Six months ended  June 30,** | ** ** |
|-----------------------------------------|------------|-----------------------------------------------|------------|
| ** **                              | ** ** | **2007**                                      | ** ** | **2006** | ** ** |
| Amortization of  up-front payments      |       | $                                             | 2.1        |   | $ | 2.1 |   |
| Milestones                              |       | 15.0                                          |       | — |   |
| Cost-sharing and  co-promotion payments |       | 22.5                                          |       | 13.7 |   |
|                                    |       | $                                             | 39.6       |   | $ | 15.8 |   |

 

***Cost of Goods Sold***

Cost of goods sold for the six months ended June 30,2007 and 2006 was $29.6 million, representing a gross margin of 91%, and $24.4million, representing a gross margin of 87%, respectively, and is comprisedprimarily of manufacturing costs associated with BYETTA and SYMLIN sales duringthe period.  The improvement in grossmargin for the six months ended June 30, 2007 compared to the same period in2006 reflects thesame factors that influenced similar fluctuations in the three months endedJune 30, 2007 discussed above.

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

Selling, general and administrative expenses increasedto $180.9 million for the six months ended June 30, 2007, from $123.4 millionfor the same period in 2006. The increase primarily reflects the same factorsthat influenced similar fluctuations in the three months ended June 30, 2007discussed above.

***Research and Development Expenses***

The following table provides information regarding ourresearch and development expenses for our major projects (in millions):
|                                   | ** ** | **Six months ended June 31,** | ** ** |
|-----------------------------------|------------|---------------------------------------------------|------------|
| ** **                        | ** ** | **2007**                                          | ** ** | **2006** | ** ** | **Increase  (Decrease)** | ** ** |
| Diabetes                          |       | $                                                 | 63.0       |   | $ | 47.8 |   | $ | 15.2 |   |
| Obesity                           |       | 31.7                                              |       | 22.6 |   | 9.1 |   |
| Research and early-stage programs |       | 19.2                                              |       | 17.5 |   | 1.7 |   |
| Indirect costs                    |       | 17.4                                              |       | 14.3 |   | 3.1 |   |
|                              |       | $                                                 | 131.3      |   | $ | 102.2 |   | $ | 29.1 |   |

 

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The $29.1 million increase in research and developmentexpenses for the six months ended June 30, 2007 as compared to the same periodin 2006 primarily reflects  increasedexpenses of $15.2 million for our diabetes programs and $9.1 million for ourobesity programs. The increase in expenses for our diabetes programs primarilyreflects increased expenses for exenatide LAR associated with manufacturingscale-up and the on-going clinical study discussed above.  The increase in expenses for our obesityprograms primarily reflects the recognition of a $10.0 million developmentmilestone associated with leptin.

***CollaborativeProfit Sharing***

Collaborative profit sharing was $137.3 million  and $73.4 million for the six months endedJune 30, 2007 and 2006, respectively, and consists of Lilly’s 50% share of thegross margin for BYETTA in the United States.

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

Interest and other income consist primarily ofinterest income from investment of cash and other investments. Interest andother income increased to $19.3 million for the six months ended June 30, 2007,from $13.9 million for the same period in 2006.  The increase of $5.4 million is due to higherinterest rates received on our investments and higher average investmentbalances in 2007 as compared to 2006.

Interest and other expenseconsist primarily of interest expense resulting from our long-term debtobligations. Interest expense in the six months ended June 30, 2007 consists ofinterest on our $775 million of outstanding convertible senior notes and theamortization of associated debt issuance costs. Interest and otherexpense was $3.7 million and $5.3 million for the six months ended June 30,2007 and 2006, respectively.  Thedecrease in 2007 reflects lower interest expense following the August 2006conversion of all of our $175 million of then outstanding 2.25% convertiblesenior notes issued in 2003, partially offset by additional interest expensefollowing the issuance of  $575 millionof 3.00% convertible senior notes issued in June 2007.

***Net Loss***

Our net loss for the six months ended June 30, 2007was $94.4 million compared to a net loss of $114.3 million for the same periodin 2006. The decrease in net loss primarily reflects the increased net productsales and revenues under collaborative agreements, partially offset by theincreased selling, general and administrative expenses, increased research anddevelopment expenses and increased collaborative profit-sharing discussedabove.

# **Liquidityand Capital Resources**

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

At June 30, 2007, we had $1.1 billion in cash, cashequivalents and short-term investments, compared to $767.3 million at December31, 2006.  We used cash of $54.2 millionand $90.4 million for our operating activities in the six months ended June 30,2007 and 2006, respectively.   Our cashused for operating activities in the six months ended June 30, 2007 includeduses of cash due to increases in current assets, including increases ininventories and other current assets of $18.9 million and $10.8 million, respectively, and a decrease in accruedcompensation of $10.0 million, offset by sources of cash due to increases inaccounts payable and accrued liabilities of $21.7 million, an increase inpayable to collaborative partner of $5.9 million. The increase in inventoriesreflects increased inventory purchases to support sales growth and investmentin inventory to support the planned launch of SYMLIN in a new pen deliverysystem. The increase in other current assets primarily reflects a receivablefrom Lilly for a milestone to be received by Amylin. The decrease in accruedcompensation primarily reflects a reduction in our bonus accrual, reflectingthe payment of prior year bonus partially offset by an additional accrual forthe current year.  The increase inaccounts payable primarily reflects a $10.0 million milestone associated withleptin.  The increase in payable tocollaborative partner, which represents Lilly’s 50% share of BYETTA grossmargins in the United States, primarily reflects increased net product salesfor BYETTA.

Our investing activities used cash of $215.2 millionand $413.1 million for the six months ended June 30, 2007 and 2006,respectively. Investing activities in both quarters consisted primarily ofpurchases and sales of short-term investments and purchases of property, plantand equipment and increases in other long-term assets.   Purchases of property, plant and 

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equipmentincreased to $142.0 million for the six months ended June 30, 2007 from $26.4million for the six months ended June 30, 2006. The increase during the six months ended June 30, 2007 primarilyreflects costs associated with our manufacturing facility for exenatide LARand, to a lesser extent, purchases of tenant improvements, office equipment andscientific equipment to support our growth. We expect that our capital expenditures will continue to significantlyincrease in future periods due primarily to costs associated with ongoingconstruction of our manufacturing facility for exenatide LAR.  We expect to complete the commercial-scalemanufacturing process in the second half of 2008.  Through June 30, 2007, we had incurred $176.4million associated with the construction of this facility. Previously weestimated a cost of up to approximately $180 million for the initial build-out,however we are expanding this project, which may increase our expenditures from$180 million to an approximate total of $400 million over the next two years.The full expansion of this project is dependent upon on the continued progressof exenatide LAR through the development process.** **In addition, we anticipatecontinued investments in tenant improvements, office equipment and scientificequipment. We are evaluating various forms of secured debt financing to fund aportion of the cost of our manufacturing facility. In addition, we areevaluating the potential utility of other financing mechanisms, includingrevolving credit lines or similar facilities, which may be secured by ourinventories, accounts receivable or other assets.  The $12.7 million increase in other long-termassets primarily reflects our investments in Psylin and BioSeek.

Financing activities provided cash of $582.2 millionand $529.6 million for the six months ended June 30, 2007 and 2006,respectively. Financing activities for the six months ended June 30, 2007include $558.8 million in net proceeds from our issuance of  $575 million in aggregate principal amount ofour 3.0% convertible senior notes due in 2014, or the 2007 Notes, the exerciseof stock options and proceeds from our employee stock purchase plan.

At June 30, 2007, we had $200 million in aggregateprincipal amount of our 2.5% convertible senior notes due in 2011, or the 2004Notes, and $575 million in aggregate principal amount 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 currentlyconvertible into a total of up to 9.4 million shares of our common stock atapproximately $61.07 per share and are not redeemable at our option.

The following table summarizesour contractual obligations and maturity dates as of June 30, 2007 (inthousands):
|                                      | ** ** | **Payments Due by Period**                                                                 | ** ** |
|--------------------------------------|------------|-----------------------------------------------------------------------------------------------------------|------------|
| **Contractual Obligations**     | ** ** | **        Total        ** | ** ** | **Less than 1  year** | ** ** | **1-3 years** | ** ** | **4-5 years** | ** ** | **After 5 years** | ** ** |
| Long-term  debt                      |       | $                                                                                                         | 775,000    |   | $ | — |   | $ | — |   | $ | 200,000 |   | $ | 575,000 |   |
| Interest  payments on long-term debt |       | 141,085                                                                                                   |       | 22,585 |   | 44,500 |   | 39,500 |   | 34,500 |   |
| Inventory  purchase obligations(1)   |       | 145,098                                                                                                   |       | 80,453 |   | 52,175 |   | 12,470 |   | — |   |
| Operating  lease obligations         |       | 133,511                                                                                                   |       | 16,899 |   | 30,600 |   | 28,377 |   | 57,635 |   |
| Total(2)                             |       | $                                                                                                         | 1,194,694  |   | $ | 119,937 |   | $ | 127,275 |   | $ | 280,347 |   | $ | 667,135 |   |

 

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(1)   Includes$99.0 million of outstanding purchase orders, cancelable by us upon 30 days’written notice, subject to reimbursement of costs incurred through the date ofcancellation.

(2)   Excludeslong-term obligation of $8.2 million related to deferred compensation, thepayment of which is dependent upon elections made by participants that aresubject to change.

In addition, under certain license and collaborationagreements we are required to pay royalties and/or milestone payments upon thesuccessful development and commercialization of related products. We expect tomake development milestone payments up to $19 million associated with licensingagreements in the next 12 months. Additional milestones of up to approximately $238 million could be paidover the next ten to fifteen years if development and commercialization of allour early stage programs continue and are successful.  The significant majority of these milestonesrelate to potential future regulatory approvals and subsequent salesthresholds. Given the inherent risk in pharmaceutical development, it is highlyunlikely that we will ultimately make all of these milestone payments; however,we would consider these payments as positive because they would signify thatthe related products are moving successfully through development andcommercialization.

Our future capital requirementswill depend on many factors, including: the amount of product sales we achievefor BYETTA and SYMLIN; costs associated with the continued commercialization ofBYETTA and SYMLIN; costs associated with the establishment of our exenatide LARmanufacturing facility; costs of potential licenses or acquisitions; thepotential 

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need to repay existing indebtedness; costs associatedwith an increase in our infrastructure; our ability to receive or need to makemilestone payments; our ability, and the extent, to which we establishcollaborative arrangements for SYMLIN or any of our product candidates;progress in our research and development programs and the magnitude of theseprograms; costs involved in preparing, filing, prosecuting, maintaining, enforcingor defending our patents; competing technological and market developments; andcosts of manufacturing, including costs associated with establishing our ownmanufacturing capabilities or obtaining and validating additional manufacturersof our products; and scale-up costs for our drug candidates.

**ITEM 3.****                                                     Quantitativeand Qualitative Disclosures about Market Risk**

We invest our excess cashprimarily in U.S. Government securities, asset-backed securities and debtinstruments of financial institutions and corporations with strong creditratings. These instruments have various short-term maturities. We do notutilize derivative financial instruments, derivative commodity instruments orother market risk sensitive instruments, positions or transactions in anymaterial fashion. Accordingly, we believe that, while the instruments held aresubject to changes in the financial standing of the issuer of such securities,we are not subject to any material risks arising from changes in interestrates, foreign currency exchange rates, commodity prices, equity prices orother market changes that affect market risk sensitive investments. Our debt isnot subject to significant swings in valuation as interest rates on our debtare fixed. The fair value of our 2004 Notes and 2007 Notes at June 30, 2007 wasapproximately $273.3 million and $561.9 million, respectively. A hypothetical1% adverse move in interest rates along the entire interest rate yield curvewould not materially affect the fair value of our financial instruments thatare exposed to changes in interest rates.

**ITEM 4.****                                                     Controlsand Procedures**

As of June 30, 2007, an evaluation was performed underthe supervision and with the participation of our management, including ourPresident and Chief Executive Officer (referred to as our CEO) and our SeniorVice President, Finance and Chief Financial Officer (referred to as our CFO),of the effectiveness of the design and operation of our disclosure controls andprocedures. In designing and evaluating the disclosure controls and procedures,management recognizes that any controls and procedures, no matter how welldesigned and operated, can provide only reasonable assurance of achieving thedesired control objectives, and management necessarily is required to apply itsjudgment in evaluating the cost-benefit relationship of possible controls andprocedures. Based on that evaluation, our management, including our CEO andCFO, concluded that our disclosure controls and procedures were effective at areasonable level of assurance as of June 30, 2007.

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

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

**PART II.OTHER INFORMATION**

**1A.  Risk Factors**

**CAUTIONARY FACTORS THATMAY AFFECT FUTURE RESULTS**

The following setsforth cautionary factors that may affect our future results, includingclarifications to the cautionary factors included in our Annual Report on Form10-K for the fiscal year ended December 31, 2006 and our subsequent filingswith the Securities and Exchange Commission.

***We have a historyof operating losses, anticipate future losses and may never become profitable.***

We have experienced significant operating losses sinceour inception in 1987, including losses of $94.4 million for the six monthsended June 30, 2007, $218.9 million in 2006, $206.8 million in 2005 and $157.2million in 2004. As of June 30, 2007, we had an accumulated deficit ofapproximately $1.3 billion. The extent of our future losses and the timing ofpotential 

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profitability are uncertain, and we may never achieveprofitable operations. We have been engaged in discovering and developing drugssince inception, which has required, and will continue to require, significantresearch and development expenditures. We derived substantially all of ourrevenues prior to 2005 from development funding, fees and milestone paymentsunder collaborative agreements and from interest income. BYETTA and SYMLIN maynot be as commercially successful as we expect and we may not succeed incommercializing any of our other drug candidates. We may incur substantialoperating losses for at least the next few years 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. Theselosses, among other things, have had and will have an adverse effect on ourstockholders’ equity and working capital. Even if we become profitable, we maynot remain profitable.

***We began selling,marketing and distributing our first products, 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, wehad never sold or marketed our own products. Our ability to generate productrevenue for the next few years will depend solely on the success of theseproducts. The ability of BYETTA and SYMLIN to generate revenue at the levels weexpect will depend on many factors, including the following:

·   acceptance of these first-in-classmedicines by the medical community, patients receiving therapy and third partypayors;

·  a satisfactory efficacy and safety profile asdemonstrated in a broad patient population;

·  successfully expanding and sustainingmanufacturing capacity to meet demand;

·  the competitive landscape for approved anddeveloping therapies that will compete with the products; and

·  our ability to expand the indications forwhich 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 ourdrug candidates that may be approved by the FDA, will be subject to continualreview by the FDA, and we cannot assure you that newly discovered or developedsafety issues will not arise. With the use of any of our marketed drugs by awide patient population, serious adverse events may occur from time to timethat initially do not appear to relate to the drug itself, and only if thespecific event occurs with some regularity over a period of time does the drugbecome suspect as having a causal relationship to the adverse event. Any safetyissues could cause us to suspend or cease marketing of our approved products,subject us to substantial liabilities, and adversely affect our revenues andfinancial condition.

Moreover, the marketing of our approved products willbe subject to extensive regulatory requirements administered by the FDA andother regulatory bodies, including adverse event reporting requirements and theFDA’s general prohibition against promoting products for unapproved uses. Themanufacturing facilities for our approved products are also subject tocontinual review and periodic inspection and approval of manufacturingmodifications. Manufacturing facilities that manufacture drug products for theUnited States market, whether they are located inside or outside the UnitedStates, are subject to biennial inspections by the FDA and must comply with theFDA’s current good manufacturing practice, or cGMP, regulations. The FDAstringently applies regulatory standards for manufacturing. Failure to complywith any of these post-approval requirements can, among other things, result inwarning letters, product seizures, recalls, fines, injunctions, suspensions orrevocations of marketing licenses, operating restrictions and criminalprosecutions. Any of these enforcement actions, any unanticipated changes inexisting regulatory requirements or the adoption of new requirements, or anysafety issues that arise with any approved products, could adversely affect ourability to market products and generate revenues and thus adversely affect ourability to continue our business.

The manufacturers of our products and drug candidatesalso are subject to numerous federal, state, local and foreign laws relating tosuch matters as safe working conditions, manufacturing practices, environmentalprotection, fire hazard control and hazardous substance disposal. In thefuture, our manufacturers may incur significant costs to comply with those lawsand regulations, which could increase our manufacturing costs and reduce ourability to operate profitably.

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***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 ofnewly-approved drug products and drug candidates is a time-consuming andcomplex process. We currently have no manufacturing capabilities. In order tosuccessfully commercialize our products, including BYETTA and SYMLIN, andcontinue to develop our drug candidates, including exenatide LAR, we rely onvarious third parties to provide the necessary manufacturing.

There are a limited number of manufacturers thatoperate under the FDA’s cGMP regulations capable of manufacturing for us. Inaddition, there are a limited number of peptide suppliers, cartridge manufacturersand disposable pen manufacturers. If we are not able to arrange for andmaintain third-party manufacturing on commercially reasonable terms, or we loseone of our sole source suppliers used for our existing products or for somecomponents of our manufacturing processes for our products or drug candidates,we may not be able to market our products or complete development of our drugcandidates on a timely basis, if at all.

Reliance on third-party manufacturers limits ourability to control certain aspects of the manufacturing process and thereforeexposes us to a variety of significant risks, including, but not limited to,risks to our ability to commercialize our products or conduct clinical trials,risks of reliance on the third-party for regulatory compliance and qualityassurance, third-party refusal to supply on a long-term basis, the possibilityof breach of the manufacturing agreement by the third-party and the possibilityof termination 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 ofthese risks occur, our product supply will be interrupted resulting in lost ordelayed revenues and delayed clinical trials. Our reliance on third-partymanufacturers for the production of our two commercial products is described inmore detail below.

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

We rely on Bachem and Lonza Ltd. to manufacture ourcommercial supply of bulk pramlintide acetate, the active ingredient containedin SYMLIN. In addition, we rely on Baxter to manufacture the dosage form ofSYMLIN in vials. We have submitted an sNDA to the FDA seeking approval of adisposable pen for the delivery of SYMLIN in cartridges and, if approved, planto make the SYMLIN pen available to patients in the second half of 2007. Ifapproved, we would rely on Wockhardt for the dosage form of SYMLIN incartridges and Ypsomed AG to manufacture the components for the SYMLIN disposablepen. We would also rely on Hollister-Stier Laboratories LLC for the assembly ofthe SYMLIN pen.

If any of our existing or future manufacturers ceaseto manufacture or are otherwise unable to timely deliver sufficient quantitiesof BYETTA or SYMLIN, in either bulk or dosage form, or other productcomponents, including pens for the delivery of these products, it could disruptour ability to market our products, subject us to product shortages, reduceproduct sales and/or reduce our profit margins. Any delay or disruption in themanufacturing of bulk product, the dosage form of our products or other productcomponents, including pens for delivery of our products, could also harm ourreputation in the medical and patient communities. 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 to establish these new manufacturing facilitieswould be substantial.

Our manufacturers have not produced BYETTA or SYMLINfor commercial use for a sustained period of time. As such, additionalunforeseeable risks may be encountered as we, together with our manufacturers,continue to develop familiarity and experience with regard to manufacturing ourproducts. Furthermore, we and the other manufacturers used for our drugcandidates may not be able to produce supplies in commercial quantities if ourdrug candidates are approved. While we believe that business relations betweenus and our manufacturers are generally good, we cannot predict whether any ofthe manufacturers that we may use will meet our requirements for quality,quantity or timeliness for the manufacture of bulk exenatide or pramlintideacetate, dosage form of BYETTA or SYMLIN, or pens. Therefore, we may not beable to obtain necessary supplies of products with acceptable quality, onacceptable terms or in sufficient quantities, if at all. Our dependence onthird parties for the manufacture of products may also reduce our gross profitmargins and our ability to develop and deliver products in a timely manner.

In order to manufacture on a commercial scale theonce-weekly formulation of exenatide LAR, if it is approved by the FDA, we mustdesign, construct, commission and validate a new facility. We are dependent onAlkermes and Parsons to assist us in the design, construction and validation ofthe manufacturing facility. We have never established or operated a 

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manufacturing facility and cannot assure you that wewill be able to successfully establish or operate such a facility in a timelyor economical manner, or at all. In addition, we are dependent on Alkermes tosuccessfully develop and transfer to us its technology for manufacturing theonce-weekly formulation of exenatide LAR. Although we have completedmanufacturing scale-up to intermediate batch size, and together with Alkermeswe have completed engineering batches of commercial scale at a third partyfacility, we cannot be assured that a commercial scale manufacturing processfor exenatide LAR will be successfully developed and/or transferred to us in atimely or economical manner, or at all. In addition, we are dependent onAlkermes to supply us with commercial quantities of the polymer required tomanufacture exenatide LAR. We also will need to obtain sufficient supplies ofdiluents, solvents, devices, packaging and other components necessary forcommercial manufacture of exenatide LAR. If we, together with Alkermes, areunable to successfully develop a commercial scale manufacturing process andincrease our manufacturing scale to a commercially viable level, we may not beable to commercially launch exenatide LAR.

***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 healthinsurers and other third-party payors to contain or reduce the costs of healthcare through various means, including efforts to increase the amount of patientco-pay obligations, may limit our commercial opportunity. In the United States,we expect that there will continue to be a number of federal and stateproposals to implement government control over the pricing of prescriptionpharmaceuticals. In addition, increasing emphasis on managed care in the UnitedStates will continue to put pressure on the rate of adoption and pricing ofpharmaceutical products.

Significant uncertainty exists as to the reimbursementstatus of health care products. Third-party payors, including Medicare, arechallenging the prices charged for medical products and services. Governmentand other third-party payors increasingly are attempting to contain health carecosts by limiting both coverage and the level of reimbursement for new drugsand by refusing to provide coverage for uses of approved products for diseaseindications for which the FDA has not granted labeling approval. Third-partyinsurance coverage may not be available to patients for BYETTA and/or SYMLIN orany other products we discover and develop. If government and other third-partypayors do not provide adequate coverage and reimbursement levels for ourproducts, the market acceptance of these products may be reduced.

***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 developproducts and therapies for the treatment of diabetes and other metabolicdisorders. Our competitors include multinational pharmaceutical and chemicalcompanies, specialized biotechnology firms and universities and other researchinstitutions. A number of our largest competitors, including AstraZeneca,Bristol-Myers Squibb, GlaxoSmithKline, Lilly, Merck & Co., Novartis, NovoNordisk, Pfizer, Sanofi-Aventis and Takeda Pharmaceuticals, are pursuing thedevelopment or marketing of pharmaceuticals that target the same diseases thatwe are targeting, and it is possible that the number of companies seeking todevelop products and therapies for the treatment of diabetes, obesity and othermetabolic disorders will increase. Many of our competitors have substantiallygreater financial, technical, human and other resources than we do and may bebetter equipped to develop, manufacture and market technologically superiorproducts. In addition, many of these competitors have significantly greaterexperience than we do in undertaking preclinical testing and human clinicalstudies of new pharmaceutical products and in obtaining regulatory approvals ofhuman therapeutic products. Accordingly, our competitors may succeed inobtaining FDA approval for superior products. Furthermore, now that we havereceived FDA approval for BYETTA and SYMLIN, we may also be competing againstother companies with respect to our manufacturing and product distributionefficiency and sales and marketing capabilities, areas in which we have limitedor no experience as an organization.

Our target patient population for BYETTA includespeople with diabetes who have not achieved adequate glycemic control usingmetformin, sulfonylurea and/or a TZD, the three most common oral therapies fortype 2 diabetes. Our target population for SYMLIN is people with either type 2or type 1 diabetes whose therapy includes multiple mealtime insulin injectionsdaily. Other products are currently in development or exist in the market thatmay compete directly with the products that we are developing or marketing.Various other products are available or in development to treat type 2diabetes, including:

·  sulfonylureas;

·  metformin;

·  insulins, including injectable and inhaledversions;

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·  TZDs;

·  glinides;

·  DPP-IV inhibitors;

·  incretin/GLP-1 agonists;

·  CB-1 antagonists;

·  PPARs; and

·  alpha-glucosidase inhibitors.

In addition, several companies are developing variousapproaches to improve treatments for type 1 and type 2 diabetes. We cannotpredict whether our products will have sufficient advantages to cause healthcare professionals to adopt them over other products or that our products willoffer an economically feasible alternative to other products. Our productscould become obsolete before we recover expenses incurred in developing theseproducts.

***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 problemswith any of our completed, ongoing or planned clinical studies that will causeus to delay or suspend our ongoing and planned clinical studies, delay theanalysis of data from our completed or ongoing clinical studies or performadditional clinical studies prior to receiving necessary regulatory approvals.We also cannot predict whether we will encounter delays or an inability tocreate manufacturing processes for drug candidates that allow us to producedrug product in sufficient quantities to be economical, otherwise known asmanufacturing scale-up. If the results of our ongoing or planned clinicalstudies for our drug candidates are not available when we expect or if weencounter any delay in the analysis of data from our clinical studies or if weencounter delays in our ability to scale-up our manufacturing processes:

·  we may be unable to complete our developmentprograms for exenatide LAR or our obesity clinical trials;

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

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

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

In addition, Lilly can terminate our collaboration forthe development and commercialization of BYETTA and sustained-releaseformulations of exenatide at any time on 60 days notice.  Furthermore, if the FDA does not accept forfiling an NDA for a sustained-release formulation of exenatide by December 31,2007 Lilly may elect to convert potential future milestone payments that we mayreceive under our collaboration agreement into shares of our common stock forup to 60 days following December 31, 2007. The conversion price will equal theimmediately preceding twenty day average closing market price of the Company’scommon stock on the date of such election to convert. We currently do notexpect the NDA to be filed by this date.

Any of the following could delay the completion of ourongoing and planned clinical studies:

·  ongoing discussions with the FDA or comparableforeign authorities regarding the scope or design of our clinical trials;

·  delays in enrolling volunteers;

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

·  negative results of clinical studies;

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

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

·  serious side effects experienced by studyparticipants 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 LAR.***

We have entered into a collaborative arrangement withLilly, who currently markets diabetes therapies and is developing additionaldiabetes drug candidates, to commercialize BYETTA and further developsustained-release formulations of BYETTA, including exenatide LAR. We enteredinto this collaboration in order to:

·  fund some of our research and developmentactivities;

·  assist us in seeking and obtaining regulatoryapprovals; and

·  assist us in the successful commercializationof BYETTA and exenatide LAR.

In general, we cannot control the amount and timing ofresources that Lilly may devote to our collaboration. If Lilly fails to assistin the further development of exenatide LAR or the commercialization of BYETTA,or if Lilly’s efforts are not effective, our business may be negativelyaffected. We are relying on Lilly to obtain regulatory approvals outside theUnited States for BYETTA and exenatide LAR. Our collaboration with Lilly maynot continue or result in additional successfully commercialized drugs. Lillycan terminate our collaboration at any time upon 60 days notice. If Lillyceased funding and/or developing and commercializing BYETTA or exenatide LAR,we would have to seek additional sources for funding and may have to delay,reduce or eliminate one or more of our commercialization and developmentprograms for these compounds. We are also dependent on Alkermes for thedevelopment of exenatide LAR. 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.

***If our patents aredetermined to be unenforceable or if we are unable to obtain new patents basedon current patent applications or for future inventions, we may not be able toprevent 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 many issued UnitedStates patents and pending United States patent applications related to thedevelopment and commercialization of exenatide, including BYETTA and exenatideLAR, 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 LAR, but wedo not have a composition-of-matter patent covering exenatide. We also own orhold exclusive rights to various foreign patent applications that correspond toissued United States patents or pending United States patent applications.

Our success will depend in part on our ability toobtain patent protection for our products and drug candidates and technologiesboth in the United States and other countries. We cannot guarantee that anypatents will issue from any pending or future patent applications owned by orlicensed to us. Alternatively, a third party may successfully challenge orcircumvent our patents. Our rights under any issued patents may not provide uswith sufficient protection against competitive products or otherwise covercommercially valuable products or processes. In addition, because patentapplications in the United States are maintained in secrecy for eighteen monthsafter the filing of the applications, and publication of discoveries in thescientific or patent literature often lag behind actual discoveries, we cannotbe sure that the inventors of subject matter covered by our patents and patentapplications were the first to invent or the first to file patent applicationsfor these inventions. Third parties have filed, and in the future are likely tofile, patent applications on inventions similar to ours.  From time-to-time we have participated in,and in the future are likely to participate in, interference proceedingsdeclared by the United States Patent and Trademark Office to determine priorityof invention, which could result in a loss of our patent position. We may alsohave to participate in opposition proceedings against our patents in otherjurisdictions, such as Europe. Furthermore, we may not have identified all United States and foreignpatents that pose a risk of infringement.

We also rely upon licensing opportunities for some ofour technologies.  We cannot be certainthat 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 our licensed technology rights or if we arenot able to obtain a required license, we could be adversely affected.

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***We may be unable toobtain regulatory clearance to market our drug candidates in the United Statesor foreign countries on a timely basis, or at all.***

Our drug candidates are subject to extensivegovernment regulations related to development, clinical trials, manufacturingand commercialization. The process of obtaining FDA and other regulatoryapprovals is costly, time-consuming, uncertain and subject to unanticipateddelays. Regulatory authorities may refuse to approve an application forapproval of a drug candidate if they believe that applicable regulatorycriteria are not satisfied. Regulatory authorities may also require additionaltesting for safety and efficacy. Moreover, if the FDA grants regulatoryapproval of a product, the approval may be limited to specific indications orlimited with respect to its distribution, and expanded or additionalindications for approved drugs may not be approved, which could limit ourrevenues. Foreign regulatory authorities may apply similar limitations or mayrefuse to grant any approval. Unexpected changes to the FDA or foreignregulatory approval process could also delay or prevent the approval of our drugcandidates.

The data collected from our clinical trials may not besufficient to support approval of our drug candidates or additional or expandedindications by the FDA or any foreign regulatory authorities. Biotechnologystock prices have declined significantly in certain instances where companieshave failed to meet expectations with respect to FDA approval or the timing forFDA approval. If the FDA’s or any foreign regulatory authority’s response isdelayed or not favorable for any of our drug candidates, our stock price coulddecline significantly.

Moreover, manufacturing facilities operated by thethird-party manufacturers with whom we may contract to manufacture ourunapproved drug candidates may not pass an FDA or other regulatory authoritypreapproval inspection. Any failure or delay in obtaining these approvals couldprohibit or delay us or any of our business partners from marketing these drugcandidates.

Consequently, even if we believe that preclinical andclinical data are sufficient to support regulatory approval for our drugcandidates, the FDA and foreign regulatory authorities may not ultimatelyapprove our drug candidates for commercial sale in any jurisdiction. If ourdrug candidates are not approved, our ability to generate revenues may belimited and our business will be adversely affected.

***Litigationregarding patents and other proprietary rights may be expensive, cause delaysin bringing products to market and harm our ability to operate.***

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

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

·  the enforceability, validity or scope ofprotection offered by our patents.

Themanufacture, use or sale of any of our products or drug candidates may infringeon the patent rights of others. If we are unable to avoid infringement of thepatent rights of others, we may be required to seek a license, defend aninfringement action or challenge the validity of the patents in court. Patentlitigation is costly and time consuming. We may not have sufficient resourcesto bring these actions to a successful conclusion. In addition, if we do notobtain a license, develop or obtain non-infringing technology, fail tosuccessfully defend an infringement action or have infringing patents declaredinvalid, we may:

·  incur substantial monetary damages;

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

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

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

Upon approval of BYETTA and SYMLIN by the FDA, webecame subject to various health care “fraud and abuse” laws, such as theFederal False Claims Act, the federal anti-kickback statute and other state andfederal laws and regulations. Pharmaceutical companies have faced lawsuits andinvestigations pertaining to violations of these laws and regulations. Wecannot guarantee that measures that we have taken to prevent such violations,including our corporate compliance program, will protect us from futureviolations, lawsuits or investigations. If any such actions are institutedagainst us, and we are not successful in defending ourselves or asserting ourrights, those actions could have a significant impact on our business,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, especiallysince we launched our first products in 2005 and when the level of marketacceptance of these products may change rapidly. In addition, our customer baseis highly concentrated with four customers accounting for most of our net productsales. Fluctuations in the buying patterns of these customers, which may resultfrom seasonality, wholesaler buying decisions or other factors outside of ourcontrol, could significantly affect the level of our net sales on a period toperiod basis. As a result, it is reasonably likely that our financial resultswill fluctuate to an extent, that may not meet with market expectations andthat also may adversely affect our stock price. There are a number of otherfactors that could cause our financial results to fluctuate unexpectedly,including:

·  product sales;

·  cost of product sales;

·  achievement and timing of research anddevelopment milestones;

·  collaboration revenues;

·  cost and timing of clinical trials, regulatoryapprovals and product launches;

·  marketing and other expenses;

·  manufacturing or supply issues; and

·  potential acquisitions of businesses andtechnologies and our ability to successfully integrate any such acquisitionsinto our existing business.

***We may 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:

·  Commercialization of BYETTA and SYMLIN;

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

·  Development of exenatide LAR and otherpipeline candidates;

·  Executing our INTO strategy;

·  Our other research and development activities;

·  Other operating expenses;

·  Potential acquisitions or investments incomplementary technologies or businesses; and

·  Other general corporate purposes.

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

***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 liabilityrisks that are inherent in the testing, manufacturing and marketing of humantherapeutic products. Product liability claims could result in the impositionof substantial liability on us, a recall of products, or a change in theindications for which they may be used. We currently have limited product liabilityinsurance coverage. We cannot assure you that our insurance will provideadequate coverage against potential liabilities.

***Our ability toenter into and maintain third-party relationships is important to oursuccessful development and commercialization of BYETTA, SYMLIN and our otherdrug candidates and to our potential profitability.***

With respect to sales, marketing and distributionoutside the United States, we will be substantially dependent on Lilly foractivities relating to BYETTA and sustained-release formulations of BYETTA,including exenatide LAR. We believe that we will likely need to enter intomarketing and distribution arrangements with third parties for, or find acorporate partner who can provide support for, the development and commercializationof SYMLIN or our other drug candidates outside the United States. We may alsoenter into arrangements with third parties for the commercialization of SYMLINor any of our other drug candidates within the United States.

With respect to BYETTA and, if approved, exenatideLAR, Lilly is co-promoting within the United States. If Lilly ceasedcommercializing BYETTA or, if approved, exenatide LAR, for any reason, we wouldlikely need to either enter into a marketing and distribution arrangement witha third party for those products or significantly increase our internal salesand commercialization infrastructure.

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

***We have asignificant amount of indebtedness. We may not be able to make payments on ourindebtedness, and we may incur additional indebtedness in the future, whichcould adversely affect our operations.***

In April 2004, we issued $200 million of the 2004Notes and in June 2007, we issued $575 million of the 2007 Notes. Our abilityto make payments on our debt, including the 2004 and 2007 Notes, will depend onour future operating performance and ability to generate cash and may alsodepend on our ability to obtain additional debt or equity financing. Duringeach of the last five years, our operating cash flows were negative andinsufficient to cover our fixed charges. We may need to use our cash to payprincipal and interest on our debt, thereby reducing the funds available tofund our research and development programs, strategic initiatives and workingcapital requirements. Our ability to generate sufficient operating cash flow toservice our indebtedness, including the 2004 and 2007 notes, and 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. Our debt service obligations increase ourvulnerabilities to competitive pressures, because many of our competitors areless leveraged than we are. If we are unable to generate sufficient operatingcash flow to service our indebtedness and fund our operating requirements, wemay be forced to reduce our development programs, sell assets or seekadditional debt or equity financing, which may not be available to us onsatisfactory terms or at all. Our level of indebtedness may make us morevulnerable to economic or industry downturns. If we incur new indebtedness, therisks relating to our business and our ability to service our indebtedness willintensify.

***We may be requiredto redeem our convertible senior notes upon a designated event.***

Holders of the 2004 and 2007 Notes may require us toredeem all or any portion of their notes upon the occurrence of certaindesignated events which generally involve a change in control of our company.We may not have sufficient cash funds to redeem the notes upon a designatedevent. We may elect, subject to certain conditions, to pay the redemption pricefor the 2004 Notes in our common stock or a combination of cash and our commonstock. We may be unable to satisfy the 

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requisite conditions to enable us to pay some or allof the redemption price for the 2004 Notes in our common stock. In addition,although there are currently no restrictions on our ability to pay theredemption price under our existing debt agreements, future debt agreements mayprohibit us from repaying the redemption price of either of the notes in eithercash or common stock. If we are prohibited from redeeming the 2004 Notes or2007 Notes, we could seek consent from our lenders to redeem the notes. If weare unable to obtain their consent, we could attempt to refinance the notes. Ifwe were unable to obtain a consent or refinance, we would be prohibited fromredeeming the notes. If we were unable to redeem the notes upon a designatedevent, it would result in an event of default under the indentures governingthe notes. An event of default under the indentures could result in a furtherevent of default under our other then-existing debt. In addition, theoccurrence of a designated event may be an event of default under our otherdebt.

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

***Our future 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 executiveofficer, and the other principal members of our executive and scientific teams.The unexpected loss of the services of any of these persons might impede theachievement of our research, development and commercialization objectives.Recruiting and retaining qualified sales, marketing, regulatory, scientific andother personnel and consultants will also be critical to our success. We maynot be able to attract and retain these personnel and consultants on acceptableterms given the competition between numerous pharmaceutical and biotechnologycompanies. We do not maintain “key person” insurance on any of our employees.

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

In order to protect our proprietary technology andprocesses, we rely in part on confidentiality agreements with our corporatepartners, employees, consultants, manufacturers, outside scientific collaboratorsand sponsored researchers and other advisors. These agreements may noteffectively prevent disclosure of confidential information and may not providean adequate remedy in the event of unauthorized disclosure of confidentialinformation. In addition, others may independently discover our trade secretsand proprietary information.

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

***We are exposed topotential risks from recent legislation requiring companies to evaluateinternal control over financial reporting.***

The Sarbanes-Oxley Act requires that we reportannually on the effectiveness of our internal control over financial reporting.Among other things, we must perform systems and processes evaluation andtesting. We must also conduct an assessment of our internal control to allowmanagement to report on, and our independent registered public accounting firmto attest to, our assessment of our internal control over financial reporting,as required by Section 404 of the Sarbanes-Oxley Act. In connection with ourSection 404 compliance efforts, we have incurred or expended, and expect tocontinue to incur or expend, substantial accounting and other expenses andsignificant management time and resources. We have implemented certainremediation activities resulting from our ongoing assessment of internalcontrol over financial reporting. Our future 

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assessment, or the future assessments by ourindependent registered public accounting firm, may reveal material weaknessesin our internal control. If material weaknesses are identified in the future wewould be required to conclude that our internal control over financialreporting 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 andbylaws could make it more difficult for a third party to acquire us, even ifdoing so would benefit our stockholders. These provisions include:

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

·  allowing our board of directors to issue,without stockholder approval, up to 5.5 million shares of preferred stock withterms set by the board of directors;

·  limiting the ability of holders of ouroutstanding common stock to call a special meeting of our stockholders; and

·  preventing stockholders from taking actions bywritten consent and requiring all stockholder actions to be taken at a meetingof our stockholders.

Each of these provisions, as well as selectedprovisions of Delaware law, could discourage potential takeover attempts, couldadversely affect the trading price of our securities and could cause ourmanagement to become entrenched and hard to replace. In addition to provisionsin our charter documents and under Delaware law, an acquisition of our company couldbe made more difficult by our employee benefits plans and our employee changein control plan, under which, in connection with a change in control, stockoptions held by our employees may become vested and our officers may receiveseverance benefits. We also have implemented a stockholder rights plan, alsocalled a poison pill, which could make it uneconomical for a third party toacquire us on a hostile basis.

***Our executiveofficers, directors and major stockholders control approximately 61% of our commonstock.***

As of June 30, 2007, executive officers, directors andholders of 5% or more of our outstanding common stock, in the aggregate, ownedor controlled approximately 61% of our outstanding common stock. As a result,these stockholders are able to influence all matters requiring approval by ourstockholders, including the election of directors and the approval of corporatetransactions. This concentration of ownership may also delay, deter or preventa change in control of our company and may make some transactions moredifficult or impossible to complete without the support of these stockholders.

***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 ofshares of our common stock in the public market or the perception thatadditional sales could occur could cause the trading price of our common stockto drop. Likewise, the issuance of shares of common stock upon conversion ofour convertible notes or redemption of our convertible notes upon a designatedevent, or upon additional convertible debt or equity financings or other shareissuances by us, including shares issued in connection with potential futurestrategic alliances and the uncertain number of additional shares that we maybe required to issue under our agreements with Lilly, could adversely affectthe trading price of our common stock. Our convertible notes are currentlyconvertible into a total of up to 15.2 million shares. In addition, theexistence of these notes may encourage short selling of our common stock bymarket participants.

***Significantvolatility in the market price for our common stock could expose us tolitigation risk.***

The market prices for securities of biopharmaceuticaland biotechnology companies, including our common stock, have historically beenhighly volatile, and the market from time to time has experienced significantprice and volume fluctuations 

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that are unrelated to the quarterly operatingperformance of these biopharmaceutical and biotechnology companies. SinceJanuary 1, 2005, the high and low sales price of our common stock variedsignificantly, as shown in the following table:
|                                        | ** ** | **High**   | ** ** | **Low**    | ** ** |
|----------------------------------------|------------|------------|------------|------------|------------|
| **Year ending December 31, 2007**      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Third Quarter (through  July 20, 2007) |       | $          | 44.44      |       | $          | 40.86 |   |
| Second Quarter                         |       | $          | 46.93      |       | $          | 36.91 |   |
| First Quarter                          |       | $          | 42.45      |       | $          | 35.55 |   |
| **Year ended December 31, 2006**       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Fourth Quarter                         |       | $          | 48.48      |       | $          | 35.74 |   |
| Third Quarter                          |       | $          | 51.54      |       | $          | 40.76 |   |
| Second Quarter                         |       | $          | 49.37      |       | $          | 38.16 |   |
| First Quarter                          |       | $          | 49.08      |       | $          | 35.58 |   |
| **Year ended December 31, 2005**       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Fourth Quarter                         |       | $          | 42.36      |       | $          | 32.63 |   |
| Third Quarter                          |       | $          | 35.47      |       | $          | 18.50 |   |
| Second Quarter                         |       | $          | 21.73      |       | $          | 14.50 |   |
| First Quarter                          |       | $          | 24.95      |       | $          | 17.15 |   |

 

Given the uncertainty of our future funding, whetherBYETTA and SYMLIN will meet our expectations, and the regulatory approval ofour other drug candidates, we may continue to experience volatility in our stockprice for the foreseeable future. In addition, the following factors maysignificantly affect the market price of our common stock:

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

·  safetyissues with BYETTA, SYMLIN or our product candidates;

·  clinicalstudy results;

·  determinationsby regulatory authorities with respect to our drug candidates;

·  our ability to complete our Ohio manufacturingfacility and the commercial manufacturing process for exenatide LAR;

·  developmentsin our relationships with current or future collaborative partners;

·  ourability to successfully execute our commercialization strategies;

·  developments in our relationships withthird-party manufacturers of our products and other parties who provideservices 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 materiallyadversely affect the market price of our common stock, regardless of our actualoperating performance. Periods of volatility in the market price of our commonstock expose us to securities class-action litigation, and we may be the targetof such litigation as a result of market price volatility in the future.

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

Our Annual Meeting of Stockholders was held onMay 23, 2007.  At the AnnualMeeting, the stockholders of the Company (i) elected each of the personslisted below to serve as a director of Amylin until the next annual meeting oruntil his/her successor is elected, (ii) approved an amendment to ourAmended and Restated Certificate of Incorporation to increase the authorizednumber of shares of our common stock from 200,000,000 to 450,000,000, (iii) approvedan increase of 1,000,000 shares in the aggregate number of shares of our commonstock authorized for issuance under our 2001 Employee Stock Purchase Plan, and(iv) ratified the selection of Ernst & Young LLP as our independentauditors for the fiscal year ending December 31, 2007.

We had 131,415,212 shares of common stock outstandingand entitled to vote as of March 30, 2007, the record date for the AnnualMeeting.  At the Annual Meeting,119,670,203 shares of common stock were present in person or represented byproxy for the four proposals indicated above. The following sets forth detailed information regarding the results ofthe voting at the Annual Meeting:

Proposal 1: Election of Directors.
| Director                         | ** ** | **Votes in Favor** | ** ** | **Votes Withheld** | ** ** |
|----------------------------------|------------|------------------------------|------------|-------------------------|------------|
| Daniel M.  Bradbury              |       | 117,563,432                  |       | 2,106,771               |       |
| Joseph C.  Cook, Jr.        |       | 117,600,873                  |       | 2,069,330               |       |
| Steven R. Altman                 |       | 114,640,917                  |       | 5,029,286               |       |
| Teresa Beck                      |       | 117,856,469                  |       | 1,813,733               |       |
| Karin Eastham                    |       | 114,394,383                  |       | 5,275,819               |       |
| James R. Gavin  III, M.D., Ph. D |       | 102,043,279                  |       | 17,626,924              |       |
| Ginger L. Graham                 |       | 117,527,020                  |       | 2,143,182               |       |
| Howard E.  Greene, Jr.      |       | 117,645,186                  |       | 2,025,017               |       |
| Jay S. Skyler, M.D., MACP        |       | 116,902,439                  |       | 2,767,764               |       |
| Joseph P.  Sullivan              |       | 117,862,226                  |       | 1,807,977               |       |
| James N. Wilson                  |       | 114,630,099                  |       | 5,040,104               |       |

 

Proposal 2: Approve an amendment to our Amended and Restated Certificate ofIncorporation to increase the authorized number of shares of our common stockfrom 200,000,000 to 450,000,000.
| Votes in Favor: |   | 110,137,694 |   |
|-----------------|--------|-------------|--------|
| Votes Against:  |   | 9,100,049   |   |
| Abstentions:    |   | 432,460     |   |

 

Proposal 3: Approve an increase of 1,000,000 shares in the aggregate number ofshares of our common stock authorized for issuance under our 2001 EmployeeStock Purchase Plan.
| Votes in Favor:  |   | 95,590,182 |   |
|------------------|--------|------------|--------|
| Votes Against:   |   | 6,573,514  |   |
| Abstentions:     |   | 107,719    |   |
| Broker Non Vote: |   | 17,398,788 |   |

 

Proposal 4: Ratification of selection of Ernst & Young LLP as ourIndependent Auditors.
| Votes in Favor: |   | 119,123,498 |   |
|-----------------|--------|-------------|--------|
| Votes Against:  |   | 397,575     |   |
| Abstentions:    |   | 149,129     |   |

 

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**Item5.  Other Information**

On August 6, 2007,the Compensation and Human Resources Committee of our board of directorsapproved amendments to our Change in Control Employee Severance BenefitsPlan.  Under the amended plan, a copy ofwhich is attached hereto as exhibit 10.2 and incorporated herein by reference,or the Plan, each of our officers is entitled to receive severance payments andother benefits if his or her employment is terminated for certain reasons, orcovered terminations, during the period beginning ninety days prior to andending 13 months following the effective date of a change in control of thecompany.  The amended Plan clarifies thatcovered terminations include voluntary resignations as a result of a materialreduction in base salary and a material diminution of the officer’s authority,duties and responsibilities which, in the case of our chief executive officer,includes no longer reporting directly to our board of directors or the board ofdirectors of a successor company and in the case of our chief financialofficer, includes the occurrence of a material diminution in the authority,duties or responsibilities of the supervisor to whom the chief financialofficer is required to report.

The Planamendments modify the salary continuation benefit our officers would receiveupon a covered termination as follows: (i) chief executive officer and/or president increased to 36 months;(ii) other executive officers increased to 24 months; and (iii) non-executiveofficers would continue to receive 18 months. Further, the Plan amendments modify the lump sum bonus payments ourofficers would be entitled to receive which are equal to a specified percentageof their then-current annual target bonus as follows:  (i) chief executive officer and/or presidentincreased to 300%; (ii) other executive officers increased to 200%; and (iii)non-executive officers would continue to receive 100%.  Under the amended Plan, officers would alsoreceive reimbursement of COBRA payments for a period of 18 months.  The amended Plan also clarifies that allthen-outstanding unvested stock options awarded prior to being promoted to anofficer position and held by such officers at the time of termination wouldimmediately vest in full.

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**ITEM 6. Exhibits**

The followingexhibits are included as part of this report:
| Exhibit  Number | ** ** | **Description**                                                                                                                                                                                                                                                                                                    |
|-----------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|            |       |                                                                                                                                                                                                                                                                                                               |
| 3.1             |       | Amended and Restated Certificate of Incorporation  (filed as an exhibit to Registrant’s registration statement on Form S-1  (File No. 333-44195) or amendments thereto and incorporated herein by  reference)                                                                                       |
|            |       |                                                                                                                                                                                                                                                                                                               |
| 3.2             |       | Second Amended and Restated Bylaws (filed as an  exhibit to Registrant’s Quarterly Report on Form 10-Q for the quarter  ended June 30, 2001, and incorporated herein by reference)                                                                                                                  |
|            |       |                                                                                                                                                                                                                                                                                                               |
| 3.3             |       | Certificate of Amendment of Amended and Restated  Certificate of Incorporation (filed as an exhibit to Registrant’s Quarterly  Report on Form 10-Q for the quarter ended September 30, 2001 and  incorporated herein by reference)                                                                  |
|            |       |                                                                                                                                                                                                                                                                                                               |
| 3.4             |       | Certificate of Amendment of Amended and Restated  Certificate of Incorporation                                                                                                                                                                                                                                     |
|            |       |                                                                                                                                                                                                                                                                                                               |
| 4.1             |       | Specimen Common Stock Certificate (filed as an  exhibit to Registrant’s registration statement on Form S-1 (File No.  333-44195) or amendments thereto and incorporated herein by reference)                                                                                                             |
|            |       |                                                                                                                                                                                                                                                                                                               |
| 4.2             |       | Rights Agreement, dated as of June 17, 2002, between  the Registrant and American Stock Transfer & Trust Company (filed as  an exhibit to Registrant’s Current Report on Form 8-K filed on  June 18, 2002 and incorporated herein by reference)                                       |
|            |       |                                                                                                                                                                                                                                                                                                               |
| 4.3             |       | First Amendment to Rights Agreement dated  December 13, 2002, between the Registrant and American Stock  Transfer & Trust Company (filed as an exhibit to Registrant’s Annual  Report on Form 10-K for the fiscal year ended December 31, 2002 and  incorporated herein by reference) |
|            |       |                                                                                                                                                                                                                                                                                                               |
| 4.4             |       | Form of Rights Certificate (filed as an exhibit  to Registrant’s Current Report on Form 8-K filed on June 18, 2002  and incorporated herein by reference)                                                                                                                                      |
|            |       |                                                                                                                                                                                                                                                                                                               |
| 4.5             |       | Certificate of Designation of Series A Junior  Participating Preferred Stock (filed as an exhibit to Registrant’s Current Report  on Form 8-K filed on June 18, 2002 and incorporated herein by  reference)                                                                                    |
|            |       |                                                                                                                                                                                                                                                                                                               |
| 10.1            |       | Registrant’s Amended and Restated Employee Stock  Purchase Plan (filed as an exhibit to Registrant’s Current Report on Form 8-K  filed on May 29, 2007 and incorporated herein by reference)                                                                                                             |
|            |       |                                                                                                                                                                                                                                                                                                               |
| 10.2            |       | Registrant’s Amended and Restated Officer Change In  Control Severance Plan                                                                                                                                                                                                                                   |
|            |       |                                                                                                                                                                                                                                                                                                               |
| 31.1            |       | Certification of Principal Financial Officer  pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the  Securities Exchange Act of 1934, as amended                                                                                                                                                |
|            |       |                                                                                                                                                                                                                                                                                                               |
| 31.2            |       | Certification of Principal Executive Officer  pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the  Securities Exchange Act of 1934, as amended                                                                                                                                                |
|            |       |                                                                                                                                                                                                                                                                                                               |
| 32.1            |       | Certifications Pursuant to U.S.C. Section 1350,  as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                    |

 

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**SIGNATURE**

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.
|                      | Amylin Pharmaceuticals, Inc. |
|----------------------|-----------------------------------|
|                 |                              |   |   |   |
| Date: August 7, 2007 | By:                               | /S/ MARK G. FOLETTA |   |
|                 |                              | Mark G. Foletta, |   |
| * *             | * *                          | *Senior  Vice President, Finance and  Chief Financial Officer  (on behalf of the registrant and as the  registrant’s principal financial and accounting  officer)* | * * |

 

 

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