Tableof Contents

 

 

 

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

----

 

**FORM 10-Q**

** **

----

 

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

 

**Commission File Number: 0-19700**

 

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

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

 

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

 

**Not Applicable**(Former name, former address and former fiscal year, if changed sincelast report)

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days. Yes x     No o

 

Indicateby check mark whether the registrant has submitted electronically and posted onits corporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 ofthis chapter) during the preceding 12 months (or for such shorter period thatthe registrant was required to submit and post such files).  Yes o     No o

 

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

 

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

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).  Yes o     No x

 

Indicate the number ofshares outstanding of each of the issuer’s classes of common stock, as of thelatest practicable date.

 
| **Class**                      | ** ** | **Outstanding on July 31, 2009** |
|--------------------------------|------------|------------------------------------------------------|
| Common Stock,  $.001 par value |       | ****141,176,026****                                  |

** **

** **

** **

----

**Tableof Contents**

** **

**AMYLIN PHARMACEUTICALS, INC.**

** **

**TABLE OF CONTENTS**

 
| COVER PAGE                             |                                                                                                              |
|----------------------------------------|-------------------------------------------------------------------------------------------------------------------|
| ** **                             | ** **                                                                                                        |
| TABLE OF CONTENTS                      | 2                                                                                                                 |
|                                   |                                                                                                              |
| **PART I. FINANCIAL INFORMATION** |
|                                   |
| ITEM 1.                                | Financial  Statements                                                                                             | 3 |
|                                   |                                                                                                              |   |
|                                   | Consolidated Balance Sheets as of June 30, 2009  (unaudited) and December 31, 2008                      | 3 |
|                                   |                                                                                                              |   |
|                                   | Consolidated Statements of Operations for the three  and six months ended June 30, 2009 and 2008 (unaudited) | 4 |
|                                   |                                                                                                              |   |
|                                   | Consolidated Statements of Cash Flows for the six  months ended June 30, 2009 and 2008 (unaudited)           | 5 |
|                                   |                                                                                                              |   |
|                                   | Notes to Consolidated Financial Statements (unaudited)                                                            | 6 |
|                                   |                                                                                                              |   |
| ITEM 2.                                | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                       | 20 |
|                                   |                                                                                                              |   |
| ITEM 3.                                | Quantitative and Qualitative  Disclosures about Market Risk                                                       | 32 |
|                                   |                                                                                                              |   |
| ITEM 4.                                | Controls and Procedures                                                                                           | 32 |
|                                   |                                                                                                              |   |
| **PART II. OTHER  INFORMATION**   |
|                                   |                                                                                                              |   |
| ITEM 1.                                | Legal Proceedings                                                                                                 | 32 |
|                                   |                                                                                                              |   |
| ITEM 1A.                               | Risk Factors                                                                                                      | 33 |
|                                   |                                                                                                              |   |
| ITEM 4.                                | Submission  of Matters to a Vote of Security Holders                                                              | 45 |
|                                   |                                                                                                              |   |
| ITEM 6.                                | Exhibits                                                                                                          | 47 |
|                                   |                                                                                                              |   |
| SIGNATURE                              | 48                                                                                                                |

** **

**2**

----

**Table of Contents**

 

**PART I. FINANCIALINFORMATION**

 

**ITEM 1. Financial Statements**

** **

**AMYLIN PHARMACEUTICALS,INC.**

 

**Consolidated BalanceSheets**

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

 
| ** **                                                                                                                                                            | ** ** | **June 30,  2009** | ** ** | **December 31,  2008 (1)** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|---------------------------------|------------|
| ** **                                                                                                                                                            | ** ** | **(unaudited)**         | ** ** | **(Note 1)**               | ** ** |
| Assets                                                                                                                                                                | ** ** | ** **              | ** ** | ** **                      | ** ** |
| Current assets:                                                                                                                                                       |       |                    |       |                            |       |
| Cash and cash equivalents                                                                                                                                             |       | $                       | 111,272    |                            | $          | 237,263 |   |
| Short-term investments                                                                                                                                                |       | 533,166                 |       | 579,575                         |       |
| Accounts receivable, net                                                                                                                                              |       | 76,405                  |       | 62,369                          |       |
| Inventories, net                                                                                                                                                      |       | 109,803                 |       | 115,823                         |       |
| Other current assets                                                                                                                                                  |       | 64,839                  |       | 41,038                          |       |
| Total current assets                                                                                                                                                  |       | 895,485                 |       | 1,036,068                       |       |
|                                                                                                                                                                  |       |                    |       |                            |       |
| Property, plant and equipment, net                                                                                                                                    |       | 714,541                 |       | 655,444                         |       |
| Other long-term assets                                                                                                                                                |       | 30,077                  |       | 23,755                          |       |
| Debt issuance costs                                                                                                                                                   |       | 10,264                  |       | 11,786                          |       |
|                                                                                                                                                                  |       | $                       | 1,650,367  |                            | $          | 1,727,053 |   |
|                                                                                                                                                                  |       |                    |       |                            |       |
| Liabilities and  Stockholders’ Equity                                                                                                                            |       |                    |       |                            |       |
|                                                                                                                                                                  |       |                    |       |                            |       |
| Current liabilities:                                                                                                                                                  |       |                    |       |                            |       |
| Accounts payable                                                                                                                                                      |       | $                       | 30,519     |                            | $          | 39,467 |   |
| Accrued compensation                                                                                                                                                  |       | 45,645                  |       | 65,145                          |       |
| Payable to collaborative partner                                                                                                                                      |       | 71,169                  |       | 60,470                          |       |
| Other current liabilities                                                                                                                                             |       | 87,117                  |       | 90,125                          |       |
| Restructuring liability, current portion                                                                                                                              |       | 12,841                  |       | 24,235                          |       |
| Notes payable, current portion                                                                                                                                        |       | 31,250                  |       | 31,250                          |       |
| Deferred revenue                                                                                                                                                      |       | 943                     |       | 3,086                           |       |
| Total current liabilities                                                                                                                                             |       | 279,484                 |       | 313,778                         |       |
|                                                                                                                                                                  |       |                    |       |                            |       |
| Long-term deferred credit                                                                                                                                             |       | 125,000                 |       | 125,000                         |       |
| Restructuring liability, net of current portion                                                                                                                       |       | 20,238                  |       | 22,503                          |       |
| Deferred collaborative profit-sharing                                                                                                                                 |       | 17,878                  |       | —                          |       |
| Other long-term obligations, net of current portion                                                                                                                   |       | 27,886                  |       | 31,724                          |       |
| Notes payable, net of current portion                                                                                                                                 |       | 78,125                  |       | 93,750                          |       |
| Convertible senior notes                                                                                                                                              |       | 632,130                 |       | 621,021                         |       |
|                                                                                                                                                                  |       |                    |       |                            |       |
| Commitments and contingencies                                                                                                                                         |       |                    |       |                            |       |
|                                                                                                                                                                  |       |                    |       |                            |       |
| Stockholders’ equity:                                                                                                                                            |       |                    |       |                            |       |
| Preferred stock, $.001 par value, 7,500 shares  authorized, none issued and outstanding at June 30, 2009 and  December 31, 2008                             |       | —                  |       | —                          |       |
| Common stock, $.001 par value, 450,000 shares  authorized, 140,945 and 137,623 issued and outstanding at June 30, 2009  and December 31, 2008, respectively |       | 141                     |       | 138                             |       |
| Additional paid-in capital                                                                                                                                            |       | 2,344,604               |       | 2,291,762                       |       |
| Accumulated deficit                                                                                                                                                   |       | (1,870,937              | )          | (1,761,611                      | )          |
| Accumulated other comprehensive loss                                                                                                                                  |       | (4,182                  | )          | (11,012                         | )          |
| Total stockholders’ equity                                                                                                                                       |       | 469,626                 |       | 519,277                         |       |
|                                                                                                                                                                  |       | $                       | 1,650,367  |                            | $          | 1,727,053 |   |

 

----

**(1)****        **Adjusted for the requiredretroactive adoption of FSP APB 14-1.

 

See accompanying notes to consolidated financial statements.

 

3

----

**Table of Contents**

** **

**AMYLIN PHARMACEUTICALS,INC.**

** **

**Consolidated Statementsof Operations**

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

**(unaudited)**

** **
| ** **                                                           | ** ** | **Three months ended  June 30,** | ** ** | **Six months ended  June 30,** | ** ** |
|----------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                           | ** ** | **2009**                                        | ** ** | **2008 (1)**                                  | ** ** | **2009** | ** ** | **2008 (1)** | ** ** |
| Revenues:                                                            |       |                                            |       |                                          |       |   |   |   |   |
| Net  product sales                                                   |       | $                                               | 197,497    |                                          | $          | 200,335 |   | $ | 376,829 |   | $ | 379,056 |   |
| Revenues  under collaborative agreements                             |       | 11,875                                          |       | 21,684                                        |       | 26,217 |   | 40,200 |   |
| Total  revenues                                                      |       | 209,372                                         |       | 222,019                                       |       | 403,046 |   | 419,256 |   |
|                                                                 |       |                                            |       |                                          |       |   |   |   |   |
| Costs and expenses:                                                  |       |                                            |       |                                          |       |   |   |   |   |
| Cost  of goods sold                                                  |       | 24,293                                          |       | 24,682                                        |       | 42,925 |   | 46,706 |   |
| Selling,  general and administrative                                 |       | 92,052                                          |       | 111,088                                       |       | 179,608 |   | 209,331 |   |
| Research  and development                                            |       | 63,601                                          |       | 75,401                                        |       | 123,620 |   | 152,607 |   |
| Collaborative  profit sharing                                        |       | 76,199                                          |       | 78,950                                        |       | 149,216 |   | 148,851 |   |
| Restructure                                                          |       | 11,376                                          |       | —                                        |       | 11,376 |   | — |   |
| Total  costs and expenses                                            |       | 267,521                                         |       | 290,121                                       |       | 506,745 |   | 557,495 |   |
|                                                                 |       |                                            |       |                                          |       |   |   |   |   |
| Operating  loss                                                      |       | (58,149                                         | )          | (68,102                                       | )          | (103,699 | ) | (138,239 | ) |
|                                                                 |       |                                            |       |                                          |       |   |   |   |   |
| Interest  and other income                                           |       | 700                                             |       | 6,974                                         |       | 3,723 |   | 18,004 |   |
| Interest  and other expense                                          |       | (4,923                                          | )          | (5,463                                        | )          | (9,350 | ) | (17,455 | ) |
| Net  loss                                                            |       | $                                               | (62,372    | )                                             | $          | (66,591 | ) | $ | (109,326 | ) | $ | (137,690 | ) |
|                                                                 |       |                                            |       |                                          |       |   |   |   |   |
| Net  loss per share, basic and diluted                               |       | $                                               | (0.44      | )                                             | $          | (0.49 | ) | $ | (0.78 | ) | $ | (1.01 | ) |
|                                                                 |       |                                            |       |                                          |       |   |   |   |   |
| Shares  used in computing net loss per share, basic and diluted |       | 140,912                                         |       | 137,142                                       |       | 139,864 |   | 136,500 |   |
|                                                                      |            |                                                 |            |                                               |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

----

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

 

See accompanying notes to condensedconsolidated financial statements.

 

4

----

**Table of Contents**

** **

**AMYLIN PHARMACEUTICALS,INC.**

** **

**Consolidated Statementsof Cash Flows**

**(in thousands)**

**(unaudited)**

 
| ** **                                                                    | ** ** | **Six months ended  June 30,** | ** ** |
|-------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                    | ** ** | **2009**                                      | ** ** | **2008 (1)** | ** ** |
| Operating activities:                                                         |       |                                          |       |   |   |
| Net loss                                                                      |       | $                                             | (109,326   | ) | $ | (137,690 | ) |
| Adjustments to reconcile net loss to net cash used  for operating activities: |       |                                          |       |   |   |
| Depreciation and  amortization                                                |       | 17,855                                        |       | 13,740 |   |
| Amortization of debt  discount and debt issuance costs                        |       | 4,282                                         |       | 5,976 |   |
| Employee stock-based  compensation                                            |       | 23,047                                        |       | 29,002 |   |
| Stock-settled compensation  accruals                                          |       | 11,588                                        |       | 13,752 |   |
| Other non-cash expenses,  net                                                 |       | 3,275                                         |       | 2,124 |   |
| Changes in operating assets and liabilities:                                  |       |                                          |       |   |   |
| Accounts receivable, net                                                      |       | (14,036                                       | )          | 7,941 |   |
| Inventories, net                                                              |       | 6,020                                         |       | 48 |   |
| Other current assets                                                          |       | (23,271                                       | )          | (2,557 | ) |
| Accounts payable and  accrued liabilities                                     |       | (10,302                                       | )          | 1,902 |   |
| Accrued compensation                                                          |       | (5,734                                        | )          | (532 | ) |
| Payable to collaborative  partner                                             |       | 10,699                                        |       | (4,687 | ) |
| Deferred revenue                                                              |       | (2,143                                        | )          | (2,143 | ) |
| Restructuring liabilities                                                     |       | (13,659                                       | )          | — |   |
| Deferred collaborative  profit-sharing                                        |       | 17,878                                        |       | — |   |
| Long-term prepaid expenses                                                    |       | (7,482                                        | )          | — |   |
| Other assets and  liabilities, net                                            |       | (3,838                                        | )          | 438 |   |
| Net cash flows used for  operating activities                                 |       | (95,147                                       | )          | (72,686 | ) |
|                                                                          |       |                                          |       |   |   |
| Investing activities:                                                         |       |                                          |       |   |   |
| Purchases of short-term  investments                                          |       | (444,471                                      | )          | (642,520 | ) |
| Sales and maturities of  short-term investments                               |       | 495,803                                       |       | 588,196 |   |
| Purchases of property, plant  and equipment, net                              |       | (70,720                                       | )          | (173,403 | ) |
| Increase in other  long-term assets                                           |       | (221                                          | )          | (510 | ) |
| Net cash flows used for  investing activities                                 |       | (19,609                                       | )          | (228,237 | ) |
|                                                                          |       |                                          |       |   |   |
| Financing activities:                                                         |       |                                          |       |   |   |
| Issuance of common stock,  net                                                |       | 4,390                                         |       | 9,509 |   |
| Repayment of notes payable                                                    |       | (15,625                                       | )          | — |   |
| Net cash flows (used for)  provided by financing activities                   |       | (11,235                                       | )          | 9,509 |   |
|                                                                          |       |                                          |       |   |   |
| Change in cash and cash  equivalents                                          |       | (125,991                                      | )          | (291,414 | ) |
|                                                                          |       |                                          |       |   |   |
| Cash and cash equivalents  at beginning of period                             |       | 237,263                                       |       | 422,232 |   |
| Cash and cash equivalents  at end of period                                   |       | $                                             | 111,272    |   | $ | 130,818 |   |
|                                                                          |       |                                          |       |   |   |
| **Supplemental disclosure of cash  flow information:**                        | ** ** | ** **                                    | ** ** | ** ** | ** ** |
| Property, plant and  equipment additions in other current liabilities         |       | $                                             | 4,403      |   | $ | 13,702 |   |
| Non-cash interest  capitalized to property, plant and equipment               |       | $                                             | 8,353      |   | $ | 5,679 |   |
|                                                                          |       |                                          |       |   |   |
| **Non-cash financing activities:**                                            | ** ** | ** **                                    | ** ** | ** ** | ** ** |
| Issuance of common stock  for contingent share settled obligation             |       | $                                             | —     |   | $ | 30,000 |   |
| Shares contributed as  employer 401(k) match                             |       | $                                             | 5,104      |   | $ | 4,283 |   |
| Shares contributed to  employee stock ownership plan                          |       | $                                             | 20,250     |   | $ | 16,996 |   |

 

----

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

 

See accompanying notes to consolidatedfinancial statements.

 

5

----

**Table of Contents**

** **

**AMYLIN PHARMACEUTICALS,INC.**

** **

**Notes to ConsolidatedFinancial Statements**

**June 30, 2009**

**(unaudited)**

** **

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

 

**Basis ofPresentation**

** **

The informationcontained herein has been prepared in accordance with instructions for Form 10-Qand Article 10 of Regulation S-X. The information as of June 30,2009, and for the three and six month periods ended June 30, 2009 and2008, are unaudited. In the opinion of management, the information reflects alladjustments necessary to make the results of operations for the interim periodsa fair statement of such operations. All such adjustments are of a normalrecurring nature. Interim results are not necessarily indicative of results fora full year. The balance sheet at December 31, 2008, has been derived fromthe audited consolidated financial statements at that date, adjusted for theretroactive adoption of  FinancialAccounting Standards Board (FASB) Staff Position (FSP) Accounting PrinciplesBoard (APB) 14-1 (see Note 2), but does not include all information andfootnotes required by U.S. generally accepted accounting principles forcomplete financial statements. For more complete financial information, these financialstatements should be read in conjunction with the audited consolidatedfinancial statements included in Amylin Pharmaceuticals, Inc.’s (referredto as the Company or Amylin) Annual Report on Form 10-K for the year endedDecember 31, 2008.

 

**Revenue Recognition**

** **

***NetProduct Sales***

*** ***

The Company sells BYETTA® (exenatide) injection for the treatment oftype 2 diabetes and SYMLIN® (pramlintideacetate) injection for the treatment of type 1 and type 2 diabetesprimarily to wholesale distributors, who, in turn, sell to retail pharmaciesand government entities. Product sales are recognized when delivery of theproducts has occurred, title has passed to the customer, the selling price isfixed or determinable, collectability is reasonably assured and the Company hasno further obligations. The Company records product sales net of allowances forproduct returns, rebates, wholesaler chargebacks, wholesaler discounts andprescription vouchers. The Company must make significant judgments indetermining these allowances. If actual results differ from the Company’sestimates, the Company will be required to make adjustments to these allowancesin the future.  The Company recorded an allowance relatedto the Department of Defense’s (DOD) Tricare Retail Pharmacy program pursuantto a final rule that was issued in March 2009 and is effective on May 26,2009.  The final rule clarified theDOD’s interpretation of the National Defense Authorization Act of 2008, orNDAA, signed into law on January 28, 2008. The final rule changed theprocess by which rebate obligations for the Tricare Retail Pharmacy program arecreated such that a contractual agreement is no longer required and thatobligation to pay such rebates emanates from the NDAA itself.  In consideration of this final rule theCompany recorded an allowance of $6.6 million for such rebates in the sixmonths ended June 30, 2009, of which $4.8 million represents a retroactiverebate assessment for sales made during 2008.

 

The Company records all United States BYETTA and SYMLIN product sales.With respect to BYETTA, the Company has determined that it is qualified as aprincipal under the criteria set forth in Emerging Issues Task Force (EITF),Issue 99-19, *“Reporting Gross Revenue as aPrincipal vs. Net as an Agent,”* based on the Company’sresponsibilities under its contracts with Eli Lilly and Company, or Lilly,which include manufacture of product for sale in the United States,responsibility for establishing pricing in the United States, distribution,ownership of product inventory and credit risk from customers.

 

***Revenues UnderCollaborative Agreements***

*** ***

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

 

***CollaborativeProfit-Sharing***

*** ***

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

 

6

----

***Tableof Contents***

 

***Accounts***Receivable

 

Trade accounts receivableare recorded net of allowances for cash discounts for prompt payment, doubtfulaccounts, product returns and chargebacks. Allowances for rebate discounts anddistribution fees are included in other current liabilities in the accompanyingconsolidated balance sheets. Estimates for allowances for doubtful accounts aredetermined based on existing contractual obligations, historical paymentpatterns and individual customer circumstances.  The allowance fordoubtful accounts was $0.7 million and $0.6 million at June 30, 2009 and December 31,2008, respectively.

 

**Investments in UnconsolidatedEntities**

 

The Company uses the equity method of accounting forinvestments in other companies that are not controlled by the Company and inwhich the Company’s interest is generally between 20% and 50% of the votingshares or the Company has significant influence over the entity, or both.  The Company’s share of the income or lossesof these entities are included in interest and other income or interest andother expense, and the investments, which had a net book value of $3.6 millionand $4.7 million at June 30, 2009 and December 31, 2008,respectively, are included in other long-term assets.  The Company recorded $0.6 million and $1.0 million for its share of equity method investee losses during the three months ended June 30,2009 and 2008, respectively, and $1.2 million and $1.9 million for its share of equity method investee losses during the six months ended June 30,2009 and 2008, respectively.

 

**Fair Value Measurements**

 

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

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

 

Thefollowing table summarizes the assets and liabilities measured at fair value ona recurring basis (in thousands):

 
| ** **                                                | ** ** | **Fair value measurements as of June 30, 2009** | ** ** |
|-----------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                | ** ** | **Total**                                            | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** |
| Short-term  investments                                   |       | $                                                    | 533,166    |   | $ | 533,166 |   | $ | — |   | $ | — |   |
| Cash  and cash equivalents                                |       | 111,272                                              |       | 111,272 |   | — |   | — |   |
| Derivative  financial instrument contracts, net liability |       | (3,132                                               | )          | — |   | (3,132 | ) | — |   |
|                                                      |       |                                                 |       |   |   |   |   |   |   |
|                                                      |       | $                                                    | 641,306    |   | $ | 644,438 |   | $ | (3,132 | ) | $ | — |   |

 

# **Research and Development Expenses**

#  

# Research and development costs are expensedas incurred and include salariesand bonuses, benefits, non-cash stock-based compensation, license fees,milestones under license agreements and costs paid to third-party contractorsto perform research, conduct clinical trials and develop drug materials anddelivery devices; and associated overhead expenses and facilities costs. Clinical trial costs, including costsassociated with third-party contractors, are a significant component ofresearch and development expenses. Invoicing from third-party contractors forservices performed can lag several months. The Company accrues the costs ofservices rendered in connection with such activities based on its estimate ofmanagement fees, site management and monitoring costs and data managementcosts. Actual clinical trial costs may differ from estimates and are adjustedin the period in which they become known.

 

7

----

Table ofContents

 

**DerivativeFinancial Instruments**

 

The Company mitigatescertain financial exposures, including currency risk and interest rate risk,through a controlled program of risk management that includes the use of derivativefinancial instruments. Derivatives are recorded on the balance sheet at fairvalue, with changes in value being recorded in interest and other expense. Thefair value of the Company’s derivative financial instruments was a netliability of $3.1 million and $4.8 million at June 30, 2009 and December 31,2008, respectively.  The Company hasdetermined that its derivative financial instruments are defined asLevel 2 in the fair value hierarchy. The Company recognized a gain of $0.9million and $3.0 million on derivative financial instruments for the threemonths ended June 30, 2009 and 2008, respectively and a gain of$1.6 million and $0.2 million on derivative financial instruments for the sixmonths ended June 30, 2009 and 2008, respectively.  Gains and losses onderivative financial instruments are included in interest and other expense inthe accompanying Consolidated Statements of Operations.

 

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

 
| ** **                                   | ** ** | **June 30, 2009** | ** ** | **December 31, 2008**                           | ** **            |
|----------------------------------------------|------------|------------------------|------------|------------------------------------------------------|-----------------------|
| ** **                                   | ** ** | **Fair Value**         | ** ** | **Balance sheet  location**                          | ** **            | **Fair Value** | ** ** | **Balance sheet  location** | ** ** |
| Foreign  currency derivative contracts       |       | $                      | 777        |                                                 | Other current  assets |   | $ | 160 |   | Other current  assets |   |
|                                         |       |                   |       |                                                 |                  |   |   |   |   |
| Interest  rate derivative contract (Note 12) |       | (3,909                 | )          | Other long-term  obligations, net of current portion |                  | (4,991 | ) | Other long-term  obligations, net of current portion |   |
|                                         |       |                   |       |                                                 |                  |   |   |   |   |
|                                         |       | $                      | (3,132     | )                                                    |                  |   | $ | (4,831 | ) |   |   |

** **

**Per Share Data**

** **

Basic and diluted net loss applicable to commonstock per share is computed using the weighted average number of common sharesoutstanding during the period. Common stock equivalents from stock options andwarrants of 0.2 million for both the three and six months ended June 30,2009, and common stock equivalents from stock options and warrants of 3.2million for both the three and six months ended June 30, 2008, areexcluded from the calculation of diluted loss per share for all periodspresented because the effect is antidilutive. Common stock equivalents fromshares underlying our convertible senior notes of 15.2 million for the threeand six months ended June 30, 2009 and 2008 are also excluded from thecalculation of diluted loss per share because the effect is antidilutive. In future periods, if the Company reports netincome and the common share equivalents for our convertible senior notes aredilutive, the common stock equivalents will be included in the weighted averageshares computation and interest expense related to the notes will be added backto net income to calculate diluted earnings per share.

 

**Accounting for Stock-Based Compensation**

 

Effective January 1,2006, the Company adopted the fair value method of accounting for stock-basedcompensation arrangements in accordance with Financial FASB revised SFAS No. 123 (SFAS123R), “*Share-Based Payment,”*whichestablishes accounting for non-cash stock-based awards exchanged for employeeservices and requires companies to expense the estimated fair value of theseawards over the requisite employee service period, which for the Company isgenerally the vesting period. The Company adopted SFAS 123R using the modifiedprospective method. Under the modified prospective method, prior periods arenot revised for comparative purposes. The valuation provisions of SFAS 123Rapply to new awards and to awards that are outstanding on the effective dateand subsequently modified or cancelled. Estimated non-cash stock-basedcompensation expense for awards outstanding at the effective date is beingrecognized over the remaining service period using the compensation costcalculated for pro-forma disclosure purposes under SFAS 123, *“Accounting for Stock-Based Compensation.”*

 

8

----

Table ofContents

 

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

 
| ** **                                               | ** ** | **Three months ended  June 30,** | ** ** | **Six months ended  June 30,** | ** ** |
|----------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                               | ** ** | **2009**                                        | ** ** | **2008**                                      | ** ** | **2009** | ** ** | **2008** | ** ** |
| Selling, general and administrative expenses             |       | $                                               | 7,612      |                                          | $          | 9,054 |   | $ | 14,917 |   | $ | 17,386 |   |
| Research and development expenses                        |       | 4,481                                           |       | 5,886                                         |       | 8,130 |   | 11,616 |   |
|                                                     |       | $                                               | 12,093     |                                          | $          | 14,940 |   | $ | 23,047 |   | $ | 29,002 |   |
|                                                     |       |                                            |       |                                          |       |   |   |   |   |
| Net stock-based compensation expense, per common  share: |       |                                            |       |                                          |       |   |   |   |   |
| Basic and diluted                                        |       | $                                               | 0.09       |                                          | $          | 0.11 |   | $ | 0.16 |   | $ | 0.21 |   |

 

The Company recorded$12.1 million and $14.9 million of total non-cash, stock-based compensationexpense during the three months ended June 30, 2009 and 2008,respectively, and $23.0 million and $29.0 million of total non-cash,stock-based compensation expense during the six months ended June 30, 2009and 2008, respectively, in all cases related to stock-based awards consistingof stock options and employee stock purchase rights.  At June 30, 2009, total unrecognizedestimated compensation cost related to non-vested stock-based awards grantedprior to that date was $76.2 million, which is expected to be recognized over aweighted-average period of 2.4 years. The Company issued 0.1 million and 0.2 million shares upon the exerciseof stock options in the three and six months ended June 30, 2009,respectively.

 

In addition to the stock-based compensation discussed above, theCompany also recorded $3.4 million and $9.2 million of expense associatedwith its Employee Stock Ownership Plan, or ESOP, for the three and six monthsended June 30, 2009, respectively, and $5.3 million and $10.7 million forthe three and six months ended June 30, 2008, respectively.  The breakdown of non-cash ESOP expense by operatingstatement classification is presented below (in thousands):

 
| ** **                                    | ** ** | **Three months ended** | ** ** | **Six months ended** | ** ** |
|-----------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                    | ** ** | **June 30,**      | ** ** | **June 30,**    | ** ** |
| ** **                                    | ** ** | **2009**               | ** ** | **2008**             | ** ** | **2009** | ** ** | **2008** | ** ** |
| Selling,  general and administrative expenses |       | $                      | 1,849      |                 | $          | 3,048 |   | $ | 5,080 |   | $ | 5,855 |   |
| Research  and development expenses            |       | 1,550                  |       | 2,284                |       | 4,072 |   | 4,872 |   |
|                                          |       | $                      | 3,399      |                 | $          | 5,332 |   | $ | 9,152 |   | $ | 10,727 |   |

 

**Consolidation**

 

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

 

**Recently Issued Accounting Pronouncements**

** **

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

 

·                  FSP FAS 157-4, “*DeterminingWhether a Market Is Not Active and a Transaction Is Not Distressed,” (*FSPFAS 157-4). FSP FAS 157-4 provides guidelines for making fair valuemeasurements more consistent with the principles presented in SFAS 157. FSP FAS157-4 provides additional authoritative guidance in determining whether amarket is active or inactive, and whether a transaction is distressed, isapplicable to all assets and liabilities (i.e. financial and nonfinancial) andwill require enhanced disclosures.  The April 1,2009 adoption of FSP FAS 157-4 did not have a material impact on the Company’sfinancial statements.

 

·                  FSP FAS 115-2, FSP FAS 124-2, and EITF 99-20-2, “*Recognition and Presentation of Other-Than-TemporaryImpairments*,” (FSP FAS 115-2, FSP 124-2 and EITF 99-20-2). FSP FAS115-2, FSP FAS 124-2 and EITF 99-20-2 provide additional guidance to providegreater clarity about the credit and noncredit component of another-than-temporary impairment event and to more effectively communicate whenan other-than-temporary impairment event has occurred. This FSP applies to debtsecurities.  The April 1, 2009adoption of FSP FAS 115-2, FSP FAS 124-2 and EITF 99-20-2 did not have amaterial impact on the Company’s financial statements.

 

9

----

Table of Contents

 

·                  FSP FAS 107-1 and APB 28-1, “*Interim Disclosures about Fair Value of FinancialInstruments*,” (FSP FAS 107-1 and APB 28-1). FSP FAS 107-1 and FSPAPB 28-1, amends FASB Statement No. 107, “*Disclosuresabout Fair Value of Financial Instruments*,” to require disclosuresabout fair value of financial instruments in interim as well as in annualfinancial statements. This FSP also amends APB Opinion No. 28, “*Interim Financial Reporting*,” to requirethose disclosures in all interim financial statements.  The April 1, 2009 adoption of FSP FAS107-1 and FSP APB 28-1 did not have a material impact on the Company’sfinancial statements.

 

During the second quarter, the Company adopted SFAS No. 165,“*Subsequent Events”,*issued bythe FASB in May 2009. SFAS No. 165 establishes general standards ofaccounting for and disclosure of events that occur after the balance sheet datebut before financial statements are issued or are available to be issued. Thispronouncement did not have a material impact on the Company’s consolidatedfinancial statements.

 

In June 2009, the FASB issued SFAS No. 168, “*The FASB Accounting Standards CodificationTM and theHierarchy of Generally Accepted Accounting Principles — a replacement of FASBStatement No. 162*.”  SFASNo. 168 provides for the FASB Accounting Standards CodificationTM (the “Codification”)to become the single official source of authoritative, nongovernmental U.S.generally accepted accounting principles (GAAP). The Codification did notchange GAAP but reorganizes the literature. SFAS No. 168 is effective forinterim and annual periods ending after September 15, 2009.

 

**2.****             ****Adoption of FSP APB 14-1**

 

EffectiveJanuary 1, 2009, the Company adopted the provisions of FSP APB 14-1 “*Accounting for Convertible Debt Instruments thatmay be Settled in Cash Upon Conversion (Including Partial Cash Settlement).*”  FSP ABP 14-1 requires that the liability andequity components of convertible debt instruments within the scope of FSPAPB 14-1 shall be separately accounted for in a manner that will reflectthe entity’s nonconvertible debt borrowing rate when interest cost is recognizedin subsequent periods. The carrying amount of the liability component of theconvertible debt instrument is determined by measuring the fair value of asimilar liability that does not have an associated equity component. Thecarrying value of the equity component is determined by deducting the fairvalue of the liability component from the initial proceeds ascribed to theconvertible debt instrument as a whole. Related transaction costs are allocatedto the liability and equity components in proportion to the allocation ofproceeds and accounted for as debt issuance costs and equity issuance costs,respectively. The excess of the principal amount of the liability componentover its carrying amount is amortized to interest expense using the interestmethod.  FSP ABP 14-1 is appliedretrospectively to all periods presented with the cumulative effect of thechange in accounting principle on periods prior to those presented recognizedas of the beginning of the first period presented.  Due to the Company’s option to electnet-share settlement upon conversion, the Company’s $575 million SeniorConvertible Notes issued in June 2007 (the 2007 Notes) are within thescope of FSP APB 14-1.  The Company’s$200 million Convertible Senior Notes issued in 2004 (the 2004 Notes) are notwithin the scope of FSP APB 14-1 as they may only be settled in shares of theCompany’s common stock upon conversion.

 

Uponadoption, the Company recorded a cumulative debt discount on the 2007 Notes of$185.6 million at inception, and an increase of $180.3 million to stockholders’equity representing the gross value of the equity component of $185.6 millionnet of allocated transaction costs of $5.3 million.  The debt discount is being amortized tointerest expense over the term of the 2007 Notes, net of interest capitalized,which resulted in a cumulative effect on retained earnings of the change inaccounting principle of $5.4 million as of January 1, 2008.  As required by the provisions of FSP APB14-1, the Company is retroactively adjusting its 2007 and 2008 financialstatements.

 

TheCompany’s net loss for the quarter ended June 30, 2009 of $62.4 million,or $0.44 per share, includes $1.1 million, or $0.01 per share of incrementalinterest and other expense due to the adoption of FSP APB 14-1.  The Company’s net loss for the six monthsended June 30, 2009 of $109.3 million, or $0.78 per share, includes $2.4million, or $0.02 per share, of incremental interest and other expense due tothe adoption of FSP ABP 14-1.

 

10

----

Table ofContents

 

The following table setsforth the effect of the retroactive adjustment of the applicable line itemswithin the accompanying consolidated balance sheet as of December 31, 2008(in thousands):

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

 

Thefollowing tables set forth the effect of the retroactive adjustment of theapplicable line items within the accompanying consolidated statement ofoperations for the three and six months ended June 30, 2008 (in thousands,except per share amounts):

 
| ** **                  | ** ** | **Three months ended June 30, 2008** | ** ** |
|-----------------------------|------------|-------------------------------------------|------------|
| ** **                  | ** ** | **As previously  reported**               | ** ** | **Implementation   adjustments** | ** ** | **As adjusted** | ** ** |
| Interest  and other expense |       | $                                         | (3,688     | ) | $ | (1,775 | ) | $ | (5,463 | ) |
| Net  loss                   |       | $                                         | (64,816    | ) | $ | (1,775 | ) | $ | (66,591 | ) |
| Net  loss per share         |       | $                                         | (0.47      | ) | $ | (0.02 | ) | $ | (0.49 | ) |

 
| ** **                  | ** ** | **Six months ended June 30, 2008** | ** ** |
|-----------------------------|------------|-----------------------------------------|------------|
| ** **                  | ** ** | **As previously   reported**            | ** ** | **Implementation   adjustments** | ** ** | **As adjusted** | ** ** |
| Interest  and other expense |       | $                                       | (13,378    | ) | $ | (4,077 | ) | $ | (17,455 | ) |
| Net  loss                   |       | $                                       | (133,613   | ) | $ | (4,077 | ) | $ | (137,690 | ) |
| Net  loss per share         |       | $                                       | (0.98      | ) | $ | (0.03 | ) | $ | (1.01 | ) |

 

The following tables setforth the effect of the retroactive adjustment of the applicable line itemswithin the accompanying consolidated statement of cash flows for the six monthsended June 30, 2008 (in thousands):

 
| ** **                                             | ** ** | **Six months ended June 30, 2008** | ** ** |
|--------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                             | ** ** | **As previously   reported**            | ** ** | **Implementation   adjustments** | ** ** | **As adjusted** | ** ** |
| Net  loss                                              |       | $                                       | (133,613   | ) | $ | (4,077 | ) | $ | (137,690 | ) |
| Amortization  of debt discount and debt issuance costs |       | $                                       | 1,899      |   | $ | 4,077 |   | $ | 5,976 |   |

 

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

 

The Company’s short-term investments, consisting principally of debtsecurities, are classified as available-for-sale and are stated at fair valuebased upon observed market prices (Level 1 in the fair value hierarchy).Unrealized holding gains or losses on these securities are included in othercomprehensive loss. The amortized cost of debt securities in this category isadjusted for amortization of premiums and accretion of discounts to maturity.For investments in mortgage-backed securities, amortization of premiums andaccretion of discounts are recognized in interest income using the interestmethod, adjusted for anticipated prepayments as applicable. Estimates ofexpected cash flows are updated periodically and changes are recognized in thecalculated effective yield prospectively as appropriate. Such amortization isincluded in interest income. Realized gains and losses and declines in valuejudged to be other-than-temporary on available-for-sale securities are includedin impairment loss on investments. In assessing potential impairment of itsshort-term investments, the Company evaluates the impact of interest rates,potential prepayments on mortgage-backed securities, changes in credit quality,the length of time and extent to 

 

11

----

Table ofContents

 

whichthe market value has been less than cost, and the Company’s intent and abilityto not sell the security for a sufficient period of time in order to allow foran anticipated recovery in fair value. The cost of securities sold is based onthe specific-identification method.

 

The following is a summary of short-terminvestments as of June 30, 2009 and December 31, 2008 (in thousands):

 
| ** **                                            | ** ** | **Available-for-Sale Securities** | ** ** |
|-------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                            | ** ** | **Amortized  Cost**                    | ** ** | **Gross  Unrealized  Gains (1)** | ** ** | **Gross  Unrealized  Losses(1)** | ** ** | **Estimated  Fair Value** | ** ** |
| **June 30,  2009**                               |       |                                   |       |   |   |   |   |   |   |
| U.S. Treasury securities                              |       | $                                      | 184,427    |   | $ | 66 |   | $ | (13 | ) | $ | 184,480 |   |
| Obligations of U.S.  Government-sponsored enterprises |       | 89,210                                 |       | 345 |   | (546 | ) | 89,009 |   |
| Corporate debt securities                             |       | 239,692                                |       | 574 |   | (562 | ) | 239,704 |   |
| Asset backed securities                               |       | 21,237                                 |       | 115 |   | (1,379 | ) | 19,973 |   |
| Total                                                 |       | $                                      | 534,566    |   | $ | 1,100 |   | $ | (2,500 | ) | $ | 533,166 |   |
|                                                  |       |                                   |       |   |   |   |   |   |   |
| **December 31,  2008**                           |       |                                   |       |   |   |   |   |   |   |
| U.S. Treasury securities                              |       | $                                      | 130,193    |   | $ | 449 |   | $ | — |   | $ | 130,642 |   |
| Obligations of U.S.  Government-sponsored enterprises |       | 129,197                                |       | 656 |   | (1,494 | ) | 128,359 |   |
| Corporate debt securities                             |       | 294,805                                |       | 175 |   | (4,090 | ) | 290,890 |   |
| Asset backed securities                               |       | 33,081                                 |       | 4 |   | (3,401 | ) | 29,684 |   |
| Total                                                 |       | $                                      | 587,276    |   | $ | 1,284 |   | $ | (8,985 | ) | $ | 579,575 |   |

 

----

(1)          Other comprehensive lossincluded a net unrealized loss of $2.8 million and $3.3 million on investmentsunderlying the Company’s 2001 Non-Qualified Deferred Compensation Plan at June 30,2009 and December 31, 2008, respectively.

 

The gross realized gains on sales of available-for-sale securitiestotaled approximately $0.1 million and $0.1 million and the grossrealized losses totaled $0.5 million and $0.1 million for the threemonths ended June 30, 2009 and 2008, respectively. Gross realized gains onsales of available-for-sale securities totaled approximately $0.6 millionand $2.0 million and the gross realized losses totaled $0.6 millionand $1.6 million for the six months ended June 30, 2009 and 2008,respectively

 

Contractual maturities of short-term investments at June 30, 2009were as follows (in thousands):

 
| ** **                       | ** ** | **Fair Value** | ** ** |
|----------------------------------|------------|----------------|------------|
| Due within 1 year           |       | $              | 415,705    |   |
| After 1 but within 5 years  |       | 84,729         |       |
| After 5 but within 10 years |       | 3,227          |       |
| After 10 years              |       | 29,505         |       |
| Total                            |       | $              | 533,166    |   |

 

For purposes of these maturity classifications the final maturity dateis used for securities not due at a single maturity date.   This includes asset-backed andmortgage-backed securities which are included in Obligations of U.SGovernment-sponsored enterprises in the table above.

 

12

----

Table ofContents

 

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

 
| ** **                                           | ** ** | **Less then 12 Months** | ** ** | **12 Months or Greater** | ** ** | **Total**      | ** ** |
|------------------------------------------------------|------------|-------------------------|------------|--------------------------|------------|----------------|------------|
| ** **                                           | ** ** | **Fair Value**          | ** ** | **Unrealized  Losses**   | ** ** | **Fair Value** | ** ** | **Unrealized  Losses** | ** ** | **Fair Value** | ** ** | **Unrealized  Losses** | ** ** |
| U.S. Treasury securities                             |       | $                       | 44,706     |                     | $          | (13            | )          | $ | — |   | $ | — |   | $ | 44,706 |   | $ | (13 | ) |
| Obligations of U.S Government-sponsored  enterprises |       | 14,998                  |       | (4                       | )          | 20,943         |       | (542 | ) | 35,941 |   | (546 | ) |
| Corporate debt securities                            |       | 24,775                  |       | (24                      | )          | 35,322         |       | (538 | ) | 60,097 |   | (562 | ) |
| Mortgage-backed securities                           |       | —                  |       | —                   |       | 15,100         |       | (1,379 | ) | 15,100 |   | (1,379 | ) |
|                                                 |       | $                       | 84,479     |                     | $          | (41            | )          | $ | 71,365 |   | $ | (2,459 | ) | $ | 155,844 |   | $ | (2,500 | ) |

 

The Company’sinvestments had gross unrealized losses of $2.5 million and $9.0 million at June 30,2009 and December 31, 2008, respectively. The Company recorded $1.4 million in other-than-temporary impairmentlosses for credit-related losses for two securities in its portfolio in thequarter ended June 30, 2009.  Theseimpairment losses were based upon the difference between the cost basis and theobserved market prices for these securities at June 30, 2009.  The unrealized losses on theCompany’s investments in marketable securities is due in most instances to theincreased volatility in the markets impacting certain of the classes ofsecurities the Company invests in and not a deterioration in credit ratings.The Company’s investments have a short effective duration, and since theCompany has the ability and intent not to sell these investments until arecovery of fair value, which may be maturity, the Company does not considerthese investments to be other-than-temporarily impaired at June 30, 2009.

 

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

 

Inventories are stated at the lower of cost (FIFO)or market and net of a valuation allowance for potential excess and/or obsoletematerial of $1.2 million and $5.1 million at June 30, 2009 and December 31,2008, respectively. Raw materials consists of bulk drug material for BYETTA andSYMLIN, work-in-process consists of in-process BYETTA cartridges, in-processSYMLIN cartridges and in-process SYMLIN vials, and finished goods consists ofBYETTA drug product in a disposable pen/cartridge delivery system, finishedSYMLIN drug product in vials for syringe administration and finished SYMLINdrug product in a disposable pen/cartridge delivery system.  The reduction in the valuation allowanceprimarily reflects the scrapping of material previously reserved for that theCompany was unable to utilize.

 

Inventoriesconsist of the following (in thousands):

 
| ** **      | ** ** | **June 30,  2009** | ** ** | **December 31,  2008** | ** ** |
|-----------------|------------|-------------------------|------------|-----------------------------|------------|
| Raw materials   |       | $                       | 74,165     |                        | $          | 74,140 |   |
| Work-in-process |       | 21,011                  |       | 21,382                      |       |
| Finished goods  |       | 14,627                  |       | 20,301                      |       |
|            |       | $                       | 109,803    |                        | $          | 115,823 |   |

 

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

 

Other current assets consist of the following (inthousands):

 
| ** **           | ** ** | **June 30,****2009** | ** ** | **December 31,****2008** | ** ** |
|----------------------|------------|---------------------------|------------|-------------------------------|------------|
| Prepaid inventory    |       | $                         | 34,986     |                          | $          | 13,230 |   |
| Prepaid expenses     |       | 23,816                    |       | 23,623                        |       |
| Other current assets |       | 6,037                     |       | 4,185                         |       |
|                 |       | $                         | 64,839     |                          | $          | 41,038 |   |

 

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

 

Debtissuance costs relate to the $200 million principal amount of2.5% convertible senior notes, due April 15, 2011, issued in April 2004,referred to as the 2004 Notes, the $575 million principal amount of 3.0%convertible senior notes, due June 15, 2014, issued in June 2007,referred to as the 2007 Notes, and a $125 million term loan entered into in 

 

13

----

Table of Contents

 

December 2007,referred to as the Term Loan. Amortization of debt issuance costs are recorded as interest expense inthe consolidated statement of operations on a straight-line basis, whichapproximates the interest method over the contractual term of the related debt.The Company incurred total debt issuance costs of $19.1 million in connectionwith the 2004 Notes, the 2007 Notes and the Term Loan. Amortization expense of$0.8 million was recorded in each of the three months ended June 30, 2009and 2008, respectively.  Amortizationexpense of $1.5 million was recorded in each of the six months ended June 30,2009 and 2008, respectively.

 

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

 

Other current liabilities consist of thefollowing (in thousands):

 
| ** **                 | ** ** | **June 30,****2009** | ** ** | **December 31,****2008** | ** ** |
|----------------------------|------------|---------------------------|------------|-------------------------------|------------|
| Accrued rebates            |       | $                         | 38,333     |                          | $          | 28,575 |   |
| Accrued expenses           |       | 33,481                    |       | 43,482                        |       |
| Other  current liabilities |       | 15,303                    |       | 18,068                        |       |
|                       |       | $                         | 87,117     |                          | $          | 90,125 |   |

 

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

 

TheCompany has entered into various collaborative agreements which provide it withrights to develop, produce and market products using certain know-how,technology and patent rights maintained by its collaborative partners. Terms ofthe various collaboration agreements may require the Company to make and/orreceive milestone payments upon the achievement of certain product research anddevelopment objectives and pay and/or receive royalties on future sales, ifany, of commercial products resulting from the collaboration.

 

EffectiveJanuary 1, 2009, the Company implemented EITF No. 07-01, “*Accounting for Collaborative Arrangements,”*orEITF 07-01, which prescribes that certain transactions betweencollaborators be recorded in the income statement on either a gross or netbasis, depending on the characteristics of the collaboration relationship, andprovides for enhanced disclosure of collaborative relationships. In accordancewith EITF 07-01, the Company evaluated its collaborative agreements forproper income statement classification based on the nature of the underlyingactivity. If payments to and from the Company’s collaborative partners are notwithin the scope of other authoritative accounting literature, the incomestatement classification for the payments is based on a reasonable, rationalanalogy to authoritative accounting literature that is applied in a consistentmanner. Amounts due from the Company’s collaborative partners related todevelopment activities are generally reflected as collaborative revenues andamounts due to the Company’s collaborative partners related to sharing of commercializationexpenses are generally reflected as selling, general and administrativeexpenses.  Milestone payments andup-front payments received are generally reflected as collaborative revenue asdiscussed above in Note 1, and milestone payments and up-front payments madeare generally recorded as research and development expenses if the paymentsrelate to drug candidates that have not yet received regulatory approval.  Milestone payments and up-front payments maderelated to approved drugs (of which there have been none to date) willgenerally be capitalized and amortized to cost of goods sold over the economiclife of the product.  Royalties received(of which there have been none to date) will generally be reflected ascollaborative revenues and royalties paid are generally reflected as cost ofgoods sold.  The adoption ofEITF 07-01 did not affect the Company’s financial position or results ofoperations.

 

Forcollaborations with commercialized products, if we are the principal, asdefined in EITF No. 99-19, “*ReportingRevenue as a Principal versus Net as an Agent”,*or EITF 99-19,we record revenue and the corresponding operating costs in their respectiveline items within the Company’s statement of operations.  If the Company is not the principal, itrecords operating costs as a reduction of revenue.  EITF 99-19 describes the principal asthe party who is responsible for delivering the product or service to thecustomer, has latitude with establishing price and has the risks and rewards ofproviding product or service to the customer, including inventory and creditrisk.

 

***Collaboration with Eli Lilly andCompany***

 

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

 

This agreement includes BYETTA and any sustained release formulationsof exenatide such as exenatide once weekly, the Company’s once weeklyformulation of exenatide for the treatment of type 2 diabetes. Under theterms of the agreement, operating profits from products sold in the UnitedStates are shared equally between Lilly and us. In 2005, the Company 

 

14

----

Table ofContents

 

receivedUnited States Food and Drug Administration, or FDA, approval for thetwice-daily formulation of exenatide, which is marketed in the United Statesunder the trade name BYETTA. The agreement provides for tiered royaltiespayable to us by Lilly based upon the annual gross margin for all exenatideproduct sales, including any long-acting release formulations, outside of theUnited States. Royalty payments for exenatide product sales outside of theUnited States will commence after a one-time cumulative gross margin thresholdamount has been met. Lilly is responsible for 100% of the costs related todevelopment of exenatide once weekly and twice-daily BYETTA for sale outside ofthe United States.  Lilly is responsiblefor 100% of the costs related to commercialization of all exenatide productsfor sale outside of the United States.

 

At signing, Lilly made initial non-refundable payments to the Companytotaling $80 million, of which $50 million was amortized to revenuesunder collaborative agreements prior to 2004. The remaining $30 million isbeing amortized to revenues ratably over a seven-year period ending in September 2009,which represents the Company’s estimate of the period of its performance ofsignificant development activities under the agreement.

 

In addition to these up-front payments, Lilly agreed to make futuremilestone payments of up to $85 million upon the achievement of certaindevelopment milestones, including milestones relating to both twice daily andsustained release formulations of exenatide such as exenatide once weekly, ofwhich $75 million have been paid through June 30, 2009, $30 millionof which was converted into 0.8 million shares of the Company’s common stock inFebruary 2008. No additional development milestones may be earned underthe collaboration agreement.

 

Lilly also agreed to make additional future milestone payments of up to$130 million contingent upon the commercial launch of exenatide inselected territories throughout the world, including both twice-daily andsustained release formulations Through June 30, 3009, $40 million ofthese milestones have been paid and recorded as revenue and remainingmilestones relate primarily to the commercial launch of exenatide once weekly inselected territories throughout the world, including the United States.

 

The Companyrecorded $10.6 million and $20.2 million of cost sharing payments due fromLilly for the three months ended June 30, 2009 and 2008, respectively, andrecorded $23.5 million and $37.4 million of cost sharing payments due fromLilly for the six months ended June 30, 2009 and 2008, respectively,related to the sharing of BYETTA and exenatide once weekly developmentexpenses, which are included in revenues under collaborative agreements in theaccompanying consolidated statements of operations.  In addition, the Company recorded $2.9million and $5.4 million of selling, general and administrative expenses forthe three months ended June 30, 2009 and 2008, respectively, and $7.7million and $9.3 million for the six months ended June 30, 2009 and 2008,respectively, for amounts due to Lilly for sharing of sales force and externalmarketing expenses.

 

In October 2008, the Company and Lilly entered into an exenatideonce weekly supply agreement pursuant to which the Company will supplycommercial quantities of exenatide once weekly for sale in the United States,if approved by the FDA. In addition, if Lilly receives approval to market theproduct in jurisdictions outside the United States, the Company will berequired to manufacture the product intended for commercial sale by Lilly inthose jurisdictions.

 

Under the terms of the supply agreement, Lilly made a cash payment of$125 million to the Company, which represents an amount to compensate theCompany for the estimated past and future cost of carrying Lilly’s share of thecapital investment made in the Company’s manufacturing facility in Ohio, thatotherwise would have been included in the cost of product produced at thefacility and charged to Lilly through the Company’s arrangements with them. Inaddition to this cash payment, the Company will recover Lilly’s share of thecapital investment in the facility through an allocation of depreciationexpense to cost of goods sold as discussed below. Under the terms of the supplyagreement, the Company has agreed not to charge Lilly for Lilly’s share of theinterest costs capitalized to the facility or any future financing cost thatmay be related to financing the facility. Accordingly, the Company hasdetermined that a portion of the $125 million payment, amounting to $30.2million at June 30, 2009, represents a reimbursement to the Company ofLilly’s share of interest costs capitalized to the facility that will becredited to Lilly for its share of the capitalized interest included in thecost of goods sold for exenatide once weekly as incurred. The Company hasconcluded that any excess amount represents deferred collaborative revenue forservices to be provided to Lilly under the supply agreement that will beamortized ratably over the economic useful life of the exenatide once weeklyproduct following its commercial launch. The ultimate allocation of the$125 million payment, which is classified as a long-term deferred creditin the accompanying Consolidated Balance Sheets at June 30, 2009, will bedependent upon the total amount of interest costs capitalized to the facilitywhen it is placed in service. Under certain circumstances, including upon animpairment of the exenatide once weekly manufacturing facility, Lilly mayreceive a credit for the unearned portion of the $125 million paymentwhich will be applied against Lilly’s share of the impairment charge.  The $125 million payment is not refundable toLilly if exenatide once weekly does not receive regulatory approval unless suchnon-approval results in an impairment as discussed above.

 

15

----

Table ofContents

 

In addition to the $125 million cash payment, the Company willrecover Lilly’s share of the over $500 million capital investment in thefacility through an allocation of depreciation to cost of goods sold inaccordance with the collaboration agreement. The Company retains ownership ofthe facility and Lilly’s share of the capital investment to be recoveredthrough the sharing of cost of goods sold is initially estimated to be 55%subject to adjustment based upon the allocation of the proportion of productsupplied for sale in the United States, the cost of which is shared equally bythe parties, and the proportion of product supplied for sale outside of theUnited States, the cost of which is paid for 100% by Lilly.

 

In October 2008, the Company and Lilly also entered into a loanagreement pursuant to which Lilly will make available to Amylin a$165 million unsecured line of credit that Amylin can draw upon from timeto time beginning on December 1, 2009 and ending on June 30, 2011.Any interest due under the credit facility will bear interest at the five-dayaverage three-month LIBOR rate immediately prior to the date of the advanceplus 5.25% and shall be due and payable quarterly in arrears on the firstbusiness day of each quarter. All outstanding principal, together with allaccrued and unpaid interest shall be due and payable the earlier of36 months following the date on which the loan commitment is fullyadvanced or June 30, 2014.

 

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

 

In May 2009, the Company and Lilly entered into acost allocation agreement, or the Cost Allocation Agreement, which amends theexenatide development and commercialization cost-sharing provisions containedin the companies’ Collaboration Agreement and Exenatide Once Weekly SupplyAgreement, or the Agreements.

 

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

 

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

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

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

 

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

 

In May 2009,the Company and Lilly entered into a joint supply agreement for an exenatideonce weekly pen device.  The Company andLilly agreed to cooperate in the development, manufacturing and marketing ofexenatide once weekly in a dual chamber cartridge pen configuration.  The companies will share the capital anddevelopment costs of the pen, including the estimated total capital investmentof approximately $216 million which is expected to be incurred over the nextfew years. The Company and Lilly have agreed that the estimated cost of thetotal capital investment will be allocated 60% to Lilly and 40% to the Company,with Lilly funding its share as the capital expenditures are incurred.  Through June 30, 2009, the Company hasincurred $35.6 million in capital expenditures associated with the exenatideonce weekly pen, which amount is included in construction in progress.  Lilly’s 60% share of these expenditures is$21.4 million, of which $17.9 million has been received by the Company.  Capital reimbursements from Lilly, which areincluded in deferred collaborative profit-sharing in the accompanying consolidatedbalance sheet, are being deferred and will be amortized to collaborative profitsharing for Lilly’s share of the depreciation included in cost of goods soldfor the exenatide once weekly pen device as incurred.

 

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

 

In November 2008, the Company announced acorporate restructuring that reduced its San Diego work force by approximately25 percent or 330 employees. In connection with the restructuring, theCompany recorded restructuring charges of $54.9 million, consistingprimarily of facility related charges, employee separation costs and assetimpairments which were recorded in the quarter ended December 31, 2008.

 

16

----

Table of Contents

 

In May 2009, theCompany announced a restructuring of its sales force to merge its existingprimary care and specialty sales forces into a single organization.  This restructuring reduced the total numberof Amylin sales representatives by approximately 200 employees.  The Company recorded restructuring charges of$11.4 million during the quarter ended June 30, 2009 consisting primarilyof employee separation costs which were incurred in the quarter ended June 30,2009. The following table summarizes the components of the restructuringcharges (in thousands):

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

 

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

 
| ** **                        | ** ** | **Employee  separation  costs** | ** ** | **Facilities  related  charges** | ** ** | **Other  restructuring  charges** | ** ** | **Total** | ** ** |
|-----------------------------------|------------|---------------------------------|------------|----------------------------------|------------|-----------------------------------|------------|-----------|------------|
| Balance at December 31, 2008 |       | $                               | 8,291      |                             | $          | 38,447                            |       | $         | —     |   | $ | 46,738 |   |
| Accruals                          |       | 10,629                          |       | —                           |       | 466                               |       | 11,095    |       |
| Payments                          |       | (18,254                         | )          | (6,500                           | )          | —                            |       | (24,754   | )          |
| Balance at June 30, 2009     |       | $                               | 666        |                             | $          | 31,947                            |       | $         | 466        |   | $ | 33,079 |   |

 

The $13.7 million reduction in the restructuringliability during the six months ended June 30, 2009 consists of paymentsof $18.3 million of employee separation costs, reflecting severance and otherseparation benefit payments and $6.5 million of facilities related chargesreflecting ongoing rental payments for leases associated with vacated facilities.Partially offsetting these payments are additional accruals of $11.1 millionassociated with the May 2009 sales force restructuring discussed above.The Company records restructuring activities in accordance with FASB Statement No. 44,*“Accounting for the Impairment and Disposal ofLong-Lived Assets”* and FASB Statement No. 146 *“Accounting for Costs Associated with Exit or Disposal Activities.”*

 

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

 

SFAS No. 130, “*Reporting Comprehensive Income,”* requires reporting anddisplaying comprehensive income (loss) and its components, which, for theCompany, includes net loss and unrealized gains and losses on investments. Inaccordance with SFAS No. 130, the accumulated balance of othercomprehensive income (loss) is disclosed as a separate component ofstockholders’ equity. For the three months ended June 30, 2009 and 2008,comprehensive loss consisted of (in thousands):

 
| ** **                            | ** ** | **Three months ended June 30,** | ** ** | **Six months ended June 30,** | ** ** |
|---------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                            | ** ** | **2009**                                            | ** ** | **2008**                                          | ** ** | **2009** | ** ** | **2008** | ** ** |
| Net loss                              |       | $                                                   | (62,372    | )                                                 | $          | (66,591 | ) | $ | (109,326 | ) | $ | (137,690 | ) |
| Other comprehensive loss:             |       |                                                |       |                                              |       |   |   |   |   |
| Unrealized gain (loss) on investments |       | 5,692                                               |       | (493                                              | )          | 6,830 |   | (3,638 | ) |
| Comprehensive loss                    |       | $                                                   | (56,680    | )                                                 | $          | (67,084 | ) | $ | (102,496 | ) | $ | (141,328 | ) |

 

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

 

In June 2007, the Company issued the 2007Notes in a private placement, which have an aggregate principal amount of$575 million, and are due June 15, 2014. The 2007 Notes are seniorunsecured obligations and rank equally with all other existing and futuresenior unsecured debt. The 2007 Notes bear interest at 3.0% per year, payablein cash semi-annually, and are initially convertible into a total of up to9.4 million shares of common stock at a conversion price of $61.07 pershare, subject to the customary adjustment for stock dividends and otherdilutive transactions. The Company may not redeem the 2007 Notes prior tomaturity. In addition, if a “fundamental change” (as defined in the associatedindenture agreement) occurs prior to the maturity date, the Company will insome cases increase the conversion rate for a holder of notes that elects toconvert its notes in connection with such fundamental change. The maximumconversion rate is 22.9252 ($43.62 per share), which would result in a maximumissuance of 13.2 million shares of common stock if all holders convertedat the maximum conversion rate.  Theprincipal amount of the 2007 Notes exceeds the current if-converted value.

 

17

----

Table of Contents

 

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

 

Subject to certain exceptions, if the Companyundergoes a “designated event” (as defined in the associated indentureagreement) including a “fundamental change,” such as if a majority of theCompany’s Board of Directors ceases to be composed of the existing directors orother individuals approved by a majority of the existing directors, holders ofthe 2007 Notes will, for the duration of the notes, have the option to requirethe Company to repurchase all or any portion of their 2007 Notes. Thedesignated event repurchase price will be 100% of the principal amount of the2007 Notes to be purchased plus any accrued interest up to but excluding therelevant repurchase date. The Company will pay cash for all notes sorepurchased. The 2007 Notes have been registered under the Securities Act of1933, as amended, to permit registered resale of the 2007 Notes and of thecommon stock issuable upon conversion of the 2007 Notes. Subject to certainlimitations, the Company will be required to pay the holders of the 2007 Notesspecial interest on the 2007 Notes if the Company fails to keep suchregistration statement effective during specified time periods. The 2007 Notespay interest in cash, semi-annually in arrears on June 15 and December 15of each year, which began on December 15, 2007.

 

The fair value of the 2007 Notes, determined byobserved market prices, was $373.7 and $260.4 million at June 30,2009 and December 31, 2008, respectively.

 

As discussed in Note 2, the 2007 Notes arewithin the scope of FSP APB 14-1which the Company adopted effective January 1,2009.

 

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

 
| ** **                 | ** ** | **June 30,********2009** | ** ** | **December 31,********2008** | ** ** |
|----------------------------|------------|-------------------------------|------------|-----------------------------------|------------|
| Principal  amount          |       | $                             | 575,000    |                              | $          | 575,000 |   |
| Unamortized  debt discount |       | (142,870                      | )          | (153,979                          | )          |
| Net  carrying amount       |       | $                             | 432,130    |                              | $          | 421,021 |   |

 

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

 

In April 2004, the Company issued the 2004Notes, which have an aggregate principal amount of $200 million, and are due April 15,2011. The 2004 Notes are senior unsecured obligations and rank equally with allother existing and future senior unsecured debt. The 2004 Notes bear interestat 2.5% per year, payable in cash semi-annually and are convertible into atotal of up to 5.8 million shares of common stock at a conversion price of$34.35 per share, subject to customary adjustments for stock dividends andother dilutive transactions. The Company may not redeem the 2004 Notes prior tomaturity.  As discussed in Note 2, the2004 Notes are not within the scope of FSP APB 14-1 as they can only be settledin shares of the Company’s common stock upon conversion.

 

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

 

18

----

Table ofContents

 

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

 

Thefair value of the 2004 Notes, determined by observed market prices, was $178.4and $150.0 million at June 30, 2009 and December 31, 2008,respectively.

 

The Company capitalized $3.8 million, and$2.9 million of coupon interest expense and $4.3 million and $3.2 millionof non-cash interest in debt discount in the three months ended June 30,2009 and 2008, respectively, and capitalized $7.5 million, and$5.2 million of coupon interest expense and $8.4 million and $5.7 millionof non-cash interest in debt discount in the six months ended June 30,2009 and 2008, respectively, associated with construction in progress.

 

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

 

In December 2007, the Company****entered into a$140 million credit agreement with Bank of America, N.A., as administrativeagent, collateral agent and letter of credit issuer, Silicon Valley Bank andRBS Asset Finance, Inc., as syndication agents, and Comerica Bank and BMOCapital Markets Financing, Inc., as documentation agents.  The creditagreement provides for a $125 million Term Loan and a $15 million revolvingcredit facility.  The proceeds of both loans will be used for generalcorporate purposes.  The revolving creditfacility also provides for the issuance of letters of credit and foreignexchange hedging up to the $15 million borrowing limit.  The Company had an outstanding balance of$109.4 million under the Term Loan and had issued $7.1 million and $5.6 millionof stand-by letters of credit under the revolving credit facility primarily inconnection with office leases, at June 30, 2009 and December 31,2008, respectively.

 

The Company’sdomestic subsidiaries, Amylin Ohio LLC and Amylin Investments LLC, areco-borrowers under the credit agreement.  The loans under the revolvingcredit facility are secured by substantially all of the Company’s and the twodomestic subsidiaries’ assets (other than intellectual property and certainother excluded collateral).  The Term Loan is repayable on aquarterly basis, with no principal payments due quarters one through four,6.25% of the outstanding principal due quarters five through eleven, and 56.25%of the outstanding principal due in quarter twelve.  Interest on the Term Loan will be paidquarterly on the unpaid principal balance at 1.75% above the London InterbankOffered Rate, or LIBOR, based on the Company’s election of either one, two,three or six months LIBOR term, and payable at the end of the selected interestperiod but no less frequently than quarterly as of the first business day ofthe quarter prior to the period in which the quarterly installment is due.  The Company has elected to use the threemonth LIBOR rate, which was 0.6% and 1.44% at June 30, 2009 and December 31,2008, respectively.  Interest periods onthe revolving credit facility may be either one, two, three or six months, andpayable at the end of the selected interest period but no less frequently thanquarterly, and the interest rate will be either LIBOR plus 1.0% or the Bank ofAmerica prime rate, as selected by the Company. Both loans have a final maturity date of December 21, 2010.

 

The credit agreement contains certain covenants, including arequirement to maintain minimum unrestricted cash and cash equivalentsbalances, as defined in the agreement, in excess of $400 million, belowwhich certain limitations provided for in the agreement become effective. Thecredit agreement also contains certain events of default including unrestrictedcash and cash equivalents balances, as defined in the agreement, falling below$280 million, nonpayment of principal, interest, fees or other amounts,violation of covenants, inaccuracy of representations and warranties anddefault under other indebtedness that would permit the administrative agent toaccelerate the Company’s outstanding obligations if not cured within applicablegrace periods. In addition, the credit agreement provides for automaticacceleration upon the occurrence of bankruptcy, other insolvency events and achange in control, as defined in the credit agreement as amended. There is anannual commitment fee associated with the revolving credit facility of 0.25%.

 

Maturitiesof long-term notes payable for periods ending after June 30, 2009 are asfollows (in thousands):

 
| Six months ending  December 31, 2009 |   | $      | 15,625  |   |
|-------------------------------------------|--------|--------|---------|--------|
| Year ending  December 31, 2010       |   | 93,750 |    |
| Total minimum debt payments               |   | $      | 109,375 |   |

 

In connection with theexecution of the Term Loan, the Company entered into an interest rate swap withan initial notional amount of $125 million on December 21, 2007 thathas resulted in a net fixed rate of 5.717% and matures on December 21,2010.  The Company determined that theinterest rate swap agreement is defined as Level 2 in the fair valuehierarchy.  The fair value of theinterest rate swap agreement was a liability of $3.9 million and $5.0 millionat June 30, 2009 and December 31, 2008, respectively.  The Company recognized a gain on the interestrate swap, which is included in interest and other expense, of $0.5 million and$3.0 million for the three months ended June 30, 2009 and 2008,respectively.  The Company recognized again on the interest rate swap, which is included in interest and otherexpense, of $1.1 million for the six months ended June 30, 2009 and a losson the interest rate swap, which is included in interest and other expense, of$0.7 million for the six months ended June 30, 2008.

 

19

----

Table of Contents

 

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

 

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

 

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

 

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

 

# **Other Commitments**

#  

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

 

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

 

The Company hascommitted to make future minimum payments to third parties for certaininventories in the normal course of business. The minimum purchase commitmentstotal approximately $84.3 million as of June 30, 2009. The majorityof these inventory commitments relate to exenatide once weekly and BYETTA,including minimum inventory purchases for exenatide once weekly of$62.0 million that are contingent upon FDA approval of exenatide onceweekly.

 

As of June 30, 2009, capital commitments tocomplete construction of the Company’s exenatide once weekly manufacturingfacility in Ohio are $9.4 million, and capital commitments related to theexenatide once weekly pen device are $35.6 million.

 

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

 

Fromtime to time in the ordinary course of business, the Company becomes involvedin various lawsuits, claims and proceedings relating to the conduct of itsbusiness, including those pertaining to product liability, patent infringementand employment claims.  Since August 2008,the Company and Lilly have been named as defendants in 21 separate productliability cases involving approximately 110 plaintiffs in various courts in theUnited States and a putative class action lawsuit that has been filed inLouisiana.  These cases have been broughtby individuals who allege they have used BYETTA.  They generally seek compensatory and punitivedamages for alleged injuries, consisting primarily of pancreatitis, and in afew cases, wrongful death.  Most of thecases are pending in California state court, where the Judicial Councilrecently granted the Company’s petition for a “coordinated proceeding” for allCalifornia state court cases alleging harm allegedly as a result of BYETTAuse.  The Company has also received notice from plaintiff’scounsel of additional claims by individuals who have not filed suit.  While the Company cannot predict the outcomeof any lawsuit, claim or proceeding, the Company and Lilly intend to vigorouslydefend these matters. These matters are at an early stage and as a result theCompany cannot estimate potential losses, if any, at this time.

 

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

 

Noevents subsequent to June 30, 2009 that require disclosure haveoccurred.  The Company evaluatedsubsequent events for disclosure through August 7, 2009, which representsthe date the financial statements were issued.

 

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

 

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

 

20

----

Table ofContents

 

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

 

**Overview**

 

We are a biopharmaceutical company committed to improving the lives ofpeople with diabetes, obesity and other diseases through the discovery,development and commercialization of innovative medicines. We have developedand gained approval for two first-in-class medicines to treat diabetes, BYETTA® (exenatide) injection and SYMLIN® (pramlintide acetate) injection, both of whichwere commercially launched in the United States during the second quarter of2005. BYETTA was approved in the European Union, or EU, in 2006 and ourcollaboration partner, Eli Lilly and Company, or Lilly, has commerciallylaunched BYETTA in 54 countries as of June 30, 2009. Our near-termbusiness strategy is to create value for patients and our stockholders bycapitalizing on market drivers, such as the recent inclusion by the AmericanDiabetes Association, or ADA, of BYETTA as the only new addition to theirtreatment guidelines. Our focus remains on increasing BYETTA and SYMLINrevenue, preparing for the successful launch of exenatide once weekly, ifapproved, significantly improving operating results and progressing towardpositive operating cash flow by the end of 2010. Our long-term strategy isfocused on making prudent investment decisions based on strong clinical data toadvance our obesity program. We intend to finalize our obesity funding anddevelopment strategy by the end of 2009.

 

BYETTAis the first and only approved medicine in a new class of compounds calledglucagon-like peptide-1, or GLP-1, receptor agonists. We began selling BYETTAin the United States in June 2005. BYETTA is approved in the United Statesfor the treatment of patients with type 2 diabetes who have not achievedadequate glycemic control and are using metformin, a sulfonylurea and/or athiazolidinediene, or TZD, three common oral therapies for type 2diabetes. In October 2008, the ADA and the European Association for theStudy of Diabetes, or EASD, updated their type 2 diabetes treatmentguidelines, placing the GLP-1 receptor agonist class, of which BYETTA is the onlyapproved product, as a secondary treatment option for type 2 diabetespatients. In August 2008, the Food and Drug Administration, or FDA,updated a prior alert for BYETTA referencing pancreatitis.  We are currently in discussions with the FDAregarding potential updates to the BYETTA label regarding pancreatitis andother matters.  Prescriptions declined inthe second half of 2008. During that time period we committed our fieldresources to educating the medical community on the facts about BYETTA, pancreatitisand the product’s safety profile. We believe the decline in BYETTAprescriptions and demand for the product continued to stabilize during thequarter ended June 30, 2009.  Net productsales of BYETTA were $175.1 million and $177.5 million for the three monthsended June 30, 2009 and 2008, respectively, and $332.8 million and $336.0million for the six months ended June 30, 2009 and 2008, respectively.

 

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

 

In the second quarter of2009, we entered into several agreements with Lilly that will enable us toimprove the operational effectiveness and efficiency of our collaborationagreement.  In April 2009, we andLilly announced the restructuring of our exenatide operations in order toimprove alliance effectiveness, increase financial and operational efficienciesand maximize the value of BYETTA and exenatide once weekly.  In May 2009, we and Lilly entered into a cost allocation agreement which amendsthe exenatide development and commercialization cost-sharing provisionscontained in the collaboration agreement.

 

21

----

Table ofContents

 

SYMLINis the first and only approved medicine in a new class of compounds calledamylinomimetics. We began selling SYMLIN in the United States in April 2005.Symlin is approved in the United States for the treatment of patients witheither type 1 or type 2 diabetes who are treated with mealtimeinsulin but who have not achieved adequate glycemic control. In early 2008, wecommercially launched the SymlinPen® 120 andSymlinPen® 60 pen injector devices in the United States.These pre-filled pen-injector devices feature simple, fixed dosing to improvemealtime glucose control. Net product sales of SYMLIN were $22.4 million and $22.8 million forthe three months ended June 30, 2009 and 2008, respectively, and $44.0million and $43.1 million for the six months ended June 30, 2009 and 2008,respectively.

 

In May 2009, weannounced a restructuring of our sales force that merged our existing primarycare and specialty sales forces into a single specialty salesorganization.  This new sales force willbe focused on targeting those doctors that write the majority of BYETTA andSYMLIN prescriptions. This sales-force restructuring reduced our total numberof sales representatives by approximately 200 employees.  We incurred restructuring charges of $11.4million during the quarter ended June 30, 2009.  Following this restructuring we have a fieldforce of approximately 400 people dedicated to marketing BYETTA and SYMLIN inthe United States.  Our field forceincludes our specialty sales force, and managed care and government affairsorganizations.  Lilly co-promotes BYETTAin the United States.

 

In addition to our marketedproducts, we are working with Lilly and Alkermes, Inc. to developexenatide once weekly. We are also working with Parsons, Inc. on theconstruction of a manufacturing facility for exenatide once weekly in Ohio. Wesubstantially completed the construction of this facility in 2008. We are nowmanufacturing exenatide once weekly at commercial scale in this facility andusing this material in clinical trials. In March 2009, we reported that analysis of data from the ongoingextension of our DURATION-1 study designed to provide the data required todemonstrate comparability of commercial and development drug lots to supportthe regulatorysubmission of exenatide once weekly have been successfully completed and arepart of the NDA submitted to FDA in May 2009.  The FDA filed the NDA submission in July 2009and the application has a ten month review period.  In March 2009, we alsoannounced that a meta-analysis of primary cardiovascular events acrosscontrolled clinical studies of three months or greater, from the BYETTAdatabase, showed no increased risk of cardiovascular events associated withexenatide use and that these findings will be used to support thecardiovascular safety of exenatide once weekly.

 

In March 2009 and July 2009,we announced positiveresults from DURATION-2 and DURATION-3, respectively, the second and third in aseries of five of such studies designed to test the superiority of exenatideonce weekly compared to other diabetes therapies.  In DURATION-2 exenatide once weeklydemonstrated **superior glucose control withweight loss and no increase in hypoglycemia compared to**maximum dosesof **sitagliptin or pioglitazone.  InDURATION-3**exenatideonce weekly demonstrated **superior glucose control withweight loss and with less hypoglycemia compared to**insulinglargine. During the remainder of 2009, we remain focused on building asuperior profile for exenatide once weekly by conducting clinical studies thatcompare exenatide once weekly against competing products. The objective ofthese studies is to support the launch of exenatide once weekly and demonstratesuperiority and the transformational nature of our exenatide once weeklytherapy.

 

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

 

Our long-term growth strategy is focused on making prudent investmentdecisions based on strong clinical data to advance our obesity program andincludes our IntegratedNeurohormonal Therapies for Obesity strategy.  In July 2009 we announced positiveresults from a 28-week dose-ranging study of pramlintide/metreleptin, acombination treatment comprising pramlintide, an analog of the natural hormoneamylin, and metreleptin, an analog of the natural hormone leptin, in overweightand obese patients. This Phase 2 study successfully characterized patients whoresponded best to treatment and also provided important information to informdose selection.  In 2009, we plan tocontinue the development of a potential obesity medicine that is a combinationof pramlintide and metreleptin and the development of a second generationamylinomimetic, now known as davalintide (formerly known as AC2307).Davalintide is now in a Phase 2 clinical study and we expect to reportdata from this study by the end of 2009. We intend to finalize our obesityfunding and development strategy by the end of 2009.

 

Although our efforts will remain primarily focused on our near-termopportunities including BYETTA, SYMLIN, exenatide once weekly and selectinvestments in our obesity programs, we also maintain an active discoveryresearch program focused on novel peptide and protein therapeutics and areactively seeking to in-license additional drug candidates. 

 

22

----

Table ofContents

 

Wehave also made a number of strategic investments and collaborations for thepotential development of additional drug candidates.

 

Sinceour inception in September 1987, we have devoted substantially all of ourresources to our research and development programs and, more recently, to thecommercialization of our products. All of our revenues prior to May 2005were derived from fees and expense reimbursements under our BYETTAcollaboration agreement with Lilly, previous SYMLIN collaborative agreementsand previous co-promotion agreements. During the second quarter of 2005, webegan to derive revenues from product sales of BYETTA and SYMLIN.  AtJune 30, 2009, our accumulated deficit was approximately $1.9 billion.

 

At June 30,2009, we had approximately $644.4 million in cash, cash equivalents andshort-term investments.  Additionally wehave future availability of $165 million beginning December 1, 2009pursuant to a credit facility with Lilly. Although we may not generate positiveoperating cash flows for the next few years, we intend to improve our operatingresults and reduce our use of cash for operating activities from current levelsto achieve our goal to be operating cash flow positive by the end of 2010.Additionally, we expect that our use of cash for capital expenditures willdecrease significantly from 2008 levels following the substantial completion ofour manufacturing facility in Ohio in 2008. Refer to the discussions under theheadings “*Liquidity and Capital Resources*”below and “*Cautionary Factors That May AffectFuture Results*” in Part I, Item 1A for further discussionregarding our anticipated future capital requirements.

 

**Application of CriticalAccounting Policies**

 

Our discussion andanalysis of financial condition and results of operations are based upon ourconsolidated financial statements, which have been prepared in accordance withU.S. generally accepted accounting principles. The preparation of thesefinancial statements requires us to make significant estimates and judgmentsthat affect the reported amounts of assets, liabilities, revenues and expenses,and related disclosures. On an on-going basis, our actual results may differsignificantly from our estimates.

 

There were no significantchanges in critical accounting policies from those at December 31, 2008,other than the adoption of FSP ABP 14-1 which required the estimation of thenon-convertible borrowing rate for our 2007 Notes.  The financial information as of June 30,2009, should be read in conjunction with the financial statements for the yearended December 31, 2008, contained in our annual report on Form 10-Kfiled on February 27, 2009.

 

For a discussion of ourcritical accounting policies, see “Item 7. Management’s Discussion and Analysisof Financial Condition and Results of Operations” in our annual report on Form 10-Kfiled on February 27, 2009.

 

**Resultsof Operations**

 

**Comparisonof Three Months Ended June 30, 2009 to Three Months Ended June 30,2008**

 

***Net Product Sales***

 

Net product sales for thethree months ended June 30, 2009 and 2008 were $197.5 million and $200.3million, respectively, and consisted of shipments of BYETTA and SYMLIN,less allowances for product returns, rebates, wholesaler chargebacks,wholesaler discounts and prescription vouchers.

 

The following tableprovides information regarding net product sales (in millions):

 
| ** ** | ** ** | **Three months ended  June 30,** | ** ** |
|------------|------------|-------------------------------------------------|------------|
| ** ** | ** ** | **2009**                                        | ** ** | **2008** | ** ** |
| BYETTA     |       | $                                               | 175.1      |   | $ | 177.5 |   |
| SYMLIN     |       | 22.4                                            |       | 22.8 |   |
|       |       | $                                               | 197.5      |   | $ | 200.3 |   |

 

The slight decrease in net product sales for BYETTA inthe current period primarily reflects a reduction in prescription demandfollowing the August 2008 FDA update to a prior alert referencingpancreatitis discussed above, partially offset by higher prices in the threemonths ended June 30, 2009 compared to the same period in 2008.  We believe that prescription demand continuedto stabilize in the three months ended June 30, 2009.

 

23

----

Table of Contents

 

The slight decrease in net product sales for SYMLIN inthe current period primarily reflects a reduction in prescription demandpartially offset by higher prices in the quarter ended June 30, 2009compared to the same period in 2008.  Webelieve that with the increased promotion for SYMLIN with our new specialtysales force discussed above, we have an opportunity to increase SYMLIN demandin the second half of 2009.

 

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

 

***Revenues Under Collaborative Agreements***

 

Revenues under collaborative agreements for the threemonths ended June 30, 2009 were $11.9****million,compared to $21.7 million for the same period in 2008. Substantially all of therevenue recorded in these periods consists of amounts earned pursuant to ourBYETTA collaboration agreement with Lilly. The $9.8 million decrease inrevenues under collaborative agreements in the current quarter compared to thesame period in 2008 reflects lower cost-sharing payments from Lilly forexenatide once weekly and BYETTA due to lower development expenses for exenatideonce weekly and BYETTA.

 

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

 
| ** **                        | ** ** | **Three months ended  June 30,** | ** ** |
|-----------------------------------|------------|-------------------------------------------------|------------|
| ** **                        | ** ** | **2009**                                        | ** ** | **2008** | ** ** |
| Amortization of up-front payments |       | $                                               | 1.1        |   | $ | 1.1 |   |
| Cost-sharing payments             |       | 10.8                                            |       | 20.6 |   |
|                              |       | $                                               | 11.9       |   | $ | 21.7 |   |

 

Infuture periods, we expect that revenues under collaborative agreements willconsist of ongoing cost-sharing payments from Lilly for sharing of developmentcosts, possible future milestone payments, $0.9 million of remainingamortization of the $30 million portion of the up-front payment receivedfrom Lilly upon signing of our collaboration agreement in 2002 and, followingthe commercial launch of exenatide once weekly, the amortization of a portionof the $125 million cash payment received in connection with the exenatideonce weekly supply agreement discussed above. Future cost-sharing revenuerecorded will be dependent on the timing, extent and relative proportion of totaldevelopment costs for the exenatide once weekly and BYETTA development programsincurred by us and by Lilly. The receipt and recognition as revenue of futuremilestone payments is subject to the achievement of performance requirementsunderlying such milestone payments.

 

***Costof Goods Sold***

 

Cost of goods sold was$24.3 million and $24.7 million, for the three months ended June 30, 2009and 2008, respectively, representing a gross margin of 88% in both periods, andis comprised primarily of manufacturing costs associated with BYETTA andSYMLIN.  Quarterly fluctuations in grossmargins may be influenced by product mix, pricing and the level of salesallowances.

 

***Selling, Generaland Administrative Expenses***

 

Selling, general and administrative expenses decreasedto $92.1 million for the three months ended June 30, 2009 from $111.1million for the same period in 2008. The decrease primarily reflectsefficiencies driven by the Company’s reduced cost structure following itsrecent restructurings partially offset by costs associated with our recentproxy contest.  We expect that selling,general and administrative expenses for 2009 will decrease from current levelsas we begin to realize the full savings of our May 2009 sales forcerestructuring and the absence of proxy-contest costs in the second half of2009.

 

We, along with Lilly, are jointly responsible for the co-promotion ofBYETTA within the United States, and share equally in sales force costs andexternal marketing expenses. Accordingly, our selling, general andadministrative expenses include our 50% share of these costs in the UnitedStates.

 

***Research andDevelopment Expenses***

 

Ourresearch and development costs are comprised of salaries and bonuses, benefitsand non-cash stock-based compensation; license fees, milestones under licenseagreements and costs paid to third-party contractors to perform research, 

 

24

----

Table ofContents

 

conductclinical trials and develop drug materials and delivery devices; and associatedoverhead expenses and facilities costs. We charge direct internal and externalprogram costs to the respective development programs. We also incur indirectcosts that are not allocated to specific programs because such costs benefitmultiple development programs and allow us to increase our pharmaceuticaldevelopment capabilities. These consist primarily of facilities costs and otherinternal shared resources related to the development and maintenance of systemsand processes applicable to all of our programs.

 

Our research anddevelopment efforts are focused on diabetes, obesity and other diseases.  We also maintain an active discovery researchprogram.  In diabetes, we have twoapproved products, BYETTA and SYMLIN, and we are developing exenatide onceweekly, a long-acting release formulation of exenatide, the activepharmaceutical ingredient in BYETTA.  Inobesity, we have a number of compounds in development for the potentialtreatment of obesity, which are part of a broader program, which we refer to asINTO: Integrated Neurohormonal Therapies for Obesity.  As part of this program, we are currentlyconducting clinical trials of our drug candidates, or combinations of our drugcandidates.

 

The following tableprovides information regarding our research and development expenses for ourmajor projects (in millions):

 
| ** **                         | ** ** | **Three months ended June 30,** | ** ** |
|------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                         | ** ** | **2009**                                            | ** ** | **2008** | ** ** | **Increase/(Decrease)** | ** ** |
| Diabetes  (1)                      |       | $                                                   | 35.3       |   | $ | 41.2 |   | $ | (5.9 | ) |
| Obesity                            |       | 8.1                                                 |       | 12.3 |   | (4.2 | ) |
| Research  and early-stage programs |       | 6.4                                                 |       | 9.1 |   | (2.7 | ) |
| Indirect  costs                    |       | 13.8                                                |       | 12.8 |   | 1.0 |   |
|                               |       |                                                |       |   |   |   |   |
|                               |       | $                                                   | 63.6       |   | $ | 75.4 |   | $ | (11.8 | ) |

 

----

(1)          Research and development expenses for ourdiabetes programs consist primarily of costs associated with BYETTA andexenatide once weekly which are shared by Lilly pursuant to our collaborationagreement.  Cost-sharing paymentsreceived by Lilly are included in revenues under collaborative agreements.  Expenditures for our diabetes developmentprograms are generally partially offset by an increase in cost-sharing paymentsfrom Lilly.  Cost-sharing payments fromLilly for BYETTA and exenatide once weekly development expenses were $10.6million and $20.2 million for the three months ended June 30, 2009 and 2008,respectively.

 

The$11.8 million decrease in research and development expenses for the threemonths ended June 30, 2009 compared to the same period in 2008 primarilyreflects decreased expenses of $5.9 million for our diabetes programs anddecreased expenses of $4.2 million for our obesity development programs.  The decrease in expenses for our research anddevelopment programs primarily reflects efficiencies driven by our reduced coststructure following our recent restructurings. We expectresearch and development expenses for 2009 to increase from current levels dueto costs necessary to prepare our Ohio manufacturing facility for the plannedlaunch of exenatide once weekly in 2010.

 

***Collaborative Profit Sharing***

 

Collaborative profitsharing was $76.2 million and $79.0 million for the three months ended June 30,2009 and 2008, respectively, and consists of Lilly’s 50% share of the grossmargin for BYETTA in the United States.

 

***Restructuring***

 

In May 2009, weannounced a restructuring of our sales force that merged our existing primarycare and specialty sales forces into a single specialty salesorganization.  This new sales force willbe focused on targeting those doctors that write the majority of BYETTA and SYMLINprescriptions. This sales force restructuring reduced our total number of salesrepresentatives by approximately 200 employees. We incurred restructuring charges of $11.4 million during the quarterended June 30, 2009 consisting primarily of employee separation costs.

 

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

 

Interest and other incomeconsists primarily of interest income from investment of cash and otherinvestments. Interest and other income decreased to $0.7 million for the threemonths ended June 30, 2009 from $7.0 million for the same period in2008.  The decrease primarily reflectslower average balances available for investment, lower interest rates earned onour 

 

25

----

Table ofContents

 

short-term investmentsand $1.4 million in other-than-temporary impairments on certain investments inour portfolio discussed in Note 3 to the accompanying financial statements inthe three months ended June 30, 2009 compared to the same period in 2008.

 

Interest and other expenseconsists primarily of interest expense resulting from our long-term debtobligations. Interest expense in the three months ended June 30, 2009consists of interest on our $775 million par value of outstanding convertiblesenior notes and our $109.4 million of outstanding long-term note payable, theamortization of associated debt issuance costs and recognized gains and lossesassociated with recording economic hedge transactions at fair value. Interest and other expense was $4.9million and $5.5 million for the three months ended June 30, 2009 and2008, respectively.  The decrease ininterest and other expense for the three months ended June 30, 2009primarily reflects an increase in capitalized interest associated with our Ohiomanufacturing facility and an increase in recognized gains associated witheconomic hedge transactions, partially offset by increased non-cash interestexpense from the amortization of the debt discount on our 2007 Notes discussedin Note 2 to the accompanying financial statements.

 

***Net Loss***

 

Our net loss for thethree months ended June 30, 2009 was $62.4 million compared to a net lossof $66.6 million for the same period in 2008. The decrease in net lossprimarily reflects the decreased selling, general and administrative expenses,decreased research and development expenses and decreased collaborativeprofit-sharing, partially offset by the decreased revenue under collaborativeagreements and the restructuring charge discussed above under the heading “*Restructuring.*”  We may incuroperating losses for the next few years. In November 2008 we announced ourrestructuring and our business plan to become operating cash flow positive bythe end of 2010 and in May 2009 we announced the restructuring of oursales force as discussed above.  However,our ability to reach profitability in the future will be heavily dependent uponproduct sales that we achieve for BYETTA, SYMLIN and exenatide once weekly, ifapproved.  Our ability to achieveprofitability in the future will also depend our ability to continue to controlour operating expenses, including ongoing expenses associated with the continuedcommercialization of BYETTA and SYMLIN, costs associated with the developmentand commercialization of exenatide once weekly, if approved, and expensesassociated with our research and development programs, including our obesityand early-stage development programs and related support infrastructure. Ouroperating results may fluctuate from quarter to quarter as a result ofdifferences in the timing of expenses incurred and revenues recognized.

 

**Comparisonof Six Months Ended June 30, 2009 to Six Months Ended June 30, 2008**

 

***Net Product Sales***

 

Net product sales for thesix months ended June 30, 2009 and 2008 were $376.8 million and $379.1million, respectively, and consisted of shipments of BYETTA and SYMLIN,less allowances for product returns, rebates, wholesaler chargebacks,wholesaler discounts and prescription vouchers.

 

The following tableprovides information regarding net product sales (in millions):

 
| ** ** | ** ** | **Six months ended  June 30,** | ** ** |
|------------|------------|-----------------------------------------------|------------|
| ** ** | ** ** | **2009**                                      | ** ** | **2008** | ** ** |
| BYETTA     |       | $                                             | 332.8      |   | $ | 336.0 |   |
| SYMLIN     |       | 44.0                                          |       | 43.1 |   |
|       |       | $                                             | 376.8      |   | $ | 379.1 |   |

 

The slight decrease in net product sales for BYETTA inthe current period primarily reflects decreased prescription demand followingthe August 2008 FDA update on a prior alert referencing pancreatitisdiscussed above and an allowance for rebates related to the U.S. Department ofDefense’s (DOD) Tricare Retail Pharmacy program, including $4.4 million for aretroactive rebate assessment for sales during 2008, partially offset by higherprices in the six months ended June 30, 2009 compared to the same periodin 2008. We believe that prescription demand has stabilized in the six monthsended June 30, 2009.

 

The slight increases in net product sales for SYMLINin the current period primarily reflects higher prices partially offset by areserve for the DOD’s Tricare Retail Pharmacy program, including $0.4 millionfor a retroactive rebate assessment for sales during 2008 and a reduction inprescription demand. We believe that with the increased promotion for SYMLINwith our new specialty sales force discussed above, we have the opportunity toincrease SYMLIN demand in the second half of 2009.

 

26

----

Table of Contents

 

We recorded an allowance related to the DOD’s TricareRetail Pharmacy program pursuant to a final rule that was issued in March 2009,and is effective May 26, 2009.  Thefinal rule clarified the DOD’s interpretation of the National DefenseAuthorization Act of 2008, or NDAA, signed into law on January 28,2008.  The final rule changed theprocess by which rebate obligations for the Tricare Retail Pharmacy program arecreated such that a contractual agreement is no longer required and thatobligation to pay such rebates emanates from the NDAA itself.  In consideration of this final rule werecorded an allowance of $6.6 million for such rebates in the six months ended June 30,2009, of which $4.8 million represents a retroactive rebate assessment forsales made during 2008.

 

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

 

***Revenues Under Collaborative Agreements***

 

Revenues under collaborative agreements for the sixmonths ended June 30, 2009 were $26.2****million,compared to $40.2 million for the same period in 2008. Substantially all of therevenue recorded in these periods consists of amounts earned pursuant to ourexenatide collaboration agreement with Lilly. The $14.0 million decrease inrevenues under collaborative agreements in the current quarter compared to thesame period in 2008 reflects lower cost-sharing payments from Lilly forexenatide once weekly and BYETTA due to lower development expenses forexenatide once weekly and BYETTA.

 

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

 
| ** **                        | ** ** | **Six months ended  June 30,** | ** ** |
|-----------------------------------|------------|-----------------------------------------------|------------|
| ** **                        | ** ** | **2009**                                      | ** ** | **2008** | ** ** |
| Amortization of up-front payments |       | $                                             | 2.1        |   | $ | 2.1 |   |
| Cost-sharing payments             |       | 24.1                                          |       | 38.1 |   |
|                              |       | $                                             | 26.2       |   | $ | 40.2 |   |

 

Infuture periods, we expect that revenues under collaborative agreements willconsist of ongoing cost-sharing payments from Lilly for sharing of developmentcosts, possible future milestone payments, $0.9 million of remainingamortization of the $30 million portion of the up-front payment receivedfrom Lilly upon signing of our collaboration agreement in 2002 and, followingthe commercial launch of exenatide once weekly, the amortization of a portionof the $125 million cash payment received in connection with the exenatideonce weekly supply agreement discussed above. Future cost-sharing revenuerecorded will be dependent on the timing, extent and relative proportion oftotal development costs for the exenatide once weekly and BYETTA developmentprograms incurred by us and by Lilly. The receipt and recognition as revenue offuture milestone payments is subject to the achievement of performancerequirements underlying such milestone payments.

 

***Costof Goods Sold***

 

Cost of goods sold was$42.9 million, representing a gross margin of 89%, and $46.7 million,representing a gross margin of 88%, for the six months ended June 30, 2009and 2008, respectively, and is comprised primarily of manufacturing costsassociated with BYETTA and SYMLIN.  The improvementin gross margin for the six months ended June 30, 2009, compared to thesame period in 2008, primarily reflects higher net sales prices forBYETTA and SYMLIN. Quarterlyfluctuations in gross margins may be influenced by product mix, pricing and thelevel of sales allowances.

 

***Selling, Generaland Administrative Expenses***

 

Selling, general and administrative expenses decreasedto $179.6 million for the six months ended June 30, 2009 from $209.3million for the same period in 2008. The decrease primarily reflectsefficiencies driven by the Company’s reduced cost structure following its recentrestructurings partially offset by costs associated with our recent proxycontest.  We expect that selling, generaland administrative expenses for 2009 will decrease from current levels as webegin to realize the full savings impact of our May 2009 sales forcerestructuring and the absence of proxy contest costs in the second half of theyear.

 

27

----

Table ofContents

 

We, along with Lilly, are jointly responsible for the co-promotion ofBYETTA within the United States, and share equally in sales force costs andexternal marketing expenses. Accordingly, our selling, general andadministrative expenses include our 50% share of these costs in the UnitedStates.

 

***Research andDevelopment Expenses***

 

Ourresearch and development costs are comprised of salaries and bonuses, benefitsand non-cash stock-based compensation; license fees, milestones under licenseagreements and costs paid to third-party contractors to perform research,conduct clinical trials and develop drug materials and delivery devices; andassociated overhead expenses and facilities costs. We charge direct internaland external program costs to the respective development programs. We alsoincur indirect costs that are not allocated to specific programs because suchcosts benefit multiple development programs and allow us to increase ourpharmaceutical development capabilities. These consist primarily of facilitiescosts and other internal shared resources related to the development andmaintenance of systems and processes applicable to all of our programs.

 

Our research anddevelopment efforts are focused on diabetes, obesity and other diseases.  We also maintain an active discovery researchprogram.  In diabetes, we have twoapproved products, BYETTA and SYMLIN, and we are developing exenatide onceweekly, a long-acting release formulation of exenatide, the activepharmaceutical ingredient in BYETTA.  Inobesity, we have a number of compounds in development for the potentialtreatment of obesity, which are part of a broader program, which we refer to asINTO: Integrated Neurohormonal Therapies for Obesity.  As part of this program, we are currentlyconducting clinical trials of our drug candidates, or combinations of our drugcandidates.

 

The following tableprovides information regarding our research and development expenses for ourmajor projects (in millions):

 
| ** **                         | ** ** | **Six months ended June 30,** | ** ** |
|------------------------------------|------------|---------------------------------------------------|------------|
| ** **                         | ** ** | **2009**                                          | ** ** | **2008** | ** ** | **Increase/(Decrease)** | ** ** |
| Diabetes (1)                       |       | $                                                 | 66.3       |   | $ | 81.7 |   | $ | (15.4 | ) |
| Obesity                            |       | 16.3                                              |       | 29.3 |   | (13.0 | ) |
| Research  and early-stage programs |       | 12.7                                              |       | 16.5 |   | (3.8 | ) |
| Indirect  costs                    |       | 28.3                                              |       | 25.1 |   | 3.2 |   |
|                               |       | $                                                 | 123.6      |   | $ | 152.6 |   | $ | (29.0 | ) |

 

----

(1)  Researchand development expenses for our diabetes programs consist primarily of costsassociated with BYETTA and exenatide once weekly which are shared by Lillypursuant to our collaboration agreement. Cost-sharing payments received by Lilly are included in revenues undercollaborative agreements.  Expendituresfor our diabetes development programs are generally partially offset by anincrease in cost-sharing payments from Lilly. Cost-sharing payments from Lilly for BYETTA and exenatide once weeklydevelopment expenses were $23.5 million and $37.4 million for the six monthsended June 30, 2009 and 2008, respectively.

 

The$29.0 million decrease in research and development expenses for the six monthsended June 30, 2009 compared to the same period in 2008 primarily reflectsdecreased expenses of $15.4 million for our diabetes programs and decreasedexpenses of $13.0 million for our obesity development programs.  The decrease in expenses for our research anddevelopment programs primarily reflects efficiencies driven by our reduced coststructure following our recent restructurings. We expectresearch and development expenses for 2009 will increase from current levelsdriven by costs necessary to prepare our Ohio manufacturing facility for theplanned launch of exenatide once weekly in 2010.

 

***Collaborative Profit Sharing***

 

Collaborative profitsharing was $149.2 million and $148.9 million for the six months ended June 30,2009 and 2008, respectively, and consists of Lilly’s 50% share of the grossmargin for BYETTA in the United States.

 

28

----

Table of Contents

 

***Interestand Other Income and Expense***

 

Interest and other incomeconsist primarily of interest income from investment of cash and otherinvestments. Interest and other income decreased to $3.7 million for the sixmonths ended June 30, 2009 from $18.0 million for the same period in2008.  The decrease primarily reflectslower average balances available for investment, lower interest rates earned onour short-term investments and $1.4 million in other-than-temporary impairmentson certain investments in our portfolio discussed in Note 3 to the accompanyingfinancial statements in the six months ended June 30, 2009 compared to thesame period in 2008.

 

Interest and other expenseconsist primarily of interest expense resulting from our long-term debtobligations. Interest expense in the six months ended June 30, 2009consists of interest on our $775 million par value of outstanding convertiblesenior notes and our $109.4 million of outstanding long-term note payable, theamortization of associated debt issuance costs and recognized gains and lossesassociated with recording economic hedge transactions at fair value. Interest and other expense was $9.4million and $17.5 million for the six months ended June 30, 2009 and 2008,respectively.  The decrease in interestand other expense for the six months ended June 30, 2009 primarilyreflects an increase in capitalized interest associated with our Ohiomanufacturing facility and an increase in recognized gains associated witheconomic hedge transactions, partially offset by increased non-cash interestexpense from the amortization of the debt discount on our 2007 Notes discussedin Note 2 to the accompanying financial statements.

 

***Net Loss***

 

Our net loss for the sixmonths ended June 30, 2009 was $109.3 million compared to a net loss of$137.7 million for the same period in 2008. The decrease in net loss primarilyreflects the decreased selling, general and administrative expenses anddecreased research and development expenses, partially offset by decreased netproduct sales, decreased revenue under collaborative agreements, increasedcollaborative profit-sharing and the restructuring charge discussed above underthe heading “*Restructuring.*”  We may incur operatinglosses for the next few years. In November 2008 we announced ourrestructuring and our business plan to become operating cash flow positive bythe end of 2010, and in May 2009 we announced the restructuring of oursales force as discussed above.  However,our ability to reach profitability in the future will be heavily dependent uponthe product sales that we achieve for BYETTA, SYMLIN and exenatide once weekly,if approved.  Our ability to achieveprofitability in the future will also depend our ability to continue to controlour operating expenses, including ongoing expenses associated with thecontinued commercialization of BYETTA and SYMLIN, costs associated with thedevelopment and commercialization of exenatide once weekly, if approved, andexpenses associated with our research and development programs, including ourobesity and our early-stage development programs and related supportinfrastructure. Our operating results may fluctuate from quarter to quarter asa result of differences in the timing of expenses incurred and revenuesrecognized.

 

# **Liquidity and Capital Resources**

#  

Since our inception, wehave financed our operations primarily through public sales and privateplacements of our common and preferred stock, debt financings, paymentsreceived pursuant to our exenatide collaboration with Lilly, reimbursement ofSYMLIN development expenses through earlier collaboration agreements and, sincethe second quarter of 2005, through product sales of BYETTA and SYMLIN.

 

At June 30,2009, we had approximately $644.4 million in cash, cash equivalents andshort-term investments, compared to $816.8 million at December 31, 2008, and we havefuture availability of $165 million beginning December 1, 2009pursuant to the loan agreement with Lilly. In November 2008, following ourrestructuring, we announced our business plan to be operating cash flowpositive by the end of 2010.  Inaddition, in May 2009, we implemented a restructuring of our sales force.  We expect that our use of cash for capitalexpenditures to decrease in 2009 compared to 2008 following the substantialcompletion of our manufacturing facility in Ohio in 2008, partially offset byadditional capital expenditures for the development of a pen device forexenatide once weekly.  Our currentbusiness plan does not contemplate a need to raise additional funds fromoutside sources however we will continue to evaluate the performance of ourbusiness and strategic opportunities which may require us to raise additionalfunds from outside sources in the future. If we require additional financing inthe future, we cannot assure you that it will be available to us on favorableterms, or at all. Although we have previously been successful in obtainingfinancing through our debt and equity securities offerings, there can be noassurance that we will be able to do so in the future, especially given thecurrent adverse economic and credit conditions.

 

We used cash of$95.1 million and $72.7 million for our operating activities in the six monthsended June 30, 2009 and 2008, respectively.  Our cash used for operating activities in thesix months ended June 30, 2009 includes a net use of cash of $45.9 millionfor changes in operating assets and liabilities.  This includes uses of cash due to increases inother current assets and accounts receivable of $23.3 million and $14.0million, respectively, and decreases in accounts payable and accruedliabilities, accrued compensation and restructuring liabilities of $10.3million, $5.7 million and $13.7 million, respectively.  This also includes sources of cash forincreases in payable to collaborative partner and long-term capital 

 

29

----

Table ofContents

 

reimbursement liabilityand a decrease in inventories of $10.7 million, $17.9 million and $6.0 million,respectively.  The increase in othercurrent assets reflects prepayments for raw material inventory and the increasein accounts receivable reflects increased sales in the quarter ended June 30,2009 compared to the quarter ended March 31, 2009.  The decrease in accounts payable and accruedliabilities primarily reflects lower expense levels. The decrease in accruedcompensation primarily reflects the payment of certain annual compensationaccruals related to fiscal year 2008, partially offset by additional annualcompensation accruals related to fiscal year 2009. The decrease inrestructuring liabilities reflects payments made in relation to our recentrestructuring activities, partially offset by additional accruals related toour May 2009 sales force restructuring primarily related to employeeseparation costs.  The increase inpayable to collaborative partner reflects increased gross margin for BYETTA,which we share equally with Lilly, and is driven by increased sales in thequarter ended June 30, 2009 compared to the quarter ended March 31,2009.  The increase in deferredcollaborative profit-sharing reflects payments from Lilly for its 60% share ofthe capital expenditures we have made for the exenatide once weekly pendevice.  The decrease in inventoriesprimarily reflects reduction in finished goods due to the timing and volume ofproduction.  Working capital changes mayfluctuate from quarter to quarter due to timing of inventory and other currentasset purchases and the timing of payments of accounts payable, accruedcompensation and other current liabilities.

 

Our investing activitiesused cash of $19.6 million and $228.2 million for the six months ended June 30,2009 and 2008, respectively. Investing activities in both quarters consistedprimarily of purchases and sales of short-term investments and purchases ofproperty, plant and equipment and increases in other long-term assets.  Purchases of property, plant and equipmentdecreased to $70.7 million for the six months ended June 30, 2009 from$173.4 million for the six months ended June 30, 2008.  The decrease in purchases of property, plantand equipment primarily reflects reduced expenditures for our Ohiomanufacturing facility following its substantial completion in the year ended December 31,2008. Through June 30, 2009, we had expended approximately $615 millionassociated with the construction of this facility, including the exenatide onceweekly pen device discussed below, which includes costs associated with theconstruction of the facility, purchase and installation of equipment andcapitalized labor and materials required to validate the facility.  We expect that our use of cash for capitalexpenditures will decrease in 2009 compared to 2008 following the substantialcompletion of our manufacturing facility in Ohio in 2008, partially offset bycapital investments associated with the exenatide once weekly pen devicediscussed above.  The initial capitalinvestment for the pen is expected to be $216 million over the next few years,which will be funded 60% by Lilly and 40% by us. Through June 30, 2009, wehad incurred $35.6 million in capital expenditures associated with theexenatide once weekly pen device. Lilly’s 60% share of these expenditures is$21.4 million, of which $17.9 million has been received to date and is includedin cash used for operating activities as discussed above.  We will continue to evaluate potentialadditional investments in our Ohio manufacturing facility during the productlifecycle for exenatide once weekly.

 

Financing activities usedcash of $11.2 million and provided cash of $9.5 million for the six monthsended June 30, 2009 and 2008, respectively.  Financing activities in thesix months ended June 30, 2009 include $15.6 million in principal paymentson our term loan, partially offset by proceeds from the exercise of stockoptions and proceeds from our employee stock purchase plan. Financingactivities for the six months ended June 30, 2008 include proceeds fromthe exercise of stock options and proceeds from our employee stock purchaseplan.

 

At December 31, 2008, we had $200 million in aggregateprincipal amount of convertible senior notes due 2011, or the 2004 Notes, and$575 million of the convertible senior notes due 2014, or the 2007 Notes,outstanding. The 2004 Notes are currently convertible into a total of up to5.8 million shares of our common stock at approximately $34.35 per shareand are not redeemable at our option. The 2007 Notes are currently convertibleinto a total of up to 9.4 million shares of our common stock atapproximately $61.07 per share and are not redeemable at our option.  Subject to certain exceptions, if we undergo a “designatedevent” (as defined in the associated indenture agreement) including a “fundamentalchange,” such as if a majority of our Board of Directors ceases to be composedof the existing directors or other individuals approved by a majority of theexisting directors, holders of the 2007 Notes will, for the duration of thenotes, have the option to require the Company to repurchase all or any portionof their 2007 Notes.

 

In December 2007, we entered into a $140 million creditagreement. The credit agreement provides for a $125 million term loan anda $15 million revolving credit facility. The revolving credit facilityalso provides for the issuance of letters of credit and foreign exchangehedging up to the $15 million borrowing limit. The term loan is repayableon a quarterly basis, with no payments due quarters one through four, 6.25% ofthe outstanding principal due quarters five through eleven, and 56.25% of theoutstanding principal due in quarter twelve. At June 30, 2009 we had anoutstanding balance of $109.4 million under the term loan and had issued$7.1 million of standby letters of credit under the revolving creditfacility. Both loans have a final maturity date of December 21, 2010.Interest on the term loan is payable quarterly in arrears at a rate equal to1.75% above the London Interbank Offered Rate, or LIBOR, of either one, two,three or six months LIBOR term at our election. We have entered into aninterest rate swap agreement which resulted in a net fixed interest rate of5.717% under the term loan. The interest rate on the credit facility is LIBORplus 1.0% or the Bank of America prime rate, at our election.  The credit agreement provides for automaticacceleration upon the occurrence of bankruptcy, other insolvency events and achange in control as defined in the credit agreement, as amended.

 

30

----

Table of Contents

 

In October 2008, we entered into a loan agreement with Lillypursuant to which Lilly will make available to us a $165 million unsecuredline of credit that we can draw upon from time to time beginning on December 1,2009 and ending on June 30, 2011. Any interest due under this creditfacility will bear interest at the five-day average three-month LIBOR rateimmediately prior to the date of the advance plus 5.25% and shall be due andpayable quarterly in arrears on the first business day of each quarter. Alloutstanding principal, together with all accrued and unpaid interest, shall bedue and payable the earlier of 36 months following the date on which theloan commitment is fully advanced or June 30, 2014.

 

The following table summarizes our contractualobligations and maturity dates as of June 30, 2009 (in thousands):

 
| ** **                                                             | ** ** | **Payments Due by Period** | ** ** |
|------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| **Contractual Obligations**                                       | ** ** | **Total**                                 | ** ** | **Less than 1  year** | ** ** | **1-3 years** | ** ** | **4-5 years** | ** ** | **After 5 years** | ** ** |
| Long-term convertible debt                                             |       | $                                         | 775,000    |   | $ | — |   | $ | 200,000 |   | $ | 575,000 |   | $ | — |   |
| Interest on long-term  convertible debt                                |       | 96,250                                    |       | 22,250 |   | 39,500 |   | 34,500 |   | — |   |
| Long-term note payable                                                 |       | 109,375                                   |       | 31,250 |   | 78,125 |   | — |   | — |   |
| Interest on long-term note  payable, net of swap transactions (1) |       | 7,705                                     |       | 5,583 |   | 2,122 |   | — |   | — |   |
| Inventory purchase  obligations(2)                                     |       | 116,344                                   |       | 46,409 |   | 60,758 |   | 9,177 |   | — |   |
| Construction contracts                                                 |       | 45,011                                    |       | 45,011 |   | — |   | — |   | — |   |
| Operating lease obligations                                            |       | 199,006                                   |       | 23,026 |   | 47,600 |   | 50,130 |   | 78,250 |   |
| Total(3)                                                               |       | $                                         | 1,348,691  |   | $ | 173,529 |   | $ | 428,105 |   | $ | 668,807 |   | $ | 78,250 |   |

 

----

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

 

(2)          Includes $32.0 million ofoutstanding purchase orders, cancelable by us upon 30 days’ written notice, subjectto reimbursement of costs incurred through the date of cancellation.

 

(3)          Excludes long-term obligationof $7.8 million related to deferred compensation, the payment of which issubject to elections made by participants that are subject to change.

 

Inaddition, under certain license and collaboration agreements we are required topay royalties and/or milestone payments upon the successful development andcommercialization of related products. We expect to make development milestone payments up to $2.5 millionassociated with licensing agreements in the next 12 months.  Additional milestones of up to approximately$284.9 million could be paid over the next 10 to 15 years if development andcommercialization of all our early stage programs continue and aresuccessful.  The significant majority ofthese milestones relate to potential future regulatory approvals and subsequentsales thresholds.  Given the inherentrisk in pharmaceutical development, it is highly unlikely that we willultimately make all of these milestone payments; however, we would considerthese payments as positive because they would signify that the related productsare moving successfully through development and commercialization.

 

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

 

31

----

Tableof Contents

 

**Off-Balance Sheet Arrangements**

 

We do not have any off-balance sheet arrangements that are currently orreasonably likely to be material to our consolidated financial position orresults of operations.

 
| **ITEM  3.** | **Quantitative  and Qualitative Disclosures about Market Risk** |
|--------------|-----------------------------------------------------------------|

 

Weinvest our excess cash primarily in United States Government securities,asset-backed securities, and debt instruments of financial institutions andcorporations with investment-grade credit ratings. These instruments havevarious short-term maturities. We do not utilize derivative financialinstruments, derivative commodity instruments or other market risk sensitiveinstruments, positions or transactions in any material fashion. Accordingly, webelieve that, while the instruments held are subject to changes in thefinancial standing of the issuer of such securities, we are not subject to anymaterial risks arising from changes in interest rates, foreign currencyexchange rates, commodity prices, equity prices or other market changes thataffect market risk sensitive investments. Our debt is not subject tosignificant swings in valuation due to changes in interest rates as interestrates on our debt are fixed.  The fair value ofour 2004 Notes and 2007 Notes at June 30, 2009 was approximately $178.4million and $373.7 million, respectively. We have entered into an interest rate swap in connection with our$125 million term loan.  The fairvalue of the interest rate swap at June 30, 2009 was a liability of$3.9 million.  A hypothetical 1%adverse move in interest rates along the entire interest rate yield curve wouldnot materially affect the fair value of our financial instruments that areexposed to changes in interest rates.

 
| **ITEM  4.** | **Controls and Procedures** |
|--------------|-----------------------------|

 

As of June 30, 2009,an evaluation was performed under the supervision and with the participation ofour management, including our President and Chief Executive Officer (referredto as our CEO) and our Senior Vice President, Finance and Chief FinancialOfficer (referred to as our CFO), of the effectiveness of the design andoperation of our disclosure controls and procedures. In designing andevaluating the disclosure controls and procedures, management recognizes thatany controls and procedures, no matter how well designed and operated, canprovide only reasonable assurance of achieving the desired control objectives,and management necessarily is required to apply its judgment in evaluating thecost-benefit relationship of possible controls and procedures. Based on thatevaluation, our management, including our CEO and CFO, concluded that ourdisclosure controls and procedures were effective at a reasonable level ofassurance as of June 30, 2009.

 

Our management does notexpect that our disclosure control and procedures or our internal control overfinancial reporting will prevent all error and all fraud. A control system, nomatter how well conceived and operated, can provide only reasonable, notabsolute, assurance that the objectives of the control system are met. Becauseof the inherent limitations in all control systems, no evaluation of controlscan provide absolute assurance that all control issues and instances of fraud,if any, or misstatements due to error, if any, within the company have beendetected. While we believe that our disclosure controls and procedures andinternal control over financial reporting are and have been effective, in lightof the foregoing we intend to continue to examine and refine our disclosurecontrols and procedures and internal control over financial reporting.

 

An evaluation wasalso performed under the supervision and with the participation of our management,including our CEO and CFO, of any change in our internal control over financialreporting that occurred during our last fiscal quarter and that has materiallyaffected, or is reasonably likely to materially affect, our internal controlover financial reporting. That evaluation did not identify any change in ourinternal control over financial reporting that occurred during our latestfiscal quarter and that has materially affected, or is reasonably likely toaffect, our internal control over financial reporting.

 

**PART II. OTHER INFORMATION**

 

**Item 1.  Legal Proceedings**

 

Product Liability and Other Claims

 

Fromtime to time in the ordinary course of business, we become involved in variouslawsuits, claims and proceedings relating to the conduct of our business,including those pertaining to product liability, patent infringement andemployment claims.  Since August 2008,we and Lilly have been named as defendants in 21 separate product liabilitycases involving approximately 110 plaintiffs in various courts in the UnitedStates and a putative class action lawsuit that has been filed inLouisiana.  These cases have been broughtby individuals who allege they have used BYETTA.  They generally seek compensatory and punitivedamages for alleged injuries, consisting primarily of pancreatitis, and in afew cases, wrongful death.  Most of thecases are pending in California state court, where the Judicial Councilrecently granted our petition for a “coordinated proceeding” for all Californiastate court cases alleging harm allegedly as a result of BYETTA use.  We also have received notice from plaintiff’s counsel ofadditional claims by individuals who have not filed suit.  While we cannot predict the outcome of anylawsuit, claim or proceeding, we and Lilly intend to vigorously defend thesematters.

 

32

----

Table of Contents

 

StockholderLitigation

 

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

 

OnMay 6, 2009, we entered into an amendment of the Credit Agreement.  The amendment provides that lenders under theCredit Agreement agree to consent to the election of six or more stockholdernominees to our Board at our 2009 annual meeting of stockholders upon paymentof a fee and the satisfaction of certain conditions as set forth in theamendment.  A hearing of this case washeld on May 4, 2009.  On May 12,2009 the court (i) entered a judgment in favor of the defendants for aclaim alleging breach of the duty of care by defendant directors; (ii) renderedmoot a claim seeking declaration of the invalidity and unenforceability of acontinuing directors’ provision in a credit agreement with Bank of America and (iii) declaredthat our Board was entitled to approve dissident nominees for purposes of itsindenture with Bank of New York, dismissing without prejudice other claims asbeing unripe for adjudication.  On June 5,2009, the plaintiff appealed the court’s decision.  A hearing has been set for September 30,2009.

 

OnJune 9, 2009, the independent Inspector of Elections for our annualmeeting of stockholders held on May 27, 2009 issued its certified final reportwhich indicated that two stockholder director nominees were elected to ourBoard.  The election of these twonominees out of twelve Board seats at this year’s annual meeting will nottrigger the relevant provisions in our debt instruments.

 

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

 

**CAUTIONARYFACTORS THAT MAY AFFECT FUTURE RESULTS**

 

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

 

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

 

We have experienced significant operating losses since our inception in1987, including losses of $109.3 million for the six months ended June 30,2009, $321.9 million in 2008, $216.5 million in 2007 and$218.9 million in 2006. As of June 30, 2009, we had an accumulateddeficit of approximately $1.9 billion. The extent of our future losses andthe timing of potential profitability are uncertain, and we may never achieveprofitable operations. We have been engaged in discovering and developing drugssince inception, which has required, and will continue to require, significantresearch and development expenditures. We derived substantially all of ourrevenues prior to 2005 from development funding, fees and milestone paymentsunder collaborative agreements and from interest income. BYETTA and SYMLIN maynot be as commercially successful as we expect and we may not succeed incommercializing any of our other drug candidates. We may incur substantialoperating losses for at least the next few years. These losses, among otherthings, have had and will have an adverse effect on our stockholders’ equityand working capital. Even if we become profitable, we may not remainprofitable.

 

***We began selling, marketing anddistributing our first products, BYETTA and SYMLIN, in 2005 and we will dependheavily on the success of those products in the marketplace.***

 

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

 

33

----

Tableof Contents

 

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

 

·                  acceptance of and ongoingsatisfaction with these first-in-class medicines in the United States andforeign markets by the medical community, patients receiving therapy and thirdparty payers;

 

·                  a satisfactory efficacy andsafety profile as demonstrated in a broad patient population;

 

·                  successfully expanding andsustaining manufacturing capacity to meet demand;

 

·                  safety concerns in themarketplace for diabetes therapies;

 

·                  the competitive landscapefor approved and developing therapies that will compete with the products; and

 

·                  our ability to expand theindications for which we can market the products.

 

***If we encounter safety issues withBYETTA or SYMLIN or any other drugs we market or fail to comply with extensivecontinuing regulations enforced by domestic and foreign regulatory authorities,it could cause us to discontinue marketing those drugs, reduce our revenues andharm our ability to generate future revenues, which would negatively impact ourfinancial position.***

 

BYETTA and SYMLIN, in addition to any other of our drug candidates thatmay be approved by the FDA, will be subject to continual review by the FDA, andwe cannot assure you that newly discovered or developed safety issues will notarise. With the use of any of our marketed drugs by a wide patient population,serious adverse events may occur from time to time that initially do not appearto relate to the drug itself, and only if the specific event occurs with someregularity over a period of time does the drug become suspect as having acausal relationship to the adverse event. Some patients taking BYETTA havereported developing pancreatitis. We are working to better understand therelationship between BYETTA and pancreatitis described in some spontaneouslyreported cases. In keeping with our focus on patient safety, we continue topursue our drug safety program that includes thorough investigation ofindividual spontaneous case reports along with clinical and epidemiologicstudies. Within the detection limits of an initial epidemiology study which weprovided to the FDA, we have not observed an increased incidence of pancreatitisassociated with BYETTA compared to other treatments for diabetes and thusbelieve a definite causal relationship between BYETTA and pancreatitis has notbeen proved. Any safety issues could cause us to suspend or cease marketing ofour approved products, cause us to modify how we market our approved products,subject us to substantial liabilities, and adversely affect our revenues andfinancial condition.

 

Moreover, the marketing of our approved products will be subject toextensive regulatory requirements administered by the FDA and other regulatorybodies, including adverse event reporting requirements and the FDA’s generalprohibition against promoting products for unapproved uses. The manufacturingfacilities for our approved products are also subject to continual review andperiodic inspection and approval of manufacturing modifications. Manufacturingfacilities that manufacture drug products for the United States market, whetherthey are located inside or outside the United States, are subject to biennialinspections by the FDA and must comply with the FDA’s current goodmanufacturing practice, or cGMP, regulations. The FDA stringently appliesregulatory standards for manufacturing. Failure to comply with any of thesepost-approval requirements can, among other things, result in warning letters,product seizures, recalls, fines, injunctions, suspensions or revocations ofmarketing licenses, operating restrictions and criminal prosecutions. Any ofthese enforcement actions, any unanticipated changes in existing regulatoryrequirements or the adoption of new requirements, or any safety issues thatarise with any approved products, could adversely affect our ability to marketproducts and generate revenues and thus adversely affect our ability tocontinue our business.

 

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

 

***We currently do not manufacture ourown drug products or some of our drug candidates and may not be able to obtainadequate supplies, which could cause delays, subject us to product shortages,or reduce product sales.***

 

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

 

34

----

Table of Contents

 

There are a limited number of manufacturers that operate under the FDA’scGMP regulations capable of manufacturing for us. In addition, there are alimited number of bulk drug substance suppliers, cartridge manufacturers anddisposable pen manufacturers. If we are not able to arrange for and maintainthird-party manufacturing on commercially reasonable terms, or we lose one ofour sole source suppliers used for our existing products or for some componentsof our manufacturing processes for our products or drug candidates, we may notbe able to market our products or complete development of our drug candidateson a timely basis, if at all.

 

Reliance on third-party suppliers limits our ability to control certainaspects of the manufacturing process and therefore exposes us to a variety ofsignificant risks, including, but not limited to, risks to our ability tocommercialize our products or conduct clinical trials, risks of reliance on thethird-party for regulatory compliance and quality assurance, third-partyrefusal to supply on a long-term basis, or at all, the possibility of breach ofthe manufacturing agreement by the third-party and the possibility of terminationor non-renewal of the agreement by the third-party, based on its businesspriorities, at a time that is costly or inconvenient for us. In addition,reliance on single-source suppliers subjects us to the risk of price increasesby these suppliers which could negatively impact our operating margins. If anyof these risks occur, our product supply will be interrupted resulting in lostor delayed revenues and delayed clinical trials. Our reliance on third-partymanufacturers for the production of our two commercial products is described inmore detail below.

 

We rely on Bachem and Mallinckrodt to manufacture our long-termcommercial supply of bulk exenatide, the active ingredient in BYETTA. Inaddition, we rely on single-source manufacturers for some of our raw materialsused by Bachem and Mallinckrodt to produce bulk exenatide. We also rely onWockhardt and Baxter to manufacture the dosage form of BYETTA in cartridges. Weare further dependent upon Lilly to supply pens for delivery of BYETTA incartridges.

 

We rely on Bachem and Lonza to manufacture our commercial supply ofbulk pramlintide acetate, the active ingredient contained in SYMLIN. Inaddition, we rely on Baxter to manufacture the dosage form of SYMLIN in vials.We rely on Wockhardt for the dosage form of SYMLIN in cartridges and Ypsomed AGto manufacture the components for the SYMLIN disposable pen. We also rely onHollister-Stier Laboratories LLC and Sharp Corporation for the assembly ofthe SYMLIN pen.

 

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

 

Our manufacturers have produced BYETTA and SYMLIN for commercial usefor approximately four years, however, unforeseeable risks related toenvironmental, economic, technical or other issues may be encountered as we,together with our manufacturers, continue to develop familiarity and experiencewith regard to manufacturing our products. Furthermore, we and the othermanufacturers used for our drug candidates may not be able to produce suppliesin commercial quantities if our drug candidates are approved. While we believethat business relations between us and our manufacturers are generally good, wecannot predict whether any of the manufacturers that we may use will meet ourrequirements for quality, quantity or timeliness for the manufacture of bulkexenatide or pramlintide acetate, dosage form of BYETTA or SYMLIN, or pens.Therefore, we may not be able to obtain necessary supplies of products withacceptable quality, on acceptable terms or in sufficient quantities, if at all.Our dependence on third parties for the manufacture of products may also reduceour gross profit margins and our ability to develop and deliver products in atimely manner.

 

In order to manufacture exenatide once weekly on a commercial scale, ifit is approved by the FDA, we must complete construction of and commission anew facility and validate the manufacturing process. We are dependent onAlkermes and Parsons to assist us in the construction and commissioning of themanufacturing facility. We have never established, validated, and operated amanufacturing facility and cannot assure you that we will be able tosuccessfully establish or operate such a facility in a timely or economical manner,or at all. In addition, we are dependent on Alkermes to successfully developand transfer to us its technology for manufacturing exenatide once weekly andto supply us with commercial quantities of the polymer required to manufactureexenatide once weekly. We also will need to obtain sufficient supplies ofdiluents, solvents, devices, packaging and other components necessary forcommercial manufacture of exenatide once weekly.   If exenatide once weekly is approved, wewill be dependent upon Bachem, Mallinckrodt and Lonza to manufacture ourlong-term commercial supply of bulk exenatide, the active ingredient inexenatide once weekly, and upon single suppliers to produce components forpackaging exenatide once weekly. Although we are working diligently to qualify the 

 

35

----

Table of Contents

 

commercial-scalemanufacturing process at this facility, we cannot be assured that we will beable to demonstrate comparability of product manufactured at development scaleand product manufactured at commercial scale. If we are unable to demonstratecomparability of product, we may not be able to commercially launch exenatideonce weekly in a timely manner or at all.

 

***Our ability to generate revenueswill be diminished if we fail to obtain acceptable prices or an adequate levelof reimbursement for our products from third-party payers.***

 

The continuing efforts of government, private health insurers and otherthird-party payers to contain or reduce the costs of health care throughvarious means, including efforts to increase the amount of patient co-payobligations, may limit our commercial opportunity. In the United States, thereare a number of health care reform proposals under consideration by the Federalgovernment and we expect that there will continue to be a number of federal andstate proposals to implement government control over the pricing ofprescription pharmaceuticals. In addition, increasing emphasis on managed carein the United States will continue to put pressure on the rate of adoption andpricing of pharmaceutical products.

 

Significant uncertainty exists as to the reimbursement status of healthcare products. Third-party payers, including Medicare, are challenging theprices charged for medical products and services. Government and otherthird-party payers increasingly are attempting to contain health care costs bylimiting both coverage and the level of reimbursement for new drugs and byrefusing to provide coverage for uses of approved products for diseaseindications for which the FDA has not granted labeling approval. Third-partyinsurance coverage may not be available to patients for BYETTA and/or SYMLIN orany other products we discover and develop. If government and other third-partypayers do not provide adequate coverage and reimbursement levels for ourproducts, the market acceptance of these products may be reduced.

 

***Competition in the biotechnology andpharmaceutical industries may result in competing products, superior marketingof other products and lower revenues or profits for us.***

 

There are many companies that are seeking to develop products andtherapies for the treatment of diabetes and other metabolic disorders. Ourcompetitors include multinational pharmaceutical and chemical companies,specialized biotechnology firms and universities and other researchinstitutions. A number of our largest competitors, including AstraZeneca,Bristol-Myers Squibb, GlaxoSmithKline, Lilly, Merck & Co.,Novartis, Novo Nordisk, Pfizer, Sanofi-Aventis and Takeda Pharmaceuticals, arepursuing the development or marketing of pharmaceuticals that target the samediseases that we are targeting, and it is possible that the number of companiesseeking to develop products and therapies for the treatment of diabetes,obesity and other metabolic disorders will increase. Many of our competitorshave substantially greater financial, technical, human and other resources thanwe do and may be better equipped to develop, manufacture and markettechnologically superior products. In addition, many of these competitors havesignificantly greater experience than we do in undertaking preclinical testingand human clinical studies of new pharmaceutical products and in obtainingregulatory approvals of human therapeutic products. Accordingly, ourcompetitors may succeed in obtaining FDA approval for superior products.Furthermore, now that we have received FDA approval for BYETTA and SYMLIN, wemay also be competing against other companies with respect to our manufacturingand product distribution efficiency and sales and marketing capabilities, areasin which we have limited or no experience as an organization.

 

Our target patient population for BYETTA includes people with diabeteswho have not achieved adequate glycemic control using metformin, sulfonylureaand/or a TZD, three common oral therapies for type 2 diabetes. Our targetpopulation for SYMLIN is people with either type 2 or type 1 diabeteswhose therapy includes multiple mealtime insulin injections daily. Otherproducts are currently in development or exist in the market that may competedirectly with the products that we are developing or marketing. Various otherproducts are available or in development to treat type 2 diabetes,including:

 

·                 sulfonylureas;

 

·                 metformin;

 

·                 insulins,including injectable and inhaled versions;

 

·                 TZDs;

 

·                 glinides;

 

·                 DPP-IVinhibitors;

 

36

----

Table of Contents

 

·                 incretin/GLP-1agonists;

 

·                 PPARs; and

 

·                 alpha-glucosidaseinhibitors.

 

In addition, several companies are developing various approaches,including alternative delivery methods, to improve treatments for type 1and type 2 diabetes. We cannot predict whether our products will havesufficient advantages to cause health care professionals to adopt them overother products or that our products will offer an economically feasible alternativeto other products. Our products could become obsolete before we recoverexpenses incurred in developing these products.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

·                 delays in enrolling volunteers;

 

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

 

·                 negative results of clinical studies;

 

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

 

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

 

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

 

37

----

Table of Contents

 

***We are substantially dependent onour collaboration with Lilly for the development and commercialization ofBYETTA and dependent on Lilly and Alkermes for the development of exenatideonce weekly.***

 

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

 

·                 fund some of our research and developmentactivities;

 

·                 assist us in seeking and obtaining regulatoryapprovals; and

 

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

 

In general, we cannot control the amount and timing of resources thatLilly may devote to our collaboration. If Lilly fails to assist in the furtherdevelopment of exenatide once weekly or the commercialization of BYETTA, or ifLilly’s efforts are not effective, our business may be negatively affected. Weare relying on Lilly to obtain regulatory approvals for and successfullycommercialize BYETTA and exenatide once weekly outside the United States. Our collaborationwith Lilly may not continue or result in additional successfully commercializeddrugs. Lilly can terminate our collaboration at any time upon twelve months’notice. If Lilly ceased funding and/or developing and commercializing BYETTA orexenatide once weekly, we would have to seek additional sources for funding andmay have to delay, reduce or eliminate one or more of our commercialization anddevelopment programs for these compounds. If Lilly does not successfullycommercialize BYETTA outside the United States, we may receive limited or norevenues from them. In addition, we are dependent on Alkermes to successfullydevelop and transfer to us its technology for manufacturing exenatide onceweekly. If Alkermes’ technology is not successfully developed to effectivelydeliver exenatide in a sustained release formulation, or Alkermes does notdevote sufficient resources to the collaboration, our efforts to developsustained release formulations of exenatide could be delayed or curtailed.

 

***If our patents are determined to beunenforceable or if we are unable to obtain new patents based on current patentapplications or for future inventions, we may not be able to prevent othersfrom using our intellectual property. If we are unable to obtain licenses tothird party patent rights for required technologies, we could be adverselyaffected.***

 

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

 

Our success will depend in part on our ability to obtain patentprotection for our products and drug candidates and technologies both in theUnited States and other countries. We cannot guarantee that any patents willissue from any pending or future patent applications owned by or licensed tous. Alternatively, a third party may successfully challenge or circumvent ourpatents. Our rights under any issued patents may not provide us with sufficientprotection against competitive products or otherwise cover commerciallyvaluable products or processes. For example, our SYMLIN and BYETTA products aresubject to the provisions of the Drug Price Competition and Patent TermRestoration Act of 1984, also known as the “Hatch-Waxman Act,” which providesdata exclusivity for a certain period of time. Once this exclusivity periodexpires, the Hatch-Waxman Act allows generic manufacturers to file AbbreviatedNew Drug Applications, or ANDAs, with the FDA requesting approval of genericversions of previously-approved products. For example, a generic pharmaceuticalmanufacturer could file an ANDA for SYMLIN as early as March 2009 and forBYETTA as early as April 2009. If an ANDA is filed for one of our approvedproducts prior to expiration of the patents covering those products, it couldresult in our initiating patent infringement litigation to enforce our rights.We can provide no assurances that we would prevail in such an action or in anychallenge related to our patent rights.

 

In addition, because patent applications in the United States aremaintained, in general, in secrecy for 18 months after the filing of theapplications, and publication of discoveries in the scientific or patentliterature often lag behind actual discoveries, we cannot be sure that theinventors of subject matter covered by our patents and patent applications werethe first to invent or the first to file patent applications for theseinventions. Third parties have filed, and in the future are likely to file,patent applications on inventions similar to ours. From time-to-time we haveparticipated in, and in the future are likely to participate in, interferenceproceedings declared by the United States Patent and Trademark Office todetermine priority of 

 

38

----

Table of Contents

 

invention,which could result in a loss of our patent position. We have also participatedin, and in the future are likely to participate in, opposition proceedingsagainst our patents in other jurisdictions, such as Europe and Australia.Furthermore, we may not have identified all United States and foreign patentsthat pose a risk of infringement.

 

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

 

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

 

Our drug candidates are subject to extensive government regulationsrelated to development, clinical trials, manufacturing and commercialization.The process of obtaining FDA and other regulatory approvals is costly,time-consuming, uncertain and subject to unanticipated delays. Regulatoryauthorities may refuse to approve an application for approval of a drugcandidate if they believe that applicable regulatory criteria are notsatisfied. Regulatory authorities may also require additional testing forsafety and efficacy. Moreover, if the FDA grants regulatory approval of aproduct, the approval may be limited to specific indications or limited withrespect to its distribution, and expanded or additional indications forapproved drugs may not be approved, which could limit our revenues. Foreignregulatory authorities may apply similar limitations or may refuse to grant anyapproval. Unexpected changes to the FDA or foreign regulatory approval processcould also delay or prevent the approval of our drug candidates.

 

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

 

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

 

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

 

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

 

Our success will depend in part on our ability to operate withoutinfringing the proprietary rights of third parties and preventing others frominfringing our patents. Challenges by pharmaceutical companies against thepatents of competitors are common. Legal standards relating to the validity ofpatents covering pharmaceutical and biotechnological inventions and the scopeof claims made under these patents are still developing. As a result, ourability to obtain and enforce patents is uncertain and involves complex legaland factual questions. Third parties may challenge, in courts or through patentoffice proceedings, or infringe upon, existing or future patents. In the eventthat a third party challenges a patent, a court or patent office may invalidatethe patent or determine that the patent is not enforceable. Proceedingsinvolving our patents or patent applications or those of others could result inadverse decisions about:

 

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

 

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

 

The manufacture, use or sale of any of our products or drug candidatesmay infringe on the patent rights of others. If we are unable to avoidinfringement of the patent rights of others, we may be required to seek alicense, defend an infringement action or challenge the validity of the patentsin court. Patent litigation is costly and time consuming. We may not havesufficient resources to bring these actions to a successful conclusion. In addition,if we do not obtain a license, develop or 

 

39

----

Table of Contents

 

obtainnon-infringing technology, fail to successfully defend an infringement actionor have infringing patents declared invalid, we may:

 

·                 incur substantial monetary damages;

 

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

 

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

 

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

 

Upon approval of BYETTA and SYMLIN by the FDA, we became subject tovarious health care “fraud and abuse” laws, such as the Federal False ClaimsAct, the federal anti-kickback statute and other state and federal laws andregulations. Pharmaceutical companies have faced lawsuits and investigationspertaining to violations of these laws and regulations. We cannot guaranteethat measures that we have taken to prevent such violations, including ourcorporate compliance program, will protect us from future violations, lawsuitsor investigations. If any such actions are instituted against us, and we arenot successful in defending ourselves or asserting our rights, those actionscould have a significant impact on our business, including the imposition ofsignificant fines or other sanctions.

 

***Our financial results willfluctuate, and these fluctuations may cause our stock price to fall.***

 

Forecasting future revenues is difficult, especially since we launchedour first products in 2005 and the level of market acceptance of these productsmay change rapidly. In addition, our customer base is highly concentrated withfour customers accounting for most of our net product sales. Fluctuations inthe buying patterns of these customers, which may result from seasonality,wholesaler buying decisions or other factors outside of our control, couldsignificantly affect the level of our net sales on a period to period basis. Asa result, it is reasonably likely that our financial results will fluctuate toan extent that may not meet with market expectations and that also may adverselyaffect our stock price. There are a number of other factors that could causeour financial results to fluctuate unexpectedly, including:

 

·                 product sales;

 

·                 cost of product sales;

 

·                 achievement and timing of research anddevelopment milestones;

 

·                 collaboration revenues;

 

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

 

·                 marketing and other expenses;

 

·                 manufacturing or supply issues; and

 

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

 

***We may require additional financingin the future, which may not be available to us on favorable terms, or at all.***

 

We intend to use our available cash for:

 

·                 Commercialization of BYETTA and SYMLIN;

 

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

 

·                 Development of exenatide once weekly andother pipeline candidates;

 

40

----

Table of Contents

 

·                 Executing our INTO strategy;

 

·                 Our other research and development activities;

 

·                 Other operating expenses;

 

·                 Potential acquisitions or investments incomplementary technologies or businesses; and

 

·                 Other general corporate purposes.

 

We may also be required to use our cash to pay principal and intereston outstanding debt, including a term loan with a current balance of $109.4million due in 2010, referred to as the Term Loan, and $775 million inoutstanding principal amount of convertible senior notes, of which$200 million is due in 2011, referred to as the 2004 Notes, and$575 million is due in 2014, referred to as the 2007 Notes.

 

If we require additional financing in the future, we cannot assure youthat it will be available to us on favorable terms, or at all. Although we havepreviously been successful in obtaining financing through our debt and equitysecurities offerings, there can be no assurance that we will be able to so inthe future, especially given the current adverse economic and creditconditions.

 

***Our investments in marketable debtsecurities are subject to credit and market risks that may adversely affecttheir fair value.***

 

We maintain a portfolio of investments in marketable debt securitieswhich are recorded at fair value. Although we have established investmentguidelines relative to diversification and maturity with the objective ofmaintaining safety of principal and liquidity, credit rating agencies mayreduce the credit rating of our individual holdings which could adverselyaffect their value. Lower credit quality and other market events, such as increasesin interest rates, and further deterioration in the credit markets may have anadverse effect on the fair value of our investment holdings and cash position.

 

***Our business has a substantial risk ofproduct liability claims, and insurance may not be adequate to cover theseclaims.***

 

Our business exposes us to potential product liability risks that areinherent in the testing, manufacturing and marketing of human therapeuticproducts.  On March 4, 2009, the Supreme Court heldin *Wyeth v. Levine* that federallaw does not preempt state product liability claims involving pharmaceuticals.  We are currently involved in twenty productliability cases which have been brought by individuals who have used BYETTA andgenerally seek compensatory and punitive damages for alleged injuries,consisting primarily of pancreatitis, and in a few cases wrongful death. We have also been notified of otherclaims of individuals who have not filed suit. Product liability claims couldresult in the imposition of substantial defense costs and liability on us, arecall of products, or a change in the indications for which they may be used.We currently have limited product liability insurance coverage. We cannotassure you that our insurance will provide adequate coverage against potentialliabilities.

 

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

 

With respect to sales, marketing and distribution outside the UnitedStates, we will be substantially dependent on Lilly for activities relating toBYETTA and sustained-release formulations of BYETTA, including exenatide onceweekly. We believe that we will likely need to enter into marketing anddistribution arrangements with third parties for, or find a corporate partnerwho can provide support for, the development and commercialization of SYMLIN orour other drug candidates outside the United States. We may also enter intoarrangements with third parties for the commercialization of SYMLIN or any ofour other drug candidates within the United States.

 

With respect to BYETTA and, if approved, exenatide once weekly, Lillyis co-promoting within the United States. If Lilly ceased commercializingBYETTA or, if approved, exenatide once weekly, for any reason, we would likelyneed to either enter into a marketing and distribution arrangement with a thirdparty for those products or significantly increase our internal sales and commercializationinfrastructure.

 

We may not be able to enter into marketing and distributionarrangements or find a corporate partner for SYMLIN or our other drugcandidates as we deem necessary. If we are not able to enter into a marketingor distribution arrangement or find a 

 

41

----

Table of Contents

 

corporatepartner who can provide support for commercialization of our drug candidates aswe deem necessary, we may not be able to successfully perform these marketingor distribution activities. Moreover, any new marketer or distributor orcorporate partner for our drug candidates, including Lilly, with whom we chooseto contract may not establish adequate sales and distribution capabilities orgain market acceptance for our products, if any.

 

***We have a significant amount ofindebtedness. We may not be able to make payments on our indebtedness, and wemay incur additional indebtedness in the future, which could adversely affectour operations.***

 

In April 2004, we issued $200 million of the 2004 Notes andin June 2007, we issued $575 million of the 2007 Notes. In December 2007,we entered into the $125 million Term Loan due in December 2010. Ourability to make payments on our debt, including the 2004 and 2007 Notes and theTerm Loan, will depend on our future operating performance and ability togenerate cash and may also depend on our ability to obtain additional debt orequity financing. During each of the last five years, our operating cash flowswere negative and insufficient to cover our fixed charges. We may need to useour cash to pay principal and interest on our debt, thereby reducing the fundsavailable to fund our research and development programs, strategic initiativesand working capital requirements. Our ability to generate sufficient operatingcash flow to service our indebtedness, including the 2004 and 2007 Notes andthe Term Loan, and fund our operating requirements will depend on our ability,alone or with others, to successfully develop, manufacture, obtain requiredregulatory approvals for and market our drug candidates, as well as otherfactors, including general economic, financial, competitive, legislative andregulatory conditions, some of which are beyond our control. Our debt serviceobligations increase our vulnerabilities to competitive pressures, because manyof our competitors are less leveraged than we are. If we are unable to generatesufficient operating cash flow to service our indebtedness and fund ouroperating requirements, we may be forced to reduce or defer our developmentprograms, sell assets or seek additional debt or equity financing, which maynot be available to us on satisfactory terms or at all. Our level ofindebtedness may make us more vulnerable to economic or industry downturns. Ifwe incur new indebtedness, the risks relating to our business and our abilityto service our indebtedness will intensify.

 

***We may be required to redeem ourconvertible senior notes upon a designated event or repay the Term Loan upon anevent of default.***

 

Holders of the 2004 and 2007 Notes may require us to redeem all or anyportion of their notes upon the occurrence of certain designated events whichgenerally involve a change in control of our company. The lenders under theTerm Loan may require us to repay outstanding principal and accrued interestdue under the Term Loan upon the occurrence of an event of default, which couldinclude, among other things, nonpayment of principle and interest, violation ofcovenants and a change in control.  Wemay not have sufficient cash funds to redeem the 2004 and 2007 Notes upon adesignated event or repay the Term Loan upon an event of default. We may elect,subject to certain conditions, to pay the redemption price for the 2004 Notesin our common stock or a combination of cash and our common stock. We may beunable to satisfy the requisite conditions to enable us to pay some or all ofthe redemption price for the 2004 Notes in our common stock. If we are prohibitedfrom redeeming the 2004 or 2007 Notes, we could seek consent from our lendersto redeem the 2004 or 2007 notes. If we are unable to obtain their consent, wecould attempt to refinance the 2004 or 2007 Notes. If we were unable to obtaina consent or refinance, we would be prohibited from redeeming the 2004 or 2007Notes. If we were unable to redeem the 2004 or 2007 Notes upon a designatedevent, it would result in an event of default under the indentures governingthe 2004 or 2007 Notes. An event of default under the indentures could resultin a further event of default under our other then-existing debt, including theTerm Loan. In addition, the occurrence of a designated event may be an event ofdefault under our other debt. Further, an event of default under the Term Loancould result in an event of default under the indentures governing the 2004 or2007 Notes.

 

***If our research and development programsfail to result in additional drug candidates, the growth of our business couldbe impaired.***

 

Certain of our research and development programs for drug candidatesare at an early stage and will require significant research, development,preclinical and clinical testing, manufacturing scale-up activities, regulatoryapproval and/or commitments of resources before commercialization. We cannotpredict whether our research will lead to the discovery of any additional drugcandidates that could generate additional revenues for us.

 

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

 

We are highly dependent on our chief executive officer, and the otherprincipal members of our executive and scientific teams. The unexpected loss ofthe services of any of these persons might impede the achievement of ourresearch, development and commercialization objectives. Recruiting andretaining qualified sales, marketing, regulatory, scientific and otherpersonnel and consultants will also be critical to our success. We may not beable to attract and retain these personnel and consultants on acceptable termsgiven the competition between numerous pharmaceutical and biotechnologycompanies. We do not maintain “key person” insurance on any of our employees.

 

42

----

Table ofContents

 

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

 

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

 

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

 

***Our research and developmentactivities and planned manufacturing activities involve the use of hazardousmaterials, which subject us to regulation, related costs and delays andpotential liabilities.***

 

Our research and development and our planned manufacturing activitiesinvolve the controlled use of hazardous materials, chemicals and variousradioactive compounds. Although we believe that our research and developmentsafety procedures for handling and disposing of these materials comply with thestandards prescribed by state and federal regulations, the risk of accidentalcontamination or injury from these materials cannot be eliminated. In addition,as part of the development of our planned manufacturing activities, we willneed to develop additional safety procedures for the handling and disposing ofhazardous materials. If an accident occurs, we could be held liable forresulting damages, which could be substantial. We are also subject to numerousenvironmental, health and workplace safety laws and regulations, includingthose governing laboratory procedures, exposure to blood-borne pathogens andthe handling of biohazardous materials. Additional federal, state and locallaws and regulations affecting our operations may be adopted in the future. Wemay incur substantial costs to comply with, and substantial fines or penaltiesif we violate any of these laws or regulations.

 

***We are exposed to potential risksfrom legislation requiring companies to evaluate internal control overfinancial reporting.***

 

The Sarbanes-Oxley Act requires that we report annually on theeffectiveness of our internal control over financial reporting. Among otherthings, we must perform systems and processes evaluation and testing. We mustalso conduct an assessment of our internal control to allow management toreport on, and our independent registered public accounting firm to attest to,our internal control over financial reporting, as required by Section 404of the Sarbanes-Oxley Act. In connection with our Section 404 complianceefforts, we have incurred or expended, and expect to continue to incur orexpend, substantial accounting and other expenses and significant managementtime and resources. We have implemented certain remediation activitiesresulting from our ongoing assessment of internal control over financialreporting. Our future assessment, or the future assessments by our independentregistered public accounting firm, may reveal material weaknesses in ourinternal control. If material weaknesses are identified in the future we wouldbe required to conclude that our internal control over financial reporting areineffective and we could be subject to sanctions or investigations by theSecurities and Exchange Commission, the NASDAQ Stock Market or other regulatoryauthorities, which would require additional financial and management resourcesand could adversely affect the market price of our common stock.

 

***We have implemented anti-takeoverprovisions that could discourage or prevent an acquisition of our company, evenif the acquisition would be beneficial to our stockholders, and as a result ourmanagement may become entrenched and hard to replace.***

 

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

 

·                  allowing ourboard of directors to elect a director to fill a vacancy created by theexpansion of the board of directors;

 

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

 

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

 

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

 

43

----

Table of Contents

 

Each of these provisions, as well as selected provisions of Delawarelaw, could discourage potential takeover attempts, could adversely affect thetrading price of our securities and could cause our management to becomeentrenched and hard to replace. In addition to provisions in our charterdocuments and under Delaware law, an acquisition of our company could be mademore difficult by our employee benefits plans and our employee change incontrol severance plan, under which, in connection with a change in control andtermination of employment, stock options held by our employees may becomevested and our officers may receive severance benefits. We also haveimplemented a stockholder rights plan, also called a poison pill, which couldmake it uneconomical for a third party to acquire us on a hostile basis.

 

***Our executive officers, directors and majorstockholders control approximately 66% of our common stock.***

 

As of June 30, 2009, executive officers, directors and holders of5% or more of our outstanding common stock, in the aggregate, owned orcontrolled approximately 66% of our outstanding common stock. As a result,these stockholders are able to influence all matters requiring approval by ourstockholders, including the election of directors and the approval of corporatetransactions. This concentration of ownership may also delay, deter or preventa change in control of our company and may make some transactions moredifficult or impossible to complete without the support of these stockholders.

 

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

 

Sales by existing stockholders of a large number of shares of ourcommon stock in the public market or the perception that additional sales couldoccur could cause the trading price of our common stock to drop. Likewise, theissuance of shares of common stock upon conversion of our convertible notes orredemption of our convertible notes upon a designated event, or upon additionalconvertible debt or equity financings or other share issuances by us, includingshares issued in connection with potential future strategic alliances, couldadversely affect the trading price of our common stock. Our convertible notesare currently convertible into a total of up to 15.2 million shares. Inaddition, the existence of these notes may encourage short selling of ourcommon stock by market participants.

 

***Significant volatility in the market pricefor our common stock could expose us to litigation risk.***

 

Themarket prices for securities of biopharmaceutical and biotechnology companies,including our common stock, have historically been highly volatile, and themarket from time to time has experienced significant price and volumefluctuations that are unrelated to the quarterly operating performance of thesebiopharmaceutical and biotechnology companies. Since January 1, 2007, thehigh and low sales price of our common stock varied significantly, as shown inthe following table:

 
| ** **                                 | ** ** | **High** | ** ** | **Low** | ** ** |
|--------------------------------------------|------------|----------|------------|---------|------------|
| **Year ending December 31,  2009**    |       |     |       |    |       |
| Third Quarter (through July 31, 2009) |       | $        | 15.28      |    | $          | 11.85 |   |
| Second Quarter                             |       | $        | 14.30      |    | $          | 8.56 |   |
| First Quarter                              |       | $        | 14.13      |    | $          | 7.89 |   |
| **Year ended December 31,  2008**     |       |     |       |    |       |
| Fourth Quarter                             |       | $        | 20.47      |    | $          | 5.50 |   |
| Third Quarter                              |       | $        | 35.00      |    | $          | 18.55 |   |
| Second Quarter                             |       | $        | 33.22      |    | $          | 25.30 |   |
| First Quarter                              |       | $        | 37.38      |    | $          | 23.75 |   |
| **Year ended December 31,  2007**     |       |     |       |    |       |
| Fourth Quarter                             |       | $        | 51.10      |    | $          | 35.83 |   |
| Third Quarter                              |       | $        | 53.25      |    | $          | 40.86 |   |
| Second Quarter                             |       | $        | 46.93      |    | $          | 36.91 |   |
| First Quarter                              |       | $        | 42.45      |    | $          | 35.55 |   |

 

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

 

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

 

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

 

·                  clinical study results;

 

44

----

Table of Contents

 

·                  determinations by regulatoryauthorities with respect to our drug candidates;

 

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

 

·                  developments in ourrelationships with current or future collaborative partners;

 

·                  our ability to successfullyexecute our commercialization strategies;

 

·                  developments in ourrelationships with third-party manufacturers of our products and other partieswho provide services to us;

 

·                  technological innovations ornew commercial therapeutic products by us or our competitors;

 

·                  developments in patent orother proprietary rights; and

 

·                  governmental policy orregulation, including with respect to pricing and reimbursement.

 

Broadmarket and industry factors also may materially adversely affect the marketprice of our common stock, regardless of our actual operating performance.Periods of volatility in the market price of our common stock expose us tosecurities class-action litigation, and we may be the target of such litigationas a result of market price volatility in the future.

 

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

 

OurAnnual Meeting of Stockholders was held on May 27, 2009.  At the Annual Meeting, the stockholders ofthe Company (i) elected Adrian Adams, Steven R. Altman, Teresa Beck, M.Kathleen Behrens, Daniel M. Bradbury, Paul N. Clark, Paulo F. Costa, AlexanderJ. Denner, Karin Eastham, James R. Gavin II, M.D., Ph.D., Jay S. Skyler, M.D.,MACP and Joseph P. Sullivan to serve as a director of Amylin until the nextannual meeting or until his/her successor is elected, (ii) approved our2009 Equity Incentive Plan, (iii) approved an increase of 1,500,000million shares in the aggregate number of shares of our common stock authorizedfor issuance under our 2001 Employee Stock Purchase Plan, (iv) ratifiedthe selection of Ernst & Young LLP as our independent registeredpublic accounting firm for the fiscal year ending December 31, 2009, and (v) rejecteda stockholder proposal to change the Company’s jurisdiction of incorporationfrom Delaware to North Dakota.

 

We had140,874,975 shares of common stock outstanding and entitled to vote as of April 8,2009, the record date for the Annual Meeting. At the Annual Meeting, 117,754,826 shares of common stock were presentin person or represented by proxy for the five proposals indicated above.  The following sets forth detailed informationregarding the results of the voting at the Annual Meeting:

 

Proposal 1: Election of Directors.

 
| **Director**                         | ** ** | **Votes in Favor** | ** ** | **Votes Withheld** | ** ** |
|--------------------------------------|------------|------------------------------|------------|-------------------------|------------|
| Adrian Adams                         |       | 115,149,478                  |       | 1,176,652               |       |
| Steven R. Altman                     |       | 65,570,940                   |       | 428,753                 |       |
| Teresa Beck                          |       | 113,139,863                  |       | 3,186,267               |       |
| M. Kathleen Behrens                  |       | 55,678,374                   |       | 31,497                  |       |
| Daniel M. Bradbury                   |       | 110,101,548                  |       | 841,248                 |       |
| Paul N. Clark                        |       | 104,876,925                  |       | 11,449,655              |       |
| Joseph C.  Cook, Jr.            |       | 51,938,317                   |       | 742,854                 |       |
| Paulo F. Costa                       |       | 115,963,730                  |       | 362,400                 |       |
| Alexander J. Denner                  |       | 63,502,609                   |       | 142,350                 |       |
| Thomas F. Deuel, M.D.                |       | 42,262,315                   |       | 13,447,456              |       |
| Karin Eastham                        |       | 115,161,534                  |       | 1,164,596               |       |
| Charles M. Fleischman                |       | 54,086,987                   |       | 1,622,884               |       |
| James R. Gavin III, M.D., Ph.D. |       | 60,163,965                   |       | 452,394                 |       |
| Jay Sherwood                         |       | 52,442,978                   |       | 11,202,081              |       |
| Jay S. Skyler, M.D., MACP            |       | 115,657,140                  |       | 668,990                 |       |
| Joseph P. Sullivan                   |       | 60,217,409                   |       | 398,950                 |       |
| James N. Wilson                      |       | 52,147,494                   |       | 533,677                 |       |

 

45

----

Table of Contents

 

Proposal 2: Approve the 2009 Equity Incentive Plan.

 
| Votes in Favor: |   | 89,735,162 |   |
|-----------------|--------|------------|--------|
| Votes Against:  |   | 27,510,929 |   |
| Abstentions:    |   | 508,734    |   |

 

Proposal 3: Approve an increase of 1,500,000 million shares in theaggregate number of shares of our common stock authorized for issuance underour 2001 Employee Stock Purchase Plan.

 
| Votes in Favor: |   | 96,399,047 |   |
|-----------------|--------|------------|--------|
| Votes Against:  |   | 20,898,386 |   |
| Abstentions:    |   | 457,393    |   |

 

Proposal 4: Ratification of selection of Ernst & Young LLP asour independent registered public accounting firm.

 
| Votes in Favor: |   | 116,478,958 |   |
|-----------------|--------|-------------|--------|
| Votes Against:  |   | 756,849     |   |
| Abstentions:    |   | 519,018     |   |

 

Proposal5: Stockholder proposalto change the Company’s jurisdiction of incorporation from Delaware to NorthDakota.

 
| Votes in Favor: |   | 21,993,709 |   |
|-----------------|--------|------------|--------|
| Votes Against:  |   | 88,194,210 |   |
| Abstentions:    |   | 7,566,905  |   |

 

46

----

Table ofContents

 

**ITEM6.  Exhibits**

 

The following exhibits are included as part of thisreport:

 
| **Exhibit  Number** | ** ** | **Description**                                                                                                                                                                                                                                                                                                    |
|---------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |       |                                                                                                                                                                                                                                                                                                               |
| 3.1                 |       | Amended  and Restated Certificate of Incorporation (filed as an exhibit to  Registrant’s registration statement on Form S-1 (File  No. 333-44195) or amendments thereto and incorporated herein by reference)                                                                                       |
|                |       |                                                                                                                                                                                                                                                                                                               |
| 3.2                 |       | Fourth  Amended and Restated Bylaws (filed as an exhibit to Registrant’s Current  Report on Form 8-K filed on December 8, 2008 and incorporated  herein by reference)                                                                                                                               |
|                |       |                                                                                                                                                                                                                                                                                                               |
| 3.3                 |       | Certificate  of Amendment of Amended and Restated Certificate of Incorporation (filed as  an exhibit to Registrant’s Quarterly Report on Form 10-Q for the quarter  ended September 30, 2001 and incorporated herein by reference)                                                                  |
|                |       |                                                                                                                                                                                                                                                                                                               |
| 3.4                 |       | Certificate  of Amended and Restated Certificate of Incorporation (filed as an exhibit to  Registrant’s Quarterly Report on Form 10-Q for the quarter ended  September 30, 2007 and incorporated herein by reference)                                                                               |
|                |       |                                                                                                                                                                                                                                                                                                               |
| 4.1                 |       | Specimen  Common Stock Certificate (filed as an exhibit to Registrant’s registration  statement on Form S-1 (File No. 333-44195) or amendments thereto  and incorporated herein by reference)                                                                                                       |
|                |       |                                                                                                                                                                                                                                                                                                               |
| 4.2                 |       | Rights  Agreement, dated as of June 17, 2002, between the Registrant and  American Stock Transfer & Trust Company (filed as an exhibit to  Registrant’s Current Report on Form 8-K filed on June 18, 2002 and  incorporated herein by reference)                                      |
|                |       |                                                                                                                                                                                                                                                                                                               |
| 4.3                 |       | First  Amendment to Rights Agreement dated December 13, 2002, between the  Registrant and American Stock Transfer & Trust Company (filed as an  exhibit to Registrant’s Annual Report on Form 10-K for the fiscal year  ended December 31, 2002 and incorporated herein by reference) |
|                |       |                                                                                                                                                                                                                                                                                                               |
| 4.4                 |       | Form of  Rights Certificate (filed as an exhibit to Registrant’s Current Report on  Form 8-K filed on June 18, 2002 and incorporated herein by  reference)                                                                                                                                     |
|                |       |                                                                                                                                                                                                                                                                                                               |
| 4.5                 |       | Certificate  of Designation of Series A Junior Participating Preferred Stock (filed  as an exhibit to Registrant’s Current Report on Form 8-K filed on  June 18, 2002 and incorporated herein by reference)                                                                                    |
|                |       |                                                                                                                                                                                                                                                                                                               |
| 10.1                |       | Amendment,  dated April 9, 2009, to Collaboration Agreement, dated  September 19, 2002, between the Registrant and Eli Lilly and Company                                                                                                                                                                 |
|                |       |                                                                                                                                                                                                                                                                                                               |
| 10.2                |       | Cost  Allocation Agreement, dated May 4, 2009, between the Registrant and Eli  Lilly and Company*                                                                                                                                                                                                             |
|                |       |                                                                                                                                                                                                                                                                                                               |
| 10.3                |       | Second  Amendment, dated May 6, 2009, to Credit Agreement, dated  December 21, 2007, among the Registrant, Bank of America N.A, as  Administrative Agent, and certain lenders thereto                                                                                                                    |
|                |       |                                                                                                                                                                                                                                                                                                               |
| 10.4                |       | Exenatide  Once Weekly Supply Agreement, dated May 11, 2009, between Registrant and  Eli Lilly and Company*                                                                                                                                                                                                   |
|                |       |                                                                                                                                                                                                                                                                                                               |
| 31.1                |       | Certification  of Principal Financial Officer pursuant to Rule 13a-14(a) and  Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended                                                                                                                                                |
|                |       |                                                                                                                                                                                                                                                                                                               |
| 31.2                |       | Certification  of Principal Executive Officer pursuant to Rule 13a-14(a) and  Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended                                                                                                                                                |
|                |       |                                                                                                                                                                                                                                                                                                               |
| 32.1                |       | Certifications  Pursuant to U.S.C. Section 1350, as adopted pursuant to Section 906  of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                   |

 

----

| * | Confidential treatment has been requested with  respect to certain portions of this exhibit. Omitted portions have been filed  separately with the Securities and Exchange Commission. |
|---|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

47

----

Table of Contents

 

**SIGNATURE**

 

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

 

 
|                      | Amylin Pharmaceuticals, Inc.                               |
|---------------------------|-----------------------------------------------------------------|
|                      |                                                            |
| Date: August 7, 2009 | By:                                                             | /S/ MARK G. FOLETTA |
|                      | Mark  G. Foletta,                                               |
| * *                  | *Senior Vice President, Finance and*                            |
| * *                  | *Chief Financial Officer*                                       |
| * *                  | *(on behalf of the registrant and as the*                       |
| * *                  | *registrant’s principal financial and accounting officer)* |

 

48

----