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

----

**FORM 10-Q**

----

**(MarkOne)**
| **x**                                              | ** ** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|----------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------|
| ** **                                         | ** ** | ** **                                                                                              |
| **For the  quarterly period ended March 31, 2007** |
| ** **                                         | ** ** | ** **                                                                                              |
| **OR**                                             |
|                                               |       |                                                                                                    |
| **o**                                              | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**Commission File Number: 0-19700**

**AMYLIN PHARMACEUTICALS, INC.**(Exactname of registrant as specified in its charter)

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

 

**(858) 552-2200**(Registrant’stelephone number, including area code)

**Not Applicable**(Former name, formeraddress and former fiscal year, if changed since last report)

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days.

Yes x     No o

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the Exchange Act (checkone):

| Large accelerated filer x | Accelerated  filer o | Non-accelerated  filer o |
|---------------------------|----------------------|--------------------------|

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act).

Yes o     No x

Indicatethe number of shares outstanding of each of the issuer’s classes of commonstock, as of the latest practicable date.
| Class                          | ** ** | **Outstanding on April 19, 2007** | ** ** |
|--------------------------------|------------|-------------------------------------------------------|------------|
| Common Stock,  $.001 par value |       | 131,549,478                                           |       |

 

 

----

**AMYLIN PHARMACEUTICALS, INC.**

**TABLE OF CONTENTS**

COVERPAGE
| TABLE OF CONTENTS |       |                                                                                                   |
|-------------------|------------|--------------------------------------------------------------------------------------------------------|
| ** **        | ** ** | ** **                                                                                             | ** ** | ** ** |
| ** **        |       | **PART I. FINANCIAL INFORMATION**                                                                 |   |   |
|              |       |                                                                                                   |   |   |
| ITEM 1.           |       | Financial  Statements                                                                                  |   |   |
|              |       |                                                                                                   |   |   |
|              |       | Consolidated  Balance Sheets as of March 31, 2007 (unaudited) and December 31, 2006               |   |   |
|              |       |                                                                                                   |   |   |
|              |       | Consolidated  Statements of Operations for the three months ended March 31, 2007 and 2006  (unaudited) |   |   |
|              |       |                                                                                                   |   |   |
|              |       | Consolidated  Statements of Cash Flows for the three months ended March 31, 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 6.           |       | Exhibits                                                                                               |   |   |
|              |       |                                                                                                   |   |   |
| SIGNATURE         |       |                                                                                                   |

 

2

----

**PART I.FINANCIAL INFORMATION**

**ITEM 1. Financial Statements**

**AMYLIN PHARMACEUTICALS, INC.**

**ConsolidatedBalance Sheets(in thousands, except per sharedata)**
| ** **                                                                                                                                                        | ** ** | **March 31,  2007** | ** ** | **December 31,  2006** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                        | ** ** | **(unaudited)**          | ** ** | **(Note 1)**           | ** ** |
| Assets                                                                                                                                                            |       |                     |       |                        |       |
| Current assets:                                                                                                                                                   |       |                     |       |                        |       |
| Cash and cash  equivalents                                                                                                                                        |       | $                        | 66,062     |                        | $          | 66,640 |   |
| Short-term  investments                                                                                                                                           |       | 568,461                  |       | 700,691                     |       |
| Accounts  receivable, net                                                                                                                                         |       | 83,672                   |       | 58,089                      |       |
| Inventories, net                                                                                                                                                  |       | 65,843                   |       | 59,299                      |       |
| Other current  assets                                                                                                                                             |       | 26,826                   |       | 22,098                      |       |
| Total current assets                                                                                                                                              |       | 810,864                  |       | 906,817                     |       |
|                                                                                                                                                              |       |                     |       |                        |       |
| Property, plant, and  equipment, net                                                                                                                              |       | 215,363                  |       | 146,779                     |       |
| Patents and other  assets, net                                                                                                                                    |       | 5,736                    |       | 2,870                       |       |
| Debt issuance costs,  net                                                                                                                                         |       | 3,692                    |       | 3,920                       |       |
|                                                                                                                                                              |       | $                        | 1,035,655  |                        | $          | 1,060,386 |   |
|                                                                                                                                                              |       |                     |       |                        |       |
| Liabilities and  Stockholders’ Equity                                                                                                                        |       |                     |       |                        |       |
|                                                                                                                                                              |       |                     |       |                        |       |
| Current liabilities:                                                                                                                                              |       |                     |       |                        |       |
| Accounts payable                                                                                                                                                  |       | $                        | 44,886     |                        | $          | 36,834 |   |
| Accrued  compensation                                                                                                                                             |       | 26,502                   |       | 39,251                      |       |
| Payable to  collaborative partner                                                                                                                                 |       | 55,332                   |       | 52,338                      |       |
| Other current  liabilities                                                                                                                                        |       | 64,105                   |       | 71,178                      |       |
| Current portion  of deferred revenue                                                                                                                              |       | 4,286                    |       | 4,286                       |       |
| Total current  liabilities                                                                                                                                        |       | 195,111                  |       | 203,887                     |       |
|                                                                                                                                                              |       |                     |       |                        |       |
| Other long-term  obligations, net of current portion                                                                                                              |       | 16,048                   |       | 13,836                      |       |
|                                                                                                                                                              |       |                     |       |                        |       |
| Deferred revenue, net  of current portion                                                                                                                         |       | 6,300                    |       | 7,372                       |       |
|                                                                                                                                                              |       |                     |       |                        |       |
| Convertible senior  notes                                                                                                                                         |       | 200,000                  |       | 200,000                     |       |
|                                                                                                                                                              |       |                     |       |                        |       |
| Commitments and  contingencies                                                                                                                                    |       |                     |       |                        |       |
|                                                                                                                                                              |       |                     |       |                        |       |
| Stockholders’ equity:                                                                                                                                        |       |                     |       |                        |       |
| Common stock,  $.001 par value, 200,000 shares authorized, 131,446 and 130,458 issued and  outstanding at March 31, 2007 and December 31, 2006, respectively |       | 131                      |       | 130                         |       |
| Additional  paid-in capital                                                                                                                                       |       | 1,889,274                |       | 1,857,194                   |       |
| Accumulated  deficit                                                                                                                                              |       | (1,272,598               | )          | (1,223,184                  | )          |
| Accumulated  other comprehensive income                                                                                                                           |       | 1,389                    |       | 1,151                       |       |
| Total stockholders’  equity                                                                                                                                  |       | 618,196                  |       | 635,291                     |       |
|                                                                                                                                                              |       | $                        | 1,035,655  |                        | $          | 1,060,386 |   |

 

See accompanying notes to consolidated financialstatements.

3

----

**AMYLIN PHARMACEUTICALS, INC.**

**Consolidated Statements of Operations(in thousands, exceptper share data)(unaudited)**
| ** **                                                      | ** ** | **Three months ended  March 31,** | ** ** |
|-----------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                      | ** ** | **2007**                                         | ** ** | **2006** | ** ** |
|                                                            |       |                                             |       |   |   |
| Revenues:                                                       |       |                                             |       |   |   |
| Net product sales                                               |       | $                                                | 162,003    |   | $ | 75,872 |   |
| Revenues under collaborative agreements                         |       | 9,975                                            |       | 6,474 |   |
| Total revenues                                                  |       | 171,978                                          |       | 82,346 |   |
|                                                            |       |                                             |       |   |   |
| Costs  and expenses:                                            |       |                                             |       |   |   |
| Cost of goods sold                                              |       | 15,210                                           |       | 9,744 |   |
| Selling, general and administrative                             |       | 87,787                                           |       | 59,863 |   |
| Research and development                                        |       | 59,564                                           |       | 51,774 |   |
| Collaborative profit sharing                                    |       | 66,947                                           |       | 29,970 |   |
| Total costs and expenses                                        |       | 229,508                                          |       | 151,351 |   |
|                                                            |       |                                             |       |   |   |
| Operating  loss                                                 |       | (57,530                                          | )          | (69,005 | ) |
|                                                            |       |                                             |       |   |   |
| Interest  and other income                                      |       | 9,404                                            |       | 3,786 |   |
| Interest  and other expense                                     |       | (1,288                                           | )          | (2,682 | ) |
| Net  loss                                                       |       | $                                                | (49,414    | ) | $ | (67,901 | ) |
|                                                            |       |                                             |       |   |   |
| Net  loss per share, basic and diluted                          |       | $                                                | (0.38      | ) | $ | (0.61 | ) |
|                                                            |       |                                             |       |   |   |
| Shares used in computing net loss per share, basic  and diluted |       | 131,054                                          |       | 111,285 |   |

 

See accompanying notes toconsolidated financial statements.

4

----

**AMYLIN PHARMACEUTICALS, INC.**

**ConsolidatedStatements of Cash Flows(in thousands)(unaudited)**
| ** **                                                                    | ** ** | **Three months ended  March 31,** | ** ** |
|-------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                    | ** ** | **2007**                                         | ** ** | **2006** | ** ** |
| Operating activities:                                                         |       |                                             |       |   |   |
| Net loss                                                                      |       | $                                                | (49,414    | ) | $ | (67,901 | ) |
| Adjustments to  reconcile net loss to net cash used for operating activities: |       |                                             |       |   |   |
| Depreciation and  amortization                                                |       | 4,177                                            |       | 3,278 |   |
| Stock-based  compensation                                                     |       | 13,317                                           |       | 10,878 |   |
| Shares  constributed as employer 401(k) match                                 |       | 5,819                                            |       | 2,811 |   |
| Other non-cash  expenses, net                                                 |       | 378                                              |       | 503 |   |
| Changes in  operating assets and liabilities:                                 |       |                                             |       |   |   |
| Accounts  receivable, net                                                     |       | (25,583                                          | )          | (15,168 | ) |
| Inventories, net                                                              |       | (6,544                                           | )          | (7,365 | ) |
| Other current  assets                                                         |       | (4,579                                           | )          | 572 |   |
| Accounts payable  and other current liabilities                               |       | 9,623                                            |       | 9,602 |   |
| Accrued  compensation                                                         |       | (12,749                                          | )          | (10,419 | ) |
| Payable to  collaborative partner                                             |       | 2,994                                            |       | 10,673 |   |
| Deferred revenue                                                              |       | (1,072                                           | )          | (1,072 | ) |
| Other operating  assets and liabilities, net                                  |       | 1,635                                            |       | 1,333 |   |
| Net cash flows  used for operating activities                                 |       | (61,998                                          | )          | (62,275 | ) |
|                                                                          |       |                                             |       |   |   |
| Investing activities:                                                         |       |                                             |       |   |   |
| Purchases of  short-term investments                                          |       | (24,694                                          | )          | (29,906 | ) |
| Sales and  maturities of short-term investments                               |       | 157,012                                          |       | 284,215 |   |
| Purchase of  property, plant, and equipment, net                              |       | (81,168                                          | )          | (10,268 | ) |
| Increase in  patents and other long-term assets                               |       | (2,536                                           | )          | (60 | ) |
| Net cash flows  provided by investing activities                              |       | 48,614                                           |       | 243,981 |   |
|                                                                          |       |                                             |       |   |   |
| Financing activities:                                                         |       |                                             |       |   |   |
| Issuance of  common stock, net                                                |       | 12,806                                           |       | 15,047 |   |
| Net cash flows  provided by financing activities                              |       | 12,806                                           |       | 15,047 |   |
|                                                                          |       |                                             |       |   |   |
| Increase (decrease) in  cash and cash equivalents                             |       | (578                                             | )          | 196,753 |   |
|                                                                          |       |                                             |       |   |   |
| Cash and cash  equivalents at beginning of period                             |       | 66,640                                           |       | 72,026 |   |
| Cash and cash  equivalents at end of period                                   |       | $                                                | 66,062     |   | $ | 268,779 |   |
|                                                                          |       |                                             |       |   |   |
| Supplemental disclosure  of cash flow information:                            |       |                                             |       |   |   |
| Property, plant, and equipment additions in other current liabilities         |       | $                                                | 12,575     |   | $ | — |   |

 

See accompanying notes to consolidated financialstatements.

5

----

**AMYLIN PHARMACEUTICALS, INC.**

**Notes toConsolidated Financial StatementsMarch 31, 2007(unaudited)**

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

# **Basis of Presentation**

The information contained herein has been prepared inaccordance with instructions for Form 10-Q and Article 10 ofRegulation S-X. The information as of March 31, 2007, and for the threemonths ended March 31, 2007, and March 31, 2006, are unaudited. In the opinionof management, the information reflects all adjustments necessary to make theresults of operations for the interim periods a fair statement of suchoperations. All such adjustments are of a normal recurring nature. Interimresults are not necessarily indicative of results for a full year. The balancesheet at December 31, 2006, has been derived from the audited consolidatedfinancial statements at that date but does not include all information andfootnotes required by accounting principles generally accepted in the UnitedStates for complete financial statements. For more complete financialinformation, these financial statements should be read in conjunction with theaudited consolidated financial statements included in our Annual Report on Form 10-Kfor the year ended December 31, 2006.

# **Revenue Recognition**

# ***Net Product Sales***

Amylin Pharmaceuticals, Inc. (referred to as theCompany 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.

The Company reports all United States BYETTA andSYMLIN product sales. With respect to BYETTA, the Company has determined thatit is qualified as a principal under the criteria set forth in Emerging IssuesTask Force (EITF), Issue 99-19, *“ReportingGross Revenue as a Principal vs. Net as an Agent,”* based on theCompany’s responsibilities under its contracts with Eli Lilly and Company, orLilly, which include manufacture of product for sale in the United States,responsibility for establishing pricing in the United States, distribution,ownership of product inventory and credit risk from customers, and accordinglythe Company records all United States products sales of BYETTA.

# ***Revenues Under CollaborativeAgreements***

Amounts received for upfront product and technologylicense fees under multiple-element arrangements are deferred and recognizedover the period of such services or performance if such arrangements requireon-going services or performance. Amounts received for milestones arerecognized upon achievement of the milestone, and the expiration of stockconversion rights, if any, associated with such payments. Amounts received forequalization of development expenses are recognized in the period in which therelated expenses are incurred. Any amounts received prior to satisfying these revenuerecognition criteria will be recorded as deferred revenue.

# ***Collaborative******Profit-Sharing***

Collaborative profit-sharing represents Lilly’s 50%share of the gross margin for Byettasales in the United States.

6

----

# ***Accounts Receivable***

Trade accounts receivable are recorded net ofallowances for cash discounts for prompt payment, doubtful accounts, productreturns and chargebacks. Allowances for rebate discounts and distribution feesare included in other current liabilities in the accompanying consolidated balancesheets. Estimates for allowances for doubtful accounts are determined based onexisting contractual obligations, historical payment patterns and individualcustomer circumstances.  The allowance for doubtful accounts was $0.2million at March 31, 2007 and December 31, 2006, respectively.

# **Per Share Data**

Basicand diluted net loss applicable to common stock per share is computed using theweighted average number of common shares outstanding during the period. Commonstock equivalents from stock options and warrants of 6.7 million and 8.1million for the three months ended March 31, 2007 and March 31, 2006,respectively, are excluded from the calculation of diluted loss per share forall periods presented because the effect is antidilutive. Common stock equivalentsfrom shares underlying our convertible senior notes of 5.8 million and 11.2million for the three months ended March 31, 2007 and March 31, 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 stockequivalents will be included in the weighted average shares computation andinterest expense related to the notes will be added back to net income tocalculate diluted earnings per share.

# **Accounting for Stock-BasedCompensation**

Effective January 1, 2006, the Company adopted thefair value method of accounting for stock-based compensation arrangements in accordancewith Financial Accounting Standards Board (FASB) revised Statement of FinancialAccounting Standards No. 123 (SFAS 123R), “*Share-BasedPayment,”*which establishes accounting for non-cash, stock-basedawards exchanged for employee services and requires companies to expense theestimated fair value of these awards over the requisite employee serviceperiod, which for the Company is generally the vesting period. The Companyadopted SFAS 123R using the modified prospective method. Under the modifiedprospective method, prior periods are not revised for comparative purposes. Thevaluation provisions of SFAS 123R apply to new awards and to awards that areoutstanding on the effective date and subsequently modified or cancelled.Estimated non-cash, compensation expense for awards outstanding at theeffective date will be recognized over the remaining service period using thecompensation cost calculated for pro-forma disclosure purposes under Statementof Financial Accounting Standards No. 123 (SFAS 123), *“Accounting for Stock-Based Compensation.”*

Total estimated stock-based compensation was asfollows (in thousands, except per share data):

|                                                          | ** ** | **Three months ended** | ** ** |
|----------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                               | ** ** | **March 31,**               | ** ** |
| ** **                                               | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| Selling, general and  administrative expenses            |       | $                                | 7,981      |   | $ | 5,839 |   |
| Research and  development expenses                       |       | 5,336                            |       | 5,039 |   |
|                                                     |       | $                                | 13,317     |   | $ | 10,878 |   |
|                                                     |       |                             |       |   |   |
| Net stock-based  compensation expense, per common share: |       |                             |       |   |   |
| Basic                                                    |       | $                                | 0.10       |   | $ | 0.10 |   |
| Diluted                                                  |       | $                                | 0.10       |   | $ | 0.10 |   |

 

The Company recorded $13.3 million and $10.9 millionof total non-cash, stock-based compensation expense during the three monthsended March 31, 2007 and March 31, 2006, respectively, related to stock-basedawards, consisting of stock options and employee stock purchase rights, duringthose periods.  At March 31, 2007, totalunrecognized estimated compensation cost related to non-vested share basedawards granted prior to that date was $144.5 million which is expected to berecognized over a weighted-average period of 2.9 years.

7

----

# **Consolidation**

The consolidated financial statements include theaccounts of the Company and its wholly owned subsidiaries, Amylin EuropeLimited, Amylin Puerto Rico LLC and Amylin Ohio LLC. All significantintercompany transactions and balances have been eliminated in consolidation.

# **Income Taxes**

In July 2006, the FASB issued Interpretation No. 48(FIN 48) “*Accounting for Uncertainty in Income Taxes*- *An Interpretation of FASB Statement No. 109.”*FIN48 clarifies the accounting for uncertainty in income taxes recognized in anentity’s financial statements in accordance with FASB Statement No. 109, “*Accounting for Income Taxes*” and prescribes a recognitionthreshold and measurement attributes for financial statement disclosure of taxpositions taken or expected to be taken on a tax return.  Under FIN 48, the impact of an uncertainincome tax position on the income tax return must be recognized at the largestamount that is more-likely-than-not to be sustained upon audit by the relevanttaxing authority.  An uncertain incometax position will not be recognized if it has less than a 50% likelihood ofbeing sustained.  Additionally, FIN 48provides guidance on derecognition, classification, interest and penalties,accounting in interim periods, disclosure and transition.  

The Company adopted the provisions of FIN 48 onJanuary 1, 2007.  No unrecognized taxbenefits were recorded as of the date of adoption.  As a result of the implementation of FIN 48,the Company recognized a $23.6 million increase in unrecognized tax benefitswhich was accounted for as a reduction to deferred tax assets (primarilyrelated to reductions in tax credits) and a corresponding reduction to thevaluation allowance, resulting in no net effect on accumulated defecit.

The balance of unrecognized tax benefits at January 1,2007 of $23.6 million are tax benefits that, if recognized, would not affectthe Company’s effective tax rate since they are subject to a full valuationallowance.  The Company has not recognizedany accrued interest and penalties related to unrecognized tax benefits duringthe years ended December 31, 2006 and 2005. The Company is subject to taxation in the US 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. 

# **Recently Issued Accounting Pronouncements**

In September 2006, the FASB issued Statement ofFinancial Accounting Standards No. 157 (SFAS 157)  “*Fair Value Measurements*.”SFAS 157 establishes a framework for measuring fair value in generally acceptedaccounting principles, and expands disclosures about fair valuemeasurements.  The provisions of SFAS 157are effective for the Company beginning January 1, 2007.  The adoption of SFAS 157 did not have amaterial impact on the Company’s financial statements.

In February 2007, the FASB issued Statement ofFinancial Accounting Standards No. 159 (SFAS 159) “*The FairValue Option for Financial Assets and Financial Liabilities*.”  SFAS 159 permits entities to choose tomeasure many financial instruments and certain other items at fair value.  The provisions of SFAS 159 will be effectivefor the Company beginning January 1, 2008. The Company is in the process of determining the effect, if any, theadoption of SFAS 159 will have on its financial statements.

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

The Company’s investments,consisting principally of debt securities are classified as available-for-saleand are stated at fair value. Unrealized holding gains or losses on these securities are included in othercomprehensive income. The amortized cost of debt securities in this category isadjusted for amortization of premiums and accretion of discounts to maturity.Such amortization is included in interest income. Realized gains and losses anddeclines in value judged to be other-than-temporary (of which there have beennone to date) on available-for-sale securities are included in interest income.The cost of securities sold is based on the specific-identification method.

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

Inventories are stated atthe lower of cost (FIFO) or market and net of a valuation allowance forpotential excess and/or obsolete material of $2.0 million and $0.4 million atMarch 31, 2007 and December 31, 2006, respectively. Raw materials consists ofbulk drug material, work-in-process primarily consists of in-process SYMLINvials and in-process BYETTA cartridges, and finished goods consists of finishedSYMLIN drug product in vials for syringe administration and BYETTA drug productin cartridges for pen administration.

8

----

Inventoriesconsist of the following (in thousands):

|                 | ** ** | **March 31,  2007** | ** ** | **December 31,  2006** | ** ** |
|-----------------|------------|--------------------------|------------|-----------------------------|------------|
| Raw  materials  |       | $                        | 40,171     |                        | $          | 37,564 |   |
| Work-in-process |       | 12,008                   |       | 12,589                      |       |
| Finished  goods |       | 13,664                   |       | 9,146                       |       |
|            |       | $                        | 65,843     |                        | $          | 59,299 |   |

 

**4.****              Other CurrentLiabilities**

Other current liabilitiesconsist of the following (in thousands):

|                                                    | ** ** | **March 31, 2007** | ** ** | **December 31,  2006** | ** ** |
|----------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| Accrued property,  plant, and equipment additions  |       | $                       | 12,575     |                        | $          | 21,219 |   |
| Accrued expenses                                   |       | 17,425                  |       | 17,670                      |       |
| Accrued contract research and development expenses |       | 14,550                  |       | 11,635                      |       |
| Accrued sales  allowances                          |       | 19,555                  |       | 20,654                      |       |
|                                               |       | $                       | 64,105     |                        | $          | 71,178 |   |

 

**5.****              ComprehensiveLoss**

Statement of Financial Accounting Standards No. 130 (SFAS 130), “*Reporting Comprehensive Income,”* requires reporting and displaying comprehensive income (loss) andits components, which, for the Company, includes net loss and unrealized gainsand losses on investments. In accordance with SFAS 130, the accumulated balanceof other comprehensive income (loss) is disclosed as a separate component ofstockholders’ equity. For the three months ended March 31, 2007, and March 31,2006, the comprehensive loss consisted of (in thousands):

|                                 | ** ** | **Three months ended March 31,** | ** ** |
|---------------------------------|------------|------------------------------------------------------|------------|
| ** **                      | ** ** | **2007**                                             | ** ** | **2006** | ** ** |
| Net loss                        |       | $                                                    | (49,414    | ) | $ | (67,901 | ) |
| Other  comprehensive loss:      |       |                                                 |       |   |   |
| Unrealized gain  on investments |       | 238                                                  |       | 988 |   |
| Comprehensive loss              |       | $                                                    | (49,176    | ) | $ | (66,913 | ) |

 

**6.****              Convertible Senior Notes**

In April 2004, the Company issued 2.5%convertible senior notes, referred to as the 2004 Notes, which have anaggregate principal amount of $200 million, and are due April 15, 2011, ina private placement. The 2004 Notes have been registered under the SecuritiesAct of 1933, as amended, to permit registered resale of the 2004 Notes and ofthe common stock issuable upon conversion of the 2004 Notes. The 2004 Notesbear interest at 2.5% per year, payable in cash semi-annually and areconvertible into a total of up to 5.8 million shares of common stock at aconversion price of $34.35 per share, subject to customary adjustments forstock dividends and other dilutive transactions. The Company may not redeem the2004 Notes prior to maturity.

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

**7**.              **SubsequentEvent**

On April 16, 2007, Lilly completed the first EuropeanUnion launch of BYETTA in Germany.  Inconnection with this launch, the Company earned a $10.0 million milestonepayment from Lilly.

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

Except for the historical information herein, thediscussion in this quarterly report on Form 10-Q contains forward-lookingstatements that involve risks and uncertainties. These statements includeprojections about our accounting and finances, plans and objectives for thefuture, future operating and economic performance and other statementsregarding 

9

----

futureperformance. These statements are not guarantees of future performance orevents. Our actual results may differ materially from those discussed here.Factors that could cause or contribute to differences in our actual resultsinclude those discussed under the caption “Cautionary Factors That May AffectFuture Results,” as well as those discussed elsewhere in this quarterly reporton Form 10-Q or in our other public disclosures. You should consider carefullythose cautionary factors, together with all of the other information included inthis quarterly report on Form 10-Q. Each of the cautionary factors, eitheralone or taken together, could adversely affect our business, operating resultsand financial condition, as well as adversely affect the value of an investmentin our common stock. There may be additional risks that we are not presentlyaware of or that we currently believe are immaterial which could also impairour business and financial position. We disclaim any obligation to update theseforward-looking statements.

**Overview**

Amylin Pharmaceuticals, Inc. is a biopharmaceuticalcompany committed to improving the lives of people with diabetes, obesity andother diseases through the discovery, development and commercialization ofinnovative medicines. We have developed and gained approval for twofirst-in-class medicines to treat diabetes, BYETTA® (exenatide) injection and SYMLIN® (pramlintide acetate) injection, both of whichwere commercially launched in the United States during the second quarter of2005.  BYETTA 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.  We expect Lilly to continue tolaunch BYETTA in additional EU member states during 2007.** **We also have two late-stageprograms in development and multiple early-stage programs.

BYETTA is the first and only approved medicine in anew class of compounds called incretin mimetics. We began selling BYETTA in theUnited States in June 2005.  BYETTAis approved in the United States for the treatment of patients with type 2diabetes who have not achieved adequate glycemic control and are takingmetformin, sulfonylurea and/or a thiazolidinedone, or TZD, the three mostcommon oral therapies for type 2 diabetes. Net product sales of BYETTA were $146.5 million and $68.3 million forthe three months ended March 31, 2007 and March 31, 2006, respectively.

We have an agreement with Lilly for the globaldevelopment and commercialization of exenatide. This agreement includes BYETTAand any long-acting release formulations of exenatide such as exenatide LAR.Under the terms of the agreement, operating profits from products sold in theUnited States are shared equally between Lilly and us.  In October 2006, we and Lilly amended the agreement, which became effective January1, 2007.  Prior to amending theagreement, operating profits for exenatide, including any long-acting releaseformulations, outside of the United States were shared 80% to Lilly and 20% tous.  The amended agreement provides fortiered royalties payable to us by Lilly based upon the annual gross margin forall exenatide product sales, including any long-acting release formulations,outside of the United States.  Royaltypayments for exenatide product sales outside of the United States will commenceafter a one-time cumulative gross margin threshold amount has been met.  We expect royalty payments to commence in2009.  In addition, effective January 1,2007, Lilly became 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.

SYMLIN is the first and only approved medicine in anew class of compounds called amylinomimetics. We began selling SYMLIN in theUnited States in April 2005 for the treatment of patients with either type1 or type 2 diabetes who are treated with mealtime insulin but who have notachieved adequate glycemic control.  Netproduct sales of SYMLIN were $15.5 million and $7.6 million for the threemonths ended March 31, 2007 and March 31, 2006, respectively.

We have a field force of approximately 570 peoplededicated to marketing BYETTA and SYMLIN in the United States.  Our field force includes our specialty andprimary care sales forces, a managed care and government affairs organization,a medical science organization and diabetes care specialists.  Lilly co-promotes BYETTA in the United Statesand has primary responsibility for developing and commercializing BYETTA outsideof the United States, including any long-acting release formulations.

In addition to our marketed products, we have severalprograms in development, including late-stage programs****for diabetes and obesity.

In diabetes, we are working with Lilly and Alkermes,Inc., or Alkermes, to develop exenatide LAR to enable once-weeklyadministration of exenatide for the treatment of type 2 diabetes.   We are currently conducting a clinical studyevaluating exenatide LAR in patients with type 2 diabetes that is designed togenerate the type of safety and efficacy data that could form the basis of aNew Drug Application, or an NDA, submission to the United States Food and DrugAdministration, 

10

----

orFDA.  In addition, we and Lilly areworking with Alkermes and Parsons, Inc. on the construction of a manufacturingfacility for exenatide LAR in Ohio.  Weexpect to complete the commercial scale manufacturing process in this facilityin the second half of 2008.

We have multiple early stage programs for diabetes andobesity.  We have a number of compoundsin development for the potential treatment of obesity which are part of abroader program which we refer to as INTO: Integrated Neurohormonal Therapiesfor Obesity.  As part of this program, weare currently conducting several clinical trials of our drug candidates, orcombinations of our drug candidates. We also maintain an active discoveryresearch program focused on novel peptide therapeutics.  We are actively seeking to in-license additionaldrug candidates.  We have partnered with PyschoGenics, Inc., toform Psylin Neurosciences, Inc., a company that will focus on the discovery anddevelopment of peptide hormones for treatment of psychiatric indications.

Since our inception in September 1987, we havedevoted substantially all of our resources to our research and developmentprograms and, more recently, to the commercialization of our products. All ofour revenues prior to May 2005 were derived from fees and expensereimbursements under our BYETTA collaboration agreement with Lilly, previousSYMLIN collaborative agreements and previous co-promotion agreements. Duringthe second quarter of 2005, we began to derive revenues from product sales ofBYETTA and SYMLIN. We have beenunprofitable since inception and may incur additional operating losses for atleast the next few years. At March 31, 2007, our accumulateddeficit was approximately $1.3 billion.

At March 31, 2007, we had approximately $634.5 millionin cash, cash equivalents and short-term investments.  We may not generate positive operating cashflows for at least the next few years andaccordingly, we may need to raise additional funds from outside sources. Referto the discussions under the headings “Liquidity and Capital Resources” belowand “Cautionary Factors That May Affect Future Results” in Part II, Item1A for further discussion regarding our anticipated future capitalrequirements.

**Applicationof Critical Accounting Policies**

Our discussion and analysis of financial condition andresults of operations are based upon our consolidated financial statements,which have been prepared in accordance with U.S. generally accepted accountingprinciples. The preparation of these financial statements requires us to makesignificant estimates and judgments that affect the reported amounts of assets,liabilities, revenues and expenses, and related disclosures. On an on-goingbasis, we evaluate our estimates, and actual results, however, may differsignificantly from our estimates.

The financial information as of March 31, 2007, shouldbe read in conjunction with the financial statements for the year endedDecember 31, 2006 contained in our Form 10-K filed on February 26, 2007.

For a discussion of the Company’s critical accountingpolicies, see “Item 7. Management’s Discussion and Analysis of FinancialCondition and Reuslts of Operations” in our Form 10-K filed on February 26,2007.

**Results of Operations**

**Three Months Ended March 31, 2007**

# ***Net Product Sales***

Net product sales for the quarter ended March 31, 2007and March 31, 2006, were $162.0 million and $75.9 million, respectively, andconsisted of shipments of BYETTA and SYMLIN, less allowances for productreturns, rebates and wholesaler chargebacks, wholesaler discounts, andprescription vouchers. 

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

|            | ** ** | **Three months  ended March 31,** | ** ** |
|------------|------------|--------------------------------------------------|------------|
| ** ** | ** ** | **2007**                                         | ** ** | **2006** | ** ** |
| BYETTA     |       | $                                                | 146.5      |   | $ | 68.3 |   |
| SYMLIN     |       | 15.5                                             |       | 7.6 |   |
|       |       | $                                                | 162.0      |   | $ | 75.9 |   |

 

The increases in net product sales for BYETTA andSYMLIN for the quarter ended March 31, 2007 as compared to the same period in2006, primarily reflect continued growth in patient use.

11

----

***Revenues UnderCollaborative Agreements***

Revenues undercollaborative agreements for the quarter ended March 31, 2007, were $10.0****million compared to $6.5 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 $3.5 million increase in revenues under collaborative agreements inthe current quarter compared to the same period in 2006 primarily reflectshigher cost-sharing payments due to increased development expenses forexenatide LAR.

The following table provides information regardingrevenues under collaborative agreements (in millions):
|                                         | ** ** | **Three months ended  March 31,** | ** ** |
|-----------------------------------------|------------|--------------------------------------------------|------------|
| ** **                              | ** ** | **2007**                                         | ** ** | **2006** | ** ** |
| Amortization of up-front  payments      |       | $                                                | 1.1        |   | $ | 1.1 |   |
| Cost-sharing and  co-promotion payments |       | 8.9                                              |       | 5.4 |   |
|                                    |       | $                                                | 10.0       |   | $ | 6.5 |   |

 

In future periods, revenuesunder collaborative agreements will consist of ongoing cost-sharing paymentsfrom Lilly to equalize development costs, possible future milestone paymentsand the continued amortization of the $30 million portion of the up-frontpayment received from Lilly upon signing of the collaboration agreementagreement in 2002. The amount of cost-sharing revenue recorded will bedependent on the timing, extent and relative proportion of total developmentcosts for the exenatide LAR and BYETTA development programs incurred by us andby Lilly. The receipt and recognition as revenue of future milestone paymentsis subject to the achievement of performance requirements underlying suchmilestone payments and, for certain development milestones, the expiration ofstock conversion rights associated with such payments.

# ***Cost of Goods Sold***

Cost of goods sold for the quarters ended March 31,2007 and March 31, 2006, was $15.2 million, representing a gross margin of 91%,and $9.7 million, representing a gross margin of 87%, respectively, and iscomprised primarily of manufacturing costs associated with BYETTA and SYMLINsales during the period.  The improvementin gross margin for the quarter ended March 31, 2007, compared to the sameperiod in 2006 primarily reflects a reduction in the impact of sales allowancesand to a lesser extent lower unit costs for BYETTA resulting from higherproduction volumes and the impact of price increases. Quarterly fluctuations ingross margins may be influenced by product mix, pricing, and the level of salesallowances.

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

Selling, general and administrative expenses increasedto $87.8 million for the three months ended March 31, 2007, from $59.9 millionfor the same period in 2006. The increase primarily reflects expensesassociated with the recent expansion of the Company’s sales force, increasedpromotional expenses for BYETTA and SYMLIN and increased businessinfrastructure to support the Company’s growth.

Selling general and administrative expenses areexpected to continue to increase during the remainder of 2007, which reflectsthe planned expansion of our manufacturing capabilities in support of ourfacility in Ohio, increases in business infrastructure to support our growthand additional marketing activities.

***Research and Development Expenses***

Our research and development expenses are comprised ofsalaries, benefits and stock-based compensation, license fees, costs paid tothird-party contractors to perform research, conduct clinical trials, anddevelop and manufacture drug materials and delivery devices, and a portion ofour facilities costs. We charge direct internal and external program costs tothe respective development programs. We also incur indirect costs that are notallocated to specific programs because such costs benefit multiple developmentprograms and allow us to increase our pharmaceutical development capabilities.These consist primarily of facilities costs and other internal shared resourcesrelated to the development and maintenance of systems and processes applicableto all of our programs.

Our research and development efforts are focused ondiabetes, obesity, and other diseases. We also maintain an active discovery research program.  In diabetes, we have two approved products,BYETTA and SYMLIN, and we are developing exenatide LAR, a long acting releaseformulation of exenatide, the active pharmaceutical ingredient in BYETTA.  In obesity, we have a number of compounds indevelopment for the potential treatment of obesity which are part of a broaderprogram which 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.

12

----

Thefollowing table provides information regarding our research and developmentexpenses for our major projects (in millions):
|                                   | ** ** | **Three months ended March 31,** | ** ** |
|-----------------------------------|------------|------------------------------------------------------|------------|
| ** **                        | ** ** | **2007**                                             | ** ** | **2006** | ** ** | **Increase  (Decrease)** | ** ** |
| Diabetes                          |       | $                                                    | 27.4       |   | $ | 20.5 |   | $ | 6.9 |   |
| Obesity                           |       | 13.9                                                 |       | 15.2 |   | (1.3 | ) |
| Research and early-stage programs |       | 9.7                                                  |       | 8.9 |   | 0.8 |   |
| Indirect costs                    |       | 8.6                                                  |       | 7.2 |   | 1.4 |   |
|                              |       | $                                                    | 59.6       |   | $ | 51.8 |   | $ | 7.8 |   |

 

The $7.8 million increase in research and developmentexpenses for the quarter ended March 31, 2007 as compared to the same period in2006 primarily reflects increased expenses of $6.9 million for our diabetesprograms. This increase primarily reflects increased expenses for exenatide LARassociated with manufacturing scale-up and the on-going clinical studydiscussed above.

***CollaborativeProfit Sharing***

Collaborative profit sharing was $66.9 million  and $30.0 million for the three months endedMarch 31, 2007 and March 31, 2006, respectively, and consists of Lilly’s 50%share of the gross margin for BYETTA in the United States.

# ***Interest and Other Income andExpense***

Interest and other income consist primarily ofinterest income from investment of cash and other investments. Interest andother income increased to $9.4 million for the three months ended March 31,2007, from $3.8 million for the same period in 2006. The increase primarilyreflects higher interest rates and higher average cash balances available forinvestment during the three months ended March 31, 2007 as compared to the sameperiod in 2006.

Interest and other expenseconsist primarily of interest expense resulting from our long-term debtobligations. Interest expense in the three months ended March 31, 2007 consistsof interest on our $200 million of outstanding convertible senior notes and theamortization of associated debt issuance costs. Interest and otherexpense was $1.3 million and $2.7 million for the three months ended March 31,2007 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.

# ***Net Loss***

Our net loss for the three months ended March 31, 2007was $49.4 million compared to a net loss of $67.9 million for the same periodin 2006. The decrease in net loss primarily reflects the increased net productsales, partially offset by the increased selling, general and administrativeexpenses and increased research and development expenses and increasedcollaborative profit-sharing discussed above.

We may incur operating losses for the next fewyears.  Our ability to reachprofitability in the future will be heavily dependent upon the amount ofproduct sales that we achieve for BYETTA and SYMLIN. In addition, ongoing andpotential increased expenses associated with the continued commercialization ofBYETTA and SYMLIN, and expenses associated with the continuation and potentialexpansion of our research and development programs, including our ongoinglate-stage programs and our early-stage development programs, and relatedsupport infrastructure may impact our ability to reach profitability in thefuture. Our operating results may fluctuate from quarter to quarter as a resultof differences in the timing of expenses incurred and revenues recognized.

# ***Liquidity and Capital Resources***

Since our inception, we have financed our operationsprimarily through public sales and private placements of our common and preferredstock, debt financings, payments received pursuant to our BYETTA collaborationwith Lilly, reimbursement of SYMLIN development expenses through earliercollaboration agreements, and since the second quarter of 2005, through productsales of BYETTA and SYMLIN.

At March 31, 2007, we had $634.5 million in cash, cashequivalents and short-term investments, compared to $767.3 million at December31, 2006.

13

----

We used cash of $62.0 million and $62.3 million forour operating activities in the three months ended March 31, 2007 and March 31,2006, respectively.   Our cash used foroperating activities in the three months ended March 31, 2007 included uses ofcash due to increases in current assets, including increases in accountsreceivable and inventories, of $25.6 million and $6.5 million,respectively.  The increase in accountsreceivable reflects growth in our net product sales, and the increase ininventories reflects increased inventory purchases to support this growth. Ourcash used for operating activities in 2006 included sources of cash forincreases payable to our collaborative partner of $3.0 million.  The increase in payable to collaborativepartner, which represents Lilly’s 50% share of BYETTA gross margins in theUnited States, primarily reflects increased net product sales for BYETTA.

Our investing activities provided cash of $48.6million and $244.0 million in the three months ended March 31, 2007 and March31, 2006, respectively. Investing activities in both quarters consistedprimarily of purchases and sales of short-term investments and purchases ofproperty, plant, and equipment.  Purchases of property, plant, and equipment increased to $81.2 millionin the three months ended March 31, 2007 from $10.3 million for the threemonths ended March 31, 2006.  Theincrease during the first quarter 2007 primarily reflects costs associated withour manufacturing facility for exenatide LAR and, to a lesser extent, purchasesof tenant improvements, office equipment and scientific equipment to supportour growth.  We expect that our capitalexpenditures will continue to significantly increase in future periods dueprimarily to costs associated with ongoing construction of our manufacturingfacility for exenatide LAR.  We expect tocomplete the commercial-scale manufacturing process in the second half of2008.  Through March 31, 2007, we hadincurred $135 million associated with the construction of this facility.Previously we estimated a cost of up to approximately $180 million for theinitial build-out, however we are planning to expand this project, which wouldincrease our expenditures from $180 million to an approximate total of $400million over the next three years. The potential expansion of this project isdependent upon on the continued progress of exenatide LAR through thedevelopment 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.

Financing activities provided cash of $12.8 millionand $15.0 million in the three months ended March 31, 2007 and March 31, 2006,respectively. Financing activities in the first quarter 2007 represent proceedsfrom the exercise of stock options and proceeds from our employee stockpurchase plan.

At March 31, 2007, we had $200 million in aggregateprincipal amount of our 2.5% convertible senior notes outstanding. Our 2.5%convertible senior notes are currently convertible into a total of up to 5.8million shares of our common stock at approximately $34.35 per share. Our 2.5%convertible senior notes are not redeemable at our option.

The following table summarizesour contractual obligations and maturity dates as of March 31, 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                      |       | $                                         | 200,000    |   | $ | — |   | $ | — |   | $ | 200,000 |   | $ | — |   |
| Interest  payments on long-term debt |       | 22,500                                    |       | 5,000 |   | 10,000 |   | 7,500 |   | — |   |
| Inventory  purchase obligations(1)   |       | 149,266                                   |       | 82,316 |   | 54,480 |   | 12,470 |   | — |   |
| Operating  lease obligations         |       | 136,556                                   |       | 15,772 |   | 31,323 |   | 28,203 |   | 61,258 |   |
| Total(2)                             |       | $                                         | 508,322    |   | $ | 103,088 |   | $ | 95,803 |   | $ | 248,173 |   | $ | 61,258 |   |

 

----

(1)   Includes$103.7 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 $6.7 million related to deferred compensation, thepayment of which is subject to elections made by participants that are subjectto change.

In addition, under certain license and collaborationagreements with other companies we are required to pay royalties and/ormilestone payments upon the successful development and commercialization ofrelated products. We expect to make development milestone payments up to $15.0million associated with licensing agreements in the next 12 months.

Our future capital requirementswill depend on many factors, including: the amount of product sales we achievefor 

14

----

BYETTAand SYMLIN; costs associated with the continued commercialization of BYETTA andSYMLIN; costs associated with the establishment of our exenatide LARmanufacturing facility; costs of potential licenses or acquisitions; thepotential need to repay existing indebtedness; costs associated with anincrease 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,enforcing or defending our patents; competing technological and marketdevelopments; and costs of manufacturing, including costs associated withestablishing our own manufacturing capabilities or obtaining and validatingadditional manufacturers of our products; and scale-up costs for our drugcandidates.

**ITEM 3.**** Quantitative and 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 2.5% senior convertible notes at March 31,2007 was $255.7 million. A hypothetical 1% adverse move in interest rates alongthe entire interest rate yield curve would not materially affect the fair valueof our financial instruments that are exposed to changes in interest rates.

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

As of March 31, 2007, an evaluation was performedunder the supervision and with the participation of our management, includingour President and Chief Executive Officer (referred to as our CEO) and ourSenior Vice President, Finance and Chief Financial Officer (referred to as ourCFO), of the effectiveness of the design and operation of our disclosurecontrols and procedures. In designing and evaluating the disclosure controlsand procedures, management recognizes that any controls and procedures, nomatter how well designed and operated, can provide only reasonable assurance ofachieving the desired control objectives, and management necessarily isrequired to apply its judgment in evaluating the cost-benefit relationship ofpossible controls and procedures. Based on that evaluation, our management,including our CEO and CFO, concluded that our disclosure controls andprocedures were effective at a reasonable level of assurance as of March 31,2007.

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**

**Item1A.  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.

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

Wehave experienced significant operating losses since our inception in 1987,including losses of $49.4 million for the three months ended March 31, 2007,$218.9 million in 2006, $206.8 million in 2005 and $157.2 million in 2004. Asof March 31, 2007, we had an accumulated deficit of approximately $1.3 billion.The extent of our future losses and the timing

15

----

of potentialprofitability are uncertain, and we may never achieve profitable operations. Wehave been engaged in discovering and developing drugs since inception, whichhas required, and will continue to require, significant research anddevelopment expenditures. We derived substantially all of our revenues prior to2005 from development funding, fees and milestone payments under collaborativeagreements and from interest income. BYETTA and SYMLIN may not be ascommercially successful as we expect and we may not succeed in commercializingany of our other drug candidates. We may incur substantial operating losses forat least the next few years as we continue to expand our commercial functionfor BYETTA and SYMLIN and our research and development activities for the otherdrug candidates in our development pipeline. These losses, among other things,have had and will have an adverse effect on our stockholders’ equity andworking capital. Even if we become profitable, we may not remain profitable.

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

Prior to the launch of BYETTA and SYMLIN in 2005, 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 ofthese first-in-class medicines by the medical community, patients receivingtherapy and third party payors;

·  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.

16

----

***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. In addition,there are a limited number of each of peptide suppliers, cartridgemanufacturers and disposable pen manufacturers. If we are not able to arrangefor and maintain third-party manufacturing on commercially reasonable terms, orwe lose one of our sole source suppliers used for our existing products or forsome components of our manufacturing processes for our products or drugcandidates, we may not be able to market our products or complete developmentof our drug candidates 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 and Mallinckrodt to manufacture ourlong-term commercial supply of bulk exenatide, the active ingredient in BYETTA.In addition, we rely on single-source manufacturers for some of our rawmaterials used by Bachem and Mallinckrodt to produce bulk exenatide. We alsorely on Wockhardt and 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 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 2007. If approved, we wouldrely on Wockhardt for the dosage form of SYMLIN in cartridges and Ypsomed AG tomanufacture the components for the SYMLIN disposable pen. We would also rely onHollister-Stier for the assembly of the 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 depend uponAlkermes and Parsons to assist us in the design, construction and validation ofthe manufacturing facility. We have never established or operated amanufacturing facility and cannot assure you that we will be able tosuccessfully establish or operate such a facility in a

17

----

timely or economicalmanner, or at all. In addition, we depend upon Alkermes to successfully developand transfer to us its technology for manufacturing the once-weekly formulationof exenatide LAR. Although we have completed manufacturing scale-up tointermediate batch size, and together with Alkermes we have completedengineering batches of commercial scale at a third party facility, we cannot beassured that a commercial scale manufacturing process for exenatide LAR will besuccessfully developed and/or transferred to us in a timely or economicalmanner, or at all. In addition, we are dependent upon Alkermes to supply uswith commercial quantities of the polymer required to manufacture exenatideLAR. We also will need to obtain sufficient supplies of diluents, solvents,devices, packaging and other components necessary for commercial manufacture ofexenatide LAR. If we, together with Alkermes, are unable to successfullydevelop a commercial scale manufacturing process and increase our manufacturingscale to a commercially viable level, we may not be able to commercially launchexenatide 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;

18

----

·  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. Wealso cannot predict whether we will encounter delays or an inability to createmanufacturing processes for drug candidates that allow us to produce drugproduct in sufficient quantities to be economical, otherwise known asmanufacturing scale-up. If the results of our ongoing or planned 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. Moreover, if the FDAdoes not accept for filing an NDA for a sustained-release formulation ofexenatide by December 31, 2007, Lilly will have the right to convert a portionof future milestone payments that we may receive under our collaboration intoshares of our common stock at a conversion price equal to the fair market valueof our common stock at the time of any such conversion. 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 of clinicaltrials;

19

----

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

·  serious side effects experienced by studyparticipants relating to a drug candidate.

***We aresubstantially dependent 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.

20

----

***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 ourdrug candidates.

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:

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

·  theenforceability, validity or scope of protection 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

· beprecluded from participating in the manufacture, use or sale of our products ordrug candidates or methods of treatment requiring licenses.

21

----

***We are subject to “fraudand abuse” and similar laws and regulations, and a failure to comply with suchregulations or prevail in any litigation related to noncompliance could harmour business.***

Upon approval of BYETTA and SYMLIN by the FDA, webecame subject to various health care “fraud and abuse” laws, such as the FederalFalse Claims Act, the federal anti-kickback statute and other state and federallaws 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 a majority of our netproduct sales. Fluctuations in the buying patterns of these customers, whichmay result from seasonality, wholesaler buying decisions or other factorsoutside of our control, could significantly affect the level of our net saleson a period to period basis. As a result, it is reasonably likely that ourfinancial results will fluctuate to an extent, that may not meet with marketexpectations and that also may adversely affect our stock price. There are anumber of other factors that could cause our financial results to fluctuateunexpectedly, 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.

We may also be required to use our cash to payprincipal and interest on outstanding debt, including our $200 million ofoutstanding convertible senior notes, due in 2011.

22

----

***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 human therapeuticproducts. Product liability claims could result in the imposition ofsubstantial liability on us, a recall of products, or a change in theindications for which they may be used. We currently have limited productliability insurance coverage. We cannot assure you that our insurance willprovide adequate 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 andcommercialization of SYMLIN or our other drug candidates outside the UnitedStates. We may also enter into arrangements with third parties for thecommercialization of SYMLIN or any of our other drug candidates within theUnited 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 2.5%convertible senior notes due 2011. Our ability to make payments on our debt,including the notes, will depend on our future operating performance andability to generate cash and may also depend on our ability to obtainadditional debt or equity financing. During each of the last five years, ouroperating cash flows were negative and insufficient to cover our fixed charges.We may need to use our cash to pay principal and interest on our debt, therebyreducing the funds available to fund our research and development programs,strategic initiatives and working capital requirements. Our ability to generatesufficient operating cash flow to service our indebtedness, including thenotes, and fund our operating requirements will depend on our ability, alone orwith others, to successfully develop, manufacture, obtain required regulatoryapprovals for and market our drug candidates, as well as other factors,including general economic, financial, competitive, legislative and regulatoryconditions, some of which are beyond our control. Our debt service obligationsincrease our vulnerabilities to competitive pressures, because many of ourcompetitors are less leveraged than we are. If we are unable to generatesufficient operating cash flow to service our indebtedness and fund ouroperating requirements, we may be forced to reduce our development programs,sell assets or seek additional debt or equity financing, which may not beavailable to us on satisfactory terms or at all. Our level of indebtedness maymake us more vulnerable to economic or industry downturns. If we incur newindebtedness, the risks relating to our business and our ability to service ourindebtedness will intensify.

***We may be requiredto redeem our 2.5% convertible senior notes due 2011 upon a designated event.***

Holders of our 2.5% convertible senior notes due 2011may require us to redeem all or any portion of their notes upon the occurrenceof certain designated events which generally involve a change in control of ourcompany. We may not have sufficient cash funds to redeem the notes upon adesignated event. We may elect, subject to certain conditions, to pay theredemption price in our common stock or a combination of cash and our commonstock. We may be unable to satisfy the requisite conditions to enable us to paysome or all of the redemption price in our common stock. In addition, althoughthere are currently no restrictions on our ability to pay the redemption priceunder our existing debt agreements, future debt agreements may prohibit us fromrepaying the redemption price in either cash or common stock. If we areprohibited from

23

----

redeeming the notes, wecould seek consent from our lenders to redeem the notes. If we are unable toobtain their consent, we could attempt to refinance the notes. If we wereunable to obtain a consent or refinance, we would be prohibited from redeemingthe notes. If we were unable to redeem the notes upon a designated event, itwould result in an event of default under the indentures governing the notes.An event of default under the indentures could result in a further event ofdefault under our other then-existing debt. In addition, the occurrence of adesignated event may be an event of default under our other debt.

***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 additional revenuesfor 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 scientificcollaborators and sponsored researchers and other advisors. These agreementsmay not effectively prevent disclosure of confidential information and may notprovide an adequate remedy in the event of unauthorized disclosure ofconfidential information. In addition, others may independently discover ourtrade secrets and proprietary information.

Costly and time-consuming litigation could 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 development additional safetyprocedures for the handling and disposing of hazardous materials. If an accidentoccurs, 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 to continueto incur or expend, substantial accounting and other expenses and significantmanagement time and resources. We have implemented certain remediationactivities resulting from our ongoing assessment of internal control overfinancial reporting. Our future assessment, or the future assessments by ourindependent registered public accounting firm, may reveal material weaknessesin our internal

24

----

control. If materialweaknesses are identified in the future we would be required to conclude thatour internal control over financial reporting are ineffective and we could besubject to sanctions or investigations by the SEC, the NASDAQ Stock Market orother regulatory authorities, which would require additional financial andmanagement resources and could adversely affect the market price of our commonstock.

***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 companycould be made more difficult by our employee benefits plans and our employeechange in control plan, under which, in connection with a change in control,stock options held by our employees may become vested and our executiveofficers may receive severance benefits. We also have implemented a stockholderrights plan, also called a poison pill, which could make it uneconomical for athird party to acquire us on a hostile basis.

***Our executiveofficers, directors and major stockholders control approximately 63% of ourcommon stock.***

As of March 31, 2007, executive officers, directorsand holders of 5% or more of our outstanding common stock, in the aggregate,owned or controlled approximately 63% of our outstanding common stock. As aresult, these stockholders are able to influence all matters requiring approvalby our stockholders, including the election of directors and the approval ofcorporate transactions. This concentration of ownership may also delay, deteror prevent a change in control of our company and may make some transactionsmore difficult or impossible to complete without the support of thesestockholders.

***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 approximately 5.8 million shares. Inaddition, the existence of these notes may encourage short selling of ourcommon stock by market 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 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:

25

----

 
|                                          | ** ** | **High**   | ** ** | **Low**    | ** ** |
|------------------------------------------|------------|------------|------------|------------|------------|
| **Year  ending December 31, 2007**       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Second Quarter  (through April 19, 2007) |       | $          | 42.77      |       | $          | 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 ourstock price for the foreseeable future. In addition, the following factors maysignificantly affect the market price of our common stock:

·  our financialresults 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;

·  ourability to complete our Ohio manufacturing facility;

·  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.

26

----

**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)                                                                  |
|            |       |                                                                                                                                                                                                                                                                                                               |
| 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            |       | Employment Agreement, dated as of March 7, 2007, by  and between the Registrant and Daniel M. Bradbury                                                                                                                                                                                                             |
|            |       |                                                                                                                                                                                                                                                                                                               |
| 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                                                                                                                                                                                    |

 

27

----

**SIGNATURE**

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.
|                    | Amylin Pharmaceuticals, Inc.                                 |
|--------------------|-------------------------------------------------------------------|
|               |                                                              |
| Date: May 2,  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)* |
|                    |                                                                   |  |  |  |

 

28

----