Table
of Contents
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark
One)
x
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QUARTERLY REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the
quarterly period ended June 30, 2009
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OR
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o
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TRANSITION REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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Commission File Number: 0-19700
AMYLIN
PHARMACEUTICALS, INC.
(Exact
name of registrant as specified in its charter)
Delaware
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33-0266089
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(State or other
jurisdiction of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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9360
Towne Centre Drive
San Diego, California
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92121
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(Address of
principal executive offices)
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(Zip code)
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(858) 552-2200
(Registrants telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since
last report)
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes
x
No
o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of
this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files). Yes
o
No
o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definitions of large accelerated filer, accelerated filer, and smaller
reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
x
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Accelerated filer
o
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Non-accelerated filer
o
(Do not check if a
smaller reporting company)
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Smaller reporting company
o
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Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2
of the Exchange Act). Yes
o
No
x
Indicate the number of
shares outstanding of each of the issuers classes of common stock, as of the
latest practicable date.
Class
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Outstanding on July 31, 2009
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Common Stock,
$.001 par value
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141,176,026
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Table of Contents
PART I. FINANCIAL
INFORMATION
ITEM 1. Financial Statements
AMYLIN PHARMACEUTICALS,
INC.
Consolidated Balance
Sheets
(in thousands, except per
share data)
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June 30,
2009
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December 31,
2008 (1)
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(unaudited)
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(Note 1)
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Assets
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Current assets:
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Cash and cash equivalents
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$
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111,272
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$
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237,263
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Short-term investments
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533,166
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579,575
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Accounts receivable, net
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76,405
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62,369
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Inventories, net
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109,803
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115,823
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Other current assets
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64,839
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41,038
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Total current assets
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895,485
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1,036,068
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Property, plant and equipment, net
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714,541
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655,444
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Other long-term assets
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30,077
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23,755
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Debt issuance costs
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10,264
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11,786
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$
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1,650,367
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$
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1,727,053
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Liabilities and
Stockholders Equity
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Current liabilities:
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Accounts payable
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$
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30,519
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$
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39,467
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Accrued compensation
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45,645
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65,145
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Payable to collaborative partner
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71,169
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60,470
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Other current liabilities
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87,117
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90,125
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Restructuring liability, current portion
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12,841
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24,235
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Notes payable, current portion
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31,250
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31,250
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Deferred revenue
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943
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3,086
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Total current liabilities
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279,484
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313,778
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Long-term deferred credit
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125,000
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125,000
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Restructuring liability, net of current portion
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20,238
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22,503
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Deferred collaborative profit-sharing
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17,878
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Other long-term obligations, net of current portion
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27,886
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31,724
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Notes payable, net of current portion
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78,125
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93,750
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Convertible senior notes
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632,130
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621,021
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Commitments and contingencies
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Stockholders equity:
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Preferred stock, $.001 par value, 7,500 shares
authorized, none issued and outstanding at June 30, 2009 and
December 31, 2008
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Common stock, $.001 par value, 450,000 shares
authorized, 140,945 and 137,623 issued and outstanding at June 30, 2009
and December 31, 2008, respectively
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141
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138
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Additional paid-in capital
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2,344,604
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2,291,762
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Accumulated deficit
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(1,870,937
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)
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(1,761,611
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)
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Accumulated other comprehensive loss
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(4,182
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)
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(11,012
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)
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Total stockholders equity
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469,626
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|
519,277
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|
|
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$
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1,650,367
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$
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1,727,053
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|
(1)
Adjusted for the required
retroactive adoption of FSP APB 14-1.
See accompanying notes to consolidated financial statements.
3
Table of Contents
AMYLIN PHARMACEUTICALS,
INC.
Consolidated Statements
of Operations
(in thousands, except per
share data)
(unaudited)
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Three months ended
June 30,
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Six months ended
June 30,
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2009
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2008 (1)
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2009
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2008 (1)
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Revenues:
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Net
product sales
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$
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197,497
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$
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200,335
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$
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376,829
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$
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379,056
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Revenues
under collaborative agreements
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11,875
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21,684
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26,217
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40,200
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|
Total
revenues
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209,372
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222,019
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403,046
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419,256
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Costs and expenses:
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Cost
of goods sold
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24,293
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24,682
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42,925
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46,706
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Selling,
general and administrative
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92,052
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111,088
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179,608
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209,331
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Research
and development
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63,601
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75,401
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123,620
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152,607
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Collaborative
profit sharing
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76,199
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78,950
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149,216
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148,851
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Restructure
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11,376
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|
|
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11,376
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|
Total
costs and expenses
|
|
267,521
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|
290,121
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506,745
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557,495
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|
|
|
|
|
|
|
|
|
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Operating
loss
|
|
(58,149
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)
|
(68,102
|
)
|
(103,699
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)
|
(138,239
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)
|
|
|
|
|
|
|
|
|
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|
Interest
and other income
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|
700
|
|
6,974
|
|
3,723
|
|
18,004
|
|
Interest
and other expense
|
|
(4,923
|
)
|
(5,463
|
)
|
(9,350
|
)
|
(17,455
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)
|
Net
loss
|
|
$
|
(62,372
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)
|
$
|
(66,591
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)
|
$
|
(109,326
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)
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$
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(137,690
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)
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|
|
|
|
|
|
|
|
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|
Net
loss per share, basic and diluted
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|
$
|
(0.44
|
)
|
$
|
(0.49
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)
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$
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(0.78
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)
|
$
|
(1.01
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)
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|
|
|
|
|
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|
|
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Shares
used in computing net loss per share, basic and diluted
|
|
140,912
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|
137,142
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|
139,864
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136,500
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|
|
|
|
|
|
|
|
|
|
|
|
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|
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(1)
Adjusted for the required retroactive adoption of FSP
APB 14-1.
See accompanying notes to condensed
consolidated financial statements.
4
Table of Contents
AMYLIN PHARMACEUTICALS,
INC.
Consolidated Statements
of 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
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|
13,740
|
|
Amortization of debt
discount and debt issuance costs
|
|
4,282
|
|
5,976
|
|
Employee stock-based
compensation
|
|
23,047
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|
29,002
|
|
Stock-settled compensation
accruals
|
|
11,588
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|
13,752
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|
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 FSP
APB 14-1.
See accompanying notes to consolidated
financial statements.
5
Table of Contents
AMYLIN PHARMACEUTICALS,
INC.
Notes to Consolidated
Financial Statements
June 30, 2009
(unaudited)
1.
Summary
of Significant Accounting Policies
Basis of
Presentation
The information
contained herein has been prepared in accordance with instructions for Form 10-Q
and 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 and
2008, are unaudited. In the opinion of management, the information reflects all
adjustments necessary to make the results of operations for the interim periods
a fair statement of such operations. All such adjustments are of a normal
recurring nature. Interim results are not necessarily indicative of results for
a full year. The balance sheet at December 31, 2008, has been derived from
the audited consolidated financial statements at that date, adjusted for the
retroactive adoption of Financial
Accounting Standards Board (FASB) Staff Position (FSP) Accounting Principles
Board (APB) 14-1 (see Note 2), but does not include all information and
footnotes required by U.S. generally accepted accounting principles for
complete financial statements. For more complete financial information, these financial
statements should be read in conjunction with the audited consolidated
financial statements included in Amylin Pharmaceuticals, Inc.s (referred
to as the Company or Amylin) Annual Report on Form 10-K for the year ended
December 31, 2008.
Revenue Recognition
Net
Product Sales
The Company sells BYETTA
®
(exenatide) injection for the treatment of
type 2 diabetes and SYMLIN
®
(pramlintide
acetate) injection for the treatment of type 1 and type 2 diabetes
primarily to wholesale distributors, who, in turn, sell to retail pharmacies
and government entities. Product sales are recognized when delivery of the
products has occurred, title has passed to the customer, the selling price is
fixed or determinable, collectability is reasonably assured and the Company has
no further obligations. The Company records product sales net of allowances for
product returns, rebates, wholesaler chargebacks, wholesaler discounts and
prescription vouchers. The Company must make significant judgments in
determining these allowances. If actual results differ from the Companys
estimates, the Company will be required to make adjustments to these allowances
in the future.
The Company recorded an allowance related
to the Department of Defenses (DOD) Tricare Retail Pharmacy program pursuant
to a final rule that was issued in March 2009 and is effective on May 26,
2009. The final rule clarified the
DODs interpretation of the National Defense Authorization Act of 2008, or
NDAA, signed into law on January 28, 2008. The final rule changed the
process by which rebate obligations for the Tricare Retail Pharmacy program are
created such that a contractual agreement is no longer required and that
obligation to pay such rebates emanates from the NDAA itself. In consideration of this final rule the
Company recorded 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 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 a
principal under the criteria set forth in Emerging Issues Task Force (EITF),
Issue 99-19,
Reporting Gross Revenue as a
Principal vs. Net as an Agent,
based on the Companys
responsibilities 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 Under
Collaborative Agreements
Amounts received for upfront product and technology license fees under
multiple-element arrangements are deferred and recognized over the period of
such services or performance if such arrangements require on-going services or
performance. Non-refundable amounts received for substantive milestones are
recognized upon achievement of the milestone. Amounts received for sharing of
development expenses are recognized in the period in which the related expenses
are incurred. Any amounts received prior to satisfying these revenue
recognition criteria are recorded as deferred revenue.
Collaborative
Profit-Sharing
Collaborative
profit-sharing represents Lillys 50% share of the gross margin for BYETTA
sales in the United States.
6
Table
of Contents
Accounts
Receivable
Trade accounts receivable
are recorded net of allowances for cash discounts for prompt payment, doubtful
accounts, product returns and chargebacks. Allowances for rebate discounts and
distribution fees are included in other current liabilities in the accompanying
consolidated balance sheets. Estimates for allowances for doubtful accounts are
determined based on existing contractual obligations, historical payment
patterns and individual customer circumstances. The allowance for
doubtful accounts was $0.7 million and $0.6 million at June 30, 2009 and December 31,
2008, respectively.
Investments in Unconsolidated
Entities
The Company uses the equity method of accounting for
investments in other companies that are not controlled by the Company and in
which the Companys interest is generally between 20% and 50% of the voting
shares or the Company has significant influence over the entity, or both. The Companys share of the income or losses
of these entities are included in interest and other income or interest and
other expense, and the investments, which had a net book value of $3.6 million
and $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 a
framework for measuring fair value and requires expanded disclosures regarding
fair value measurements. SFAS No. 157 defines fair value as the exchange
price that would be received for an asset or paid to transfer a liability (an
exit price) in the principal or most advantageous market for the asset or
liability in an orderly transaction between market participants on the
measurement date. Market participants are buyers and sellers in the principal
market that are (i) independent, (ii) knowledgeable, (iii) able
to transact and (iv) willing to transact. SFAS No. 157 prioritizes
the 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.
|
The
following table summarizes the assets and liabilities measured at fair value on
a 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 expensed
as incurred and include
salaries
and bonuses, benefits, non-cash stock-based compensation, license fees,
milestones under license agreements and costs paid to third-party contractors
to perform research, conduct clinical trials and develop drug materials and
delivery devices; and associated overhead expenses and facilities costs. Clinical trial costs, including costs
associated with third-party contractors, are a significant component of
research and development expenses. Invoicing from third-party contractors for
services performed can lag several months. The Company accrues the costs of
services rendered in connection with such activities based on its estimate of
management fees, site management and monitoring costs and data management
costs. Actual clinical trial costs may differ from estimates and are adjusted
in the period in which they become known.
7
Table of
Contents
Derivative
Financial Instruments
The Company mitigates
certain financial exposures, including currency risk and interest rate risk,
through a controlled program of risk management that includes the use of derivative
financial instruments. Derivatives are recorded on the balance sheet at fair
value, with changes in value being recorded in interest and other expense. The
fair value of the Companys derivative financial instruments was a net
liability of $3.1 million and $4.8 million at June 30, 2009 and December 31,
2008, respectively. The Company has
determined that its derivative financial instruments are defined as
Level 2 in the fair value hierarchy. The Company recognized a gain of $0.9
million and $3.0 million on derivative financial instruments for the three
months ended June 30, 2009 and 2008, respectively
and a gain of
$1.6 million and $0.2 million on derivative financial instruments for the six
months ended June 30, 2009 and 2008, respectively.
Gains and losses on
derivative financial instruments are included in interest and other expense in
the accompanying Consolidated Statements of Operations.
The
following table summarizes the fair value and balance sheet classification of
the Companys 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 common
stock per share is computed using the weighted average number of common shares
outstanding during the period. Common stock equivalents from stock options and
warrants 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 3.2
million for both the three and six months ended June 30, 2008, are
excluded from the calculation of diluted loss per share for all periods
presented because the effect is antidilutive. Common stock equivalents from
shares underlying our convertible senior notes of 15.2 million for the three
and six months ended June 30, 2009 and 2008 are also excluded from the
calculation of diluted loss per share because the effect is antidilutive. In future periods, if the Company reports net
income and the common share equivalents for our convertible senior notes are
dilutive, the common stock equivalents will be included in the weighted average
shares computation and interest expense related to the notes will be added back
to 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-based
compensation arrangements in accordance with Financial FASB revised SFAS No. 123 (SFAS
123R),
Share-Based Payment,
which
establishes accounting for non-cash stock-based awards exchanged for employee
services and requires companies to expense the estimated fair value of these
awards over the requisite employee service period, which for the Company is
generally the vesting period. The Company adopted SFAS 123R using the modified
prospective method. Under the modified prospective method, prior periods are
not revised for comparative purposes. The valuation provisions of SFAS 123R
apply to new awards and to awards that are outstanding on the effective date
and subsequently modified or cancelled. Estimated non-cash stock-based
compensation expense for awards outstanding at the effective date is being
recognized over the remaining service period using the compensation cost
calculated for pro-forma disclosure purposes under SFAS 123,
Accounting for Stock-Based Compensation.
8
Table of
Contents
Total estimated
stock-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 compensation
expense 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, 2009
and 2008, respectively, in all cases related to stock-based awards consisting
of stock options and employee stock purchase rights. At June 30, 2009, total unrecognized
estimated compensation cost related to non-vested stock-based awards granted
prior to that date was $76.2 million, which is expected to be recognized over a
weighted-average period of 2.4 years.
The Company issued 0.1 million and 0.2 million shares upon the exercise
of stock options in the three and six months ended June 30, 2009,
respectively.
In addition to the stock-based compensation discussed above, the
Company also recorded $3.4 million and $9.2 million of expense associated
with its Employee Stock Ownership Plan, or ESOP, for the three and six months
ended June 30, 2009, respectively, and $5.3 million and $10.7 million for
the three and six months ended June 30, 2008, respectively. The breakdown of non-cash ESOP expense by operating
statement 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 the
Company and its wholly owned subsidiaries, Amylin Ohio, LLC and Amylin
Investments, LLC. All significant intercompany transactions and balances
have been eliminated in consolidation.
Recently Issued Accounting Pronouncements
In April 2009, the FASB issued the following new
accounting standards:
·
FSP FAS 157-4,
Determining
Whether a Market Is Not Active and a Transaction Is Not Distressed, (
FSP
FAS 157-4). FSP FAS 157-4 provides guidelines for making fair value
measurements more consistent with the principles presented in SFAS 157. FSP FAS
157-4 provides additional authoritative guidance in determining whether a
market is active or inactive, and whether a transaction is distressed, is
applicable to all assets and liabilities (i.e. financial and nonfinancial) and
will require enhanced disclosures. The April 1,
2009 adoption of FSP FAS 157-4 did not have a material impact on the Companys
financial statements.
·
FSP FAS 115-2, FSP FAS 124-2, and EITF 99-20-2,
Recognition and Presentation of Other-Than-Temporary
Impairments
, (FSP FAS 115-2, FSP 124-2 and EITF 99-20-2). FSP FAS
115-2, FSP FAS 124-2 and EITF 99-20-2 provide additional guidance to provide
greater clarity about the credit and noncredit component of an
other-than-temporary impairment event and to more effectively communicate when
an other-than-temporary impairment event has occurred. This FSP applies to debt
securities. The April 1, 2009
adoption of FSP FAS 115-2, FSP FAS 124-2 and EITF 99-20-2 did not have a
material impact on the Companys financial statements.
9
Table of Contents
·
FSP FAS 107-1 and APB 28-1,
Interim Disclosures about Fair Value of Financial
Instruments
, (FSP FAS 107-1 and APB 28-1). FSP FAS 107-1 and FSP
APB 28-1, amends FASB Statement No. 107,
Disclosures
about Fair Value of Financial Instruments
, to require disclosures
about fair value of financial instruments in interim as well as in annual
financial statements. This FSP also amends APB Opinion No. 28,
Interim Financial Reporting
, to require
those disclosures in all interim financial statements. The April 1, 2009 adoption of FSP FAS
107-1 and FSP APB 28-1 did not have a material impact on the Companys
financial statements.
During the second quarter, the Company adopted SFAS No. 165,
Subsequent Events,
issued by
the FASB in May 2009. SFAS No. 165 establishes general standards of
accounting for and disclosure of events that occur after the balance sheet date
but before financial statements are issued or are available to be issued. This
pronouncement did not have a material impact on the Companys consolidated
financial statements.
In June 2009, the FASB issued SFAS No. 168,
The FASB Accounting Standards Codification and the
Hierarchy of Generally Accepted Accounting Principles a replacement of FASB
Statement No. 162
. SFAS
No. 168 provides for the FASB Accounting Standards Codification (the Codification)
to become the single official source of authoritative, nongovernmental U.S.
generally accepted accounting principles (GAAP). The Codification did not
change GAAP but reorganizes the literature. SFAS No. 168 is effective for
interim and annual periods ending after September 15, 2009.
2.
Adoption of FSP APB 14-1
Effective
January 1, 2009, the Company adopted the provisions of
FSP APB 14-1
Accounting for Convertible Debt Instruments that
may be Settled in Cash Upon Conversion (Including Partial Cash Settlement).
FSP ABP 14-1 requires that the liability and
equity components of convertible debt instruments within the scope of FSP
APB 14-1 shall be separately accounted for in a manner that will reflect
the entitys nonconvertible debt borrowing rate when interest cost is recognized
in subsequent periods. The carrying amount of the liability component of the
convertible debt instrument is determined by measuring the fair value of a
similar liability that does not have an associated equity component. The
carrying value of the equity component is determined by deducting the fair
value of the liability component from the initial proceeds ascribed to the
convertible debt instrument as a whole. Related transaction costs are allocated
to the liability and equity components in proportion to the allocation of
proceeds and accounted for as debt issuance costs and equity issuance costs,
respectively. The excess of the principal amount of the liability component
over its carrying amount is amortized to interest expense using the interest
method. FSP ABP 14-1 is applied
retrospectively to all periods presented with the cumulative effect of the
change in accounting principle on periods prior to those presented recognized
as of the beginning of the first period presented. Due to the Companys option to elect
net-share settlement upon conversion, the Companys $575 million Senior
Convertible Notes issued in June 2007 (the 2007 Notes) are within the
scope of FSP APB 14-1. The Companys
$200 million Convertible Senior Notes issued in 2004 (the 2004 Notes) are not
within the scope of FSP APB 14-1 as they may only be settled in shares of the
Companys common stock upon conversion.
Upon
adoption, 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 million
net of allocated transaction costs of $5.3 million. The debt discount is being amortized to
interest expense over the term of the 2007 Notes, net of interest capitalized,
which resulted in a cumulative effect on retained earnings of the change in
accounting principle of $5.4 million as of January 1, 2008. As required by the provisions of FSP APB
14-1, the Company is retroactively adjusting its 2007 and 2008 financial
statements.
The
Companys 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 incremental
interest and other expense due to the adoption of FSP APB 14-1. The Companys net loss for the six months
ended June 30, 2009 of $109.3 million, or $0.78 per share, includes $2.4
million, or $0.02 per share, of incremental interest and other expense due to
the adoption of FSP ABP 14-1.
10
Table of
Contents
The following table sets
forth the effect of the retroactive adjustment of the applicable line items
within the accompanying consolidated balance sheet as of December 31, 2008
(in thousands):
|
|
As previously
reported
|
|
Implementation
adjustments
|
|
As adjusted
|
|
Property,
plant and equipment, net
|
|
$
|
636,922
|
|
$
|
18,522
|
|
$
|
655,444
|
|
Debt
issuance costs
|
|
$
|
15,884
|
|
$
|
(4,098
|
)
|
$
|
11,786
|
|
Convertible
senior notes
|
|
$
|
775,000
|
|
$
|
(153,979
|
)
|
$
|
621,021
|
|
Additional
paid-in capital
|
|
$
|
2,111,473
|
|
$
|
180,289
|
|
$
|
2,291,762
|
|
Accumulated
deficit
|
|
$
|
(1,749,725
|
)
|
$
|
(11,886
|
)
|
$
|
(1,761,611
|
)
|
The
following tables set forth the effect of the retroactive adjustment of the
applicable line items within the accompanying consolidated statement of
operations 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 set
forth the effect of the retroactive adjustment of the applicable line items
within the accompanying consolidated statement of cash flows for the six months
ended 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 Companys short-term investments, consisting principally of debt
securities, are classified as available-for-sale and are stated at fair value
based upon observed market prices (Level 1 in the fair value hierarchy).
Unrealized holding gains or losses on these securities are included in other
comprehensive loss. The amortized cost of debt securities in this category is
adjusted for amortization of premiums and accretion of discounts to maturity.
For investments in mortgage-backed securities, amortization of premiums and
accretion of discounts are recognized in interest income using the interest
method, adjusted for anticipated prepayments as applicable. Estimates of
expected cash flows are updated periodically and changes are recognized in the
calculated effective yield prospectively as appropriate. Such amortization is
included in interest income. Realized gains and losses and declines in value
judged to be other-than-temporary on available-for-sale securities are included
in impairment loss on investments. In assessing potential impairment of its
short-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 of
Contents
which
the market value has been less than cost, and the Companys intent and ability
to not sell the security for a sufficient period of time in order to allow for
an anticipated recovery in fair value. The cost of securities sold is based on
the specific-identification method.
The following is a summary of short-term
investments 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 loss
included a net unrealized loss of $2.8 million and $3.3 million on investments
underlying the Companys 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 securities
totaled approximately $0.1 million and $0.1 million and the gross
realized losses totaled $0.5 million and $0.1 million for the three
months ended June 30, 2009 and 2008, respectively. Gross realized gains on
sales of available-for-sale securities totaled approximately $0.6 million
and $2.0 million and the gross realized losses totaled $0.6 million
and $1.6 million for the six months ended June 30, 2009 and 2008,
respectively
Contractual maturities of short-term investments at June 30, 2009
were 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 date
is used for securities not due at a single maturity date. This includes asset-backed and
mortgage-backed securities which are included in Obligations of U.S
Government-sponsored enterprises in the table above.
12
Table of
Contents
The following table shows the gross unrealized losses and fair value of
the Companys investments with unrealized losses that are not deemed to be
other-than-temporarily impaired, aggregated by investment category and length
of time that individual securities have been in a continuous unrealized loss
position, 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 Companys
investments 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 impairment
losses for credit-related losses for two securities in its portfolio in the
quarter ended June 30, 2009. These
impairment losses were based upon the difference between the cost basis and the
observed market prices for these securities at June 30, 2009.
The unrealized losses on the
Companys investments in marketable securities is due in most instances to the
increased volatility in the markets impacting certain of the classes of
securities the Company invests in and not a deterioration in credit ratings.
The Companys investments have a short effective duration, and since the
Company has the ability and intent not to sell these investments until a
recovery of fair value, which may be maturity, the Company does not consider
these 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 obsolete
material 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 and
SYMLIN, work-in-process consists of in-process BYETTA cartridges, in-process
SYMLIN cartridges and in-process SYMLIN vials, and finished goods consists of
BYETTA drug product in a disposable pen/cartridge delivery system, finished
SYMLIN drug product in vials for syringe administration and finished SYMLIN
drug product in a disposable pen/cartridge delivery system. The reduction in the valuation allowance
primarily reflects the scrapping of material previously reserved for that the
Company was unable to utilize.
Inventories
consist 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 (in
thousands):
|
|
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
Debt
issuance
costs relate to the $200 million principal amount of
2.5% convertible senior notes, due April 15, 2011, issued in April 2004,
referred to as the 2004 Notes, the $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
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December 2007,
referred to as the Term Loan.
Amortization of debt issuance costs are recorded as interest expense in
the consolidated statement of operations on a straight-line basis, which
approximates the interest method over the contractual term of the related debt.
The Company incurred total debt issuance costs of $19.1 million in connection
with 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, 2009
and 2008, respectively. Amortization
expense of $1.5 million was recorded in each of the six months ended June 30,
2009 and 2008, respectively.
7.
Other Current
Liabilities
Other current liabilities consist of the
following (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
The
Company has entered into various collaborative agreements which provide it with
rights to develop, produce and market products using certain know-how,
technology and patent rights maintained by its collaborative partners. Terms of
the various collaboration agreements may require the Company to make and/or
receive milestone payments upon the achievement of certain product research and
development objectives and pay and/or receive royalties on future sales, if
any, of commercial products resulting from the collaboration.
Effective
January 1, 2009, the Company implemented EITF No. 07-01,
Accounting for Collaborative Arrangements,
or
EITF 07-01, which prescribes that certain transactions between
collaborators be recorded in the income statement on either a gross or net
basis, depending on the characteristics of the collaboration relationship, and
provides for enhanced disclosure of collaborative relationships. In accordance
with EITF 07-01, the Company evaluated its collaborative agreements for
proper income statement classification based on the nature of the underlying
activity. If payments to and from the Companys collaborative partners are not
within the scope of other authoritative accounting literature, the income
statement classification for the payments is based on a reasonable, rational
analogy to authoritative accounting literature that is applied in a consistent
manner. Amounts due from the Companys collaborative partners related to
development activities are generally reflected as collaborative revenues and
amounts due to the Companys collaborative partners related to sharing of commercialization
expenses are generally reflected as selling, general and administrative
expenses. Milestone payments and
up-front payments received are generally reflected as collaborative revenue as
discussed above in Note 1, and milestone payments and up-front payments made
are generally recorded as research and development expenses if the payments
relate to drug candidates that have not yet received regulatory approval. Milestone payments and up-front payments made
related to approved drugs (of which there have been none to date) will
generally be capitalized and amortized to cost of goods sold over the economic
life of the product. Royalties received
(of which there have been none to date) will generally be reflected as
collaborative revenues and royalties paid are generally reflected as cost of
goods sold. The adoption of
EITF 07-01 did not affect the Companys financial position or results of
operations.
For
collaborations with commercialized products, if we are the principal, as
defined in EITF No. 99-19,
Reporting
Revenue as a Principal versus Net as an Agent,
or EITF 99-19,
we record revenue and the corresponding operating costs in their respective
line items within the Companys statement of operations. If the Company is not the principal, it
records operating costs as a reduction of revenue. EITF 99-19 describes the principal as
the party who is responsible for delivering the product or service to the
customer, has latitude with establishing price and has the risks and rewards of
providing product or service to the customer, including inventory and credit
risk.
Collaboration with Eli Lilly and
Company
In September 2002, the Company and Lilly entered into a
collaboration agreement for the global development and commercialization of
exenatide. The agreement was amended in 2006 and in 2009.
This agreement includes BYETTA and any sustained release formulations
of exenatide such as exenatide once weekly, the Companys once weekly
formulation of exenatide for the treatment of type 2 diabetes. Under the
terms of the agreement, operating profits from products sold in the United
States are shared equally between Lilly and us. In 2005, the Company
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received
United States Food and Drug Administration, or FDA, approval for the
twice-daily formulation of exenatide, which is marketed in the United States
under the trade name BYETTA. The agreement provides for tiered royalties
payable to us by Lilly based upon the annual gross margin for all exenatide
product sales, including any long-acting release formulations, outside of the
United States. Royalty payments for exenatide product sales outside of the
United States will commence after a one-time cumulative gross margin threshold
amount has been met. Lilly is responsible for 100% of the costs related to
development of exenatide once weekly and twice-daily BYETTA for sale outside of
the United States. Lilly is responsible
for 100% of the costs related to commercialization of all exenatide products
for sale outside of the United States.
At signing, Lilly made initial non-refundable payments to the Company
totaling $80 million, of which $50 million was amortized to revenues
under collaborative agreements prior to 2004. The remaining $30 million is
being amortized to revenues ratably over a seven-year period ending in September 2009,
which represents the Companys estimate of the period of its performance of
significant development activities under the agreement.
In addition to these up-front payments, Lilly agreed to make future
milestone payments of up to $85 million upon the achievement of certain
development milestones, including milestones relating to both twice daily and
sustained release formulations of exenatide such as exenatide once weekly, of
which $75 million have been paid through June 30, 2009, $30 million
of which was converted into 0.8 million shares of the Companys common stock in
February 2008. No additional development milestones may be earned under
the collaboration agreement.
Lilly also agreed to make additional future milestone payments of up to
$130 million contingent upon the commercial launch of exenatide in
selected territories throughout the world, including both twice-daily and
sustained release formulations Through June 30, 3009, $40 million of
these milestones have been paid and recorded as revenue and remaining
milestones relate primarily to the commercial launch of exenatide once weekly in
selected territories throughout the world, including the United States.
The Company
recorded $10.6 million and $20.2 million of cost sharing payments due from
Lilly for the three months ended June 30, 2009 and 2008, respectively, and
recorded $23.5 million and $37.4 million of cost sharing payments due from
Lilly for the six months ended June 30, 2009 and 2008, respectively,
related to the sharing of BYETTA and exenatide once weekly development
expenses, which are included in revenues under collaborative agreements in the
accompanying consolidated statements of operations. In addition, the Company recorded $2.9
million and $5.4 million of selling, general and administrative expenses for
the three months ended June 30, 2009 and 2008, respectively, and $7.7
million 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 external
marketing expenses.
In October 2008, the Company and Lilly entered into an exenatide
once weekly supply agreement pursuant to which the Company will supply
commercial quantities of exenatide once weekly for sale in the United States,
if approved by the FDA. In addition, if Lilly receives approval to market the
product in jurisdictions outside the United States, the Company will be
required to manufacture the product intended for commercial sale by Lilly in
those 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 the
Company for the estimated past and future cost of carrying Lillys share of the
capital investment made in the Companys manufacturing facility in Ohio, that
otherwise would have been included in the cost of product produced at the
facility and charged to Lilly through the Companys arrangements with them. In
addition to this cash payment, the Company will recover Lillys share of the
capital investment in the facility through an allocation of depreciation
expense to cost of goods sold as discussed below. Under the terms of the supply
agreement, the Company has agreed not to charge Lilly for Lillys share of the
interest costs capitalized to the facility or any future financing cost that
may be related to financing the facility. Accordingly, the Company has
determined that a portion of the $125 million payment, amounting to $30.2
million at June 30, 2009, represents a reimbursement to the Company of
Lillys share of interest costs capitalized to the facility that will be
credited to Lilly for its share of the capitalized interest included in the
cost of goods sold for exenatide once weekly as incurred. The Company has
concluded that any excess amount represents deferred collaborative revenue for
services to be provided to Lilly under the supply agreement that will be
amortized ratably over the economic useful life of the exenatide once weekly
product following its commercial launch. The ultimate allocation of the
$125 million payment, which is classified as a long-term deferred credit
in the accompanying Consolidated Balance Sheets at June 30, 2009, will be
dependent upon the total amount of interest costs capitalized to the facility
when it is placed in service. Under certain circumstances, including upon an
impairment of the exenatide once weekly manufacturing facility, Lilly may
receive a credit for the unearned portion of the $125 million payment
which will be applied against Lillys share of the impairment charge. The $125 million payment is not refundable to
Lilly if exenatide once weekly does not receive regulatory approval unless such
non-approval results in an impairment as discussed above.
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In addition to the $125 million cash payment, the Company will
recover Lillys share of the over $500 million capital investment in the
facility through an allocation of depreciation to cost of goods sold in
accordance with the collaboration agreement. The Company retains ownership of
the facility and Lillys share of the capital investment to be recovered
through the sharing of cost of goods sold is initially estimated to be 55%
subject to adjustment based upon the allocation of the proportion of product
supplied for sale in the United States, the cost of which is shared equally by
the parties, and the proportion of product supplied for sale outside of the
United States, the cost of which is paid for 100% by Lilly.
In October 2008, the Company and Lilly also entered into a loan
agreement pursuant to which Lilly will make available to Amylin a
$165 million unsecured line of credit that Amylin can draw upon from time
to 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-day
average three-month LIBOR rate immediately prior to the date of the advance
plus 5.25% and shall be due and payable quarterly in arrears on the first
business day of each quarter. All outstanding principal, together with all
accrued and unpaid interest shall be due and payable the earlier of
36 months following the date on which the loan commitment is fully
advanced or June 30, 2014.
In April 2009, the
Company and Lilly announced the restructuring of its exenatide operations in
order to improve alliance effectiveness, increase financial and operational
efficiencies and maximize the value of BYETTA and exenatide once weekly.
Additionally,
the Company and Lilly
amended their Collaboration Agreement to require one
years notice for termination of the agreement without cause. Previously, the
agreement required six-months notice. In addition, the Company and Lilly also
agreed that internal marketing costs, which were previously not shared, are now
shared within the alliance.
In May 2009, the Company and Lilly entered into a
cost allocation agreement, or the Cost Allocation Agreement, which amends the
exenatide development and commercialization cost-sharing provisions contained
in the companies Collaboration Agreement and Exenatide Once Weekly Supply
Agreement, or the Agreements.
Under the terms of the Cost Allocation Agreement, the
following changes will be applied with respect to the cost-sharing provisions
of the Agreements retroactively as of January 1, 2009:
·
Lilly will be responsible for 53% of shared exenatide
global development and commercialization expenses that generate utility both in
the United States and outside the United States, including global manufacturing
development expenses. The Company will be
responsible for 47% of these expenses;
·
Lilly will assume 100% of all exenatide development
and commercialization expenses that generate utility predominantly outside the
United States. Under the previous
cost-sharing arrangement, the Company was responsible for 20% of some of these
expenses; and
·
The royalty structure for exenatide revenues generated
outside the United States has been modified to reflect Lillys revised expense
burden, with a reduction in Lillys royalty payments to the Company.
The companies will continue to equally share all
exenatide development and commercialization expenses that generate utility
predominately in the United States.
In May 2009,
the Company and Lilly entered into a joint supply agreement for an exenatide
once weekly pen device. The Company and
Lilly agreed to cooperate in the development, manufacturing and marketing of
exenatide once weekly in a dual chamber cartridge pen configuration. The companies will share the capital and
development costs of the pen, including the estimated total capital investment
of approximately $216 million which is expected to be incurred over the next
few years. The Company and Lilly have agreed that the estimated cost of the
total 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 has
incurred $35.6 million in capital expenditures associated with the exenatide
once weekly pen, which amount is included in construction in progress. Lillys 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 are
included in deferred collaborative profit-sharing in the accompanying consolidated
balance sheet, are being deferred and will be amortized to collaborative profit
sharing for Lillys share of the depreciation included in cost of goods sold
for the exenatide once weekly pen device as incurred.
9.
Restructuring
In November 2008, the Company announced a
corporate restructuring that reduced its San Diego work force by approximately
25 percent or 330 employees. In connection with the restructuring, the
Company recorded restructuring charges of $54.9 million, consisting
primarily of facility related charges, employee separation costs and asset
impairments which were recorded in the quarter ended December 31, 2008.
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Table of Contents
In May 2009, the
Company announced a restructuring of its sales force to merge its existing
primary care and specialty sales forces into a single organization. This restructuring reduced the total number
of Amylin sales representatives by approximately 200 employees. The Company recorded restructuring charges of
$11.4 million during the quarter ended June 30, 2009 consisting primarily
of employee separation costs which were incurred in the quarter ended June 30,
2009. The following table summarizes the components of the restructuring
charges (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 the
restructuring 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 restructuring
liability during the six months ended June 30, 2009 consists of payments
of $18.3 million of employee separation costs, reflecting severance and other
separation benefit payments and $6.5 million of facilities related charges
reflecting ongoing rental payments for leases associated with vacated facilities.
Partially offsetting these payments are additional accruals of $11.1 million
associated 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 of
Long-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 and
displaying comprehensive income (loss) and its components, which, for the
Company, includes net loss and unrealized gains and losses on investments. In
accordance with SFAS No. 130, the accumulated balance of other
comprehensive income (loss) is disclosed as a separate component of
stockholders 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 2007
Notes in a private placement, which have an aggregate principal amount of
$575 million, and are due June 15, 2014. The 2007 Notes are senior
unsecured obligations and rank equally with all other existing and future
senior unsecured debt. The 2007 Notes bear interest at 3.0% per year, payable
in cash semi-annually, and are initially convertible into a total of up to
9.4 million shares of common stock at a conversion price of $61.07 per
share, subject to the customary adjustment for stock dividends and other
dilutive transactions. The Company may not redeem the 2007 Notes prior to
maturity. In addition, if a fundamental change (as defined in the associated
indenture agreement) occurs prior to the maturity date, the Company will in
some cases increase the conversion rate for a holder of notes that elects to
convert its notes in connection with such fundamental change. The maximum
conversion rate is 22.9252 ($43.62 per share), which would result in a maximum
issuance of 13.2 million shares of common stock if all holders converted
at the maximum conversion rate. The
principal amount of the 2007 Notes exceeds the current if-converted value.
17
Table of Contents
The 2007 Notes will be convertible into shares
of the Companys common stock unless the Company elects net-share settlement.
If net-share settlement is elected by the Company, the Company will satisfy the
accreted value of the obligation in cash and will satisfy the excess of
conversion value over the accreted value in shares of the Companys common
stock based on a daily conversion value, determined in accordance with the
associated indenture agreement, calculated on a proportionate basis for each
day of the relevant 20-day observation period. Holders may convert the 2007
Notes only in the following circumstances and to the following extent: (1) during
the five business-day period after any five consecutive trading day period (the
measurement period) in which the trading price per note for each day of such
measurement period was less than 97% of the product of the last reported sale
price of the Companys common stock and the conversion rate on each such day; (2) during
any calendar quarter after the calendar quarter ending March 31, 2007, if
the last reported sale price of the Companys common stock for 20 or more
trading days in a period of 30 consecutive trading days ending on the last
trading day of the immediately preceding calendar quarter exceeds 130% of the
applicable conversion price in effect on the last trading day of the
immediately preceding calendar quarter; (3) upon the occurrence of
specified events; and (4) the 2007 Notes will be convertible at any time
on or after April 15, 2014 through the scheduled trading day immediately
preceding the maturity date.
Subject to certain exceptions, if the Company
undergoes a designated event (as defined in the associated indenture
agreement) including a fundamental change, such as if a majority of the
Companys Board of Directors ceases to be composed of the existing directors or
other individuals approved by a majority of the existing directors, holders of
the 2007 Notes will, for the duration of the notes, have the option to require
the Company to repurchase all or any portion of their 2007 Notes. The
designated event repurchase price will be 100% of the principal amount of the
2007 Notes to be purchased plus any accrued interest up to but excluding the
relevant repurchase date. The Company will pay cash for all notes so
repurchased. The 2007 Notes have been registered under the Securities Act of
1933, as amended, to permit registered resale of the 2007 Notes and of the
common stock issuable upon conversion of the 2007 Notes. Subject to certain
limitations, the Company will be required to pay the holders of the 2007 Notes
special interest on the 2007 Notes if the Company fails to keep such
registration statement effective during specified time periods. The 2007 Notes
pay interest in cash, semi-annually in arrears on June 15 and December 15
of each year, which began on December 15, 2007.
The fair value of the 2007 Notes, determined by
observed 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 are
within the scope of FSP APB 14-1which the Company adopted effective January 1,
2009.
The following table summarizes the principal amount
of the liability component, the unamortized discount and the net carrying
amount 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 the
2007 Notes was $180.3 million at June 30, 2009 and December 31,
2008. At June 30, 2009, the
unamortized balance of the debt discount will be amortized over the remaining
life of the 2007 Notes, approximately five years.
The effective interest rate on the net carrying value
of 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 2004
Notes, 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 all
other existing and future senior unsecured debt. The 2004 Notes bear interest
at 2.5% per year, payable in cash semi-annually and are convertible into a
total of 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 and
other dilutive transactions. The Company may not redeem the 2004 Notes prior to
maturity. As discussed in Note 2, the
2004 Notes are not within the scope of FSP APB 14-1 as they can only be settled
in shares of the Companys common stock upon conversion.
Upon a change in control, the holders of the 2004
Notes may elect to require the Company to repurchase the 2004 Notes. The
Company may elect to pay the purchase price in common stock instead of cash, or
a combination thereof. If paid with common stock, the number of shares of
common stock a holder will receive will be valued at 95% of the closing prices
of the Companys common stock for the five trading day period ending on the
third day before the purchase date.
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The 2004 Notes have been registered under the
Securities Act of 1933, as amended, to permit registered resale of the 2004
Notes and of the common stock issuable upon conversion of the 2004 Notes.
The
fair value of the 2004 Notes, determined by observed market prices, was $178.4
and $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 million
of 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 million
of 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 administrative
agent, collateral agent and letter of credit issuer, Silicon Valley Bank and
RBS Asset Finance, Inc., as syndication agents, and Comerica Bank and BMO
Capital Markets Financing, Inc., as documentation agents. The credit
agreement provides for a $125 million Term Loan and a $15 million revolving
credit facility. The proceeds of both loans will be used for general
corporate purposes. The revolving credit
facility also provides for the issuance of letters of credit and foreign
exchange 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 million
of stand-by letters of credit under the revolving credit facility primarily in
connection with office leases, at June 30, 2009 and December 31,
2008, respectively.
The Companys
domestic subsidiaries, Amylin Ohio LLC and Amylin Investments LLC, are
co-borrowers under the credit agreement. The loans under the revolving
credit facility are secured by substantially all of the Companys and the two
domestic subsidiaries assets (other than intellectual property and certain
other excluded collateral). The Term Loan is repayable on a
quarterly 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 paid
quarterly on the unpaid principal balance at 1.75% above the London Interbank
Offered Rate, or LIBOR, based on the Companys election of either one, two,
three or six months LIBOR term, and payable at the end of the selected interest
period but no less frequently than quarterly as of the first business day of
the quarter prior to the period in which the quarterly installment is due. The Company has elected to use the three
month LIBOR rate, which was 0.6% and 1.44% at June 30, 2009 and December 31,
2008, respectively. Interest periods on
the revolving credit facility may be either one, two, three or six months, and
payable at the end of the selected interest period but no less frequently than
quarterly, and the interest rate will be either LIBOR plus 1.0% or the Bank of
America 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 a
requirement to maintain minimum unrestricted cash and cash equivalents
balances, as defined in the agreement, in excess of $400 million, below
which certain limitations provided for in the agreement become effective. The
credit agreement also contains certain events of default including unrestricted
cash 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 and
default under other indebtedness that would permit the administrative agent to
accelerate the Companys outstanding obligations if not cured within applicable
grace periods. In addition, the credit agreement provides for automatic
acceleration upon the occurrence of bankruptcy, other insolvency events and a
change in control, as defined in the credit agreement as amended. There is an
annual commitment fee associated with the revolving credit facility of 0.25%.
Maturities
of long-term notes payable for periods ending after June 30, 2009 are as
follows (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 the
execution of the Term Loan, the Company entered into an interest rate swap with
an initial notional amount of $125 million on December 21, 2007 that
has resulted in a net fixed rate of 5.717% and matures on December 21,
2010. The Company determined that the
interest rate swap agreement is defined as Level 2 in the fair value
hierarchy. The fair value of the
interest rate swap agreement was a liability of $3.9 million and $5.0 million
at June 30, 2009 and December 31, 2008, respectively. The Company recognized a gain on the interest
rate 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 a
gain on the interest rate swap, which is included in interest and other
expense, of $1.1 million for the six months ended June 30, 2009 and a loss
on 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
In
March 2009, the Company contributed approximately 2.2 million newly issued
shares of its common stock, valued at $9.02 per share, to the Companys ESOP
for amounts earned by participants during the year ended December 31,
2008.
In
March 2009, the Company contributed approximately 0.4 million newly issued
shares of its common stock, valued at $11.80 per share, to the Companys 401(k) plan
for amounts earned by participants during the year ended December 31,
2008.
14.
Commitments and Contingencies
Other Commitments
The
Company has committed to make potential future milestone payments to third
parties as part of in-licensing and development programs primarily related to
research and development agreements. Potential future payments generally become
due and payable only upon the achievement of certain developmental, regulatory
and/or commercial milestones, such as achievement of regulatory approval,
successful development and commercialization of products, and subsequent
product sales. Because the achievement of these milestones is neither probable
nor reasonably estimable, the Company has not recorded a liability on the
balance sheet for any such contingencies.
As of June 30,
2009, if all such milestones are successfully achieved, the potential future
milestone and other contingency payments due under certain contractual
agreements are approximately $287.4 million in aggregate, of which $2.5 million
would be due within the next 12 months.
The Company has
committed to make future minimum payments to third parties for certain
inventories in the normal course of business. The minimum purchase commitments
total approximately $84.3 million as of June 30, 2009
. The majority
of 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 once
weekly.
As of June 30, 2009, capital commitments to
complete construction of the Companys exenatide once weekly manufacturing
facility in Ohio are $9.4 million, and capital commitments related to the
exenatide once weekly pen device are $35.6 million.
15.
Litigation
From
time to time in the ordinary course of business, the Company becomes involved
in various lawsuits, claims and proceedings relating to the conduct of its
business, including those pertaining to product liability, patent infringement
and employment claims. Since August 2008,
the Company and Lilly have been named as defendants in 21 separate product
liability cases involving approximately 110 plaintiffs in various courts in the
United States and a putative class action lawsuit that has been filed in
Louisiana. These cases have been brought
by individuals who allege they have used BYETTA. They generally seek compensatory and punitive
damages for alleged injuries, consisting primarily of pancreatitis, and in a
few cases, wrongful death. Most of the
cases are pending in California state court, where the Judicial Council
recently granted the Companys petition for a coordinated proceeding for all
California state court cases alleging harm allegedly as a result of BYETTA
use. The Company
has also received notice from plaintiffs
counsel of additional claims by individuals who have not filed suit
. While the Company cannot predict the outcome
of any lawsuit, claim or proceeding, the Company and Lilly intend to vigorously
defend these matters. These matters are at an early stage and as a result the
Company cannot estimate potential losses, if any, at this time.
16.
Subsequent Events
No
events subsequent to June 30, 2009 that require disclosure have
occurred. The Company evaluated
subsequent events for disclosure through August 7, 2009, which represents
the date the financial statements were issued.
ITEM
2. Managements Discussion and Analysis
of Financial Condition and Results of Operations
Except
for the historical information herein, the discussion in this quarterly report
on Form 10-Q contains forward-looking statements that involve risks and
uncertainties. These statements include projections about our accounting and
20
Table of
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finances, plans and
objectives for the future, future operating and economic performance and other
statements regarding future performance. These statements are not guarantees of
future performance or events. Our actual results may differ materially from
those discussed here. Factors that could cause or contribute to differences in
our actual results include those discussed under the caption Cautionary
Factors That May Affect Future Results, as well as those discussed
elsewhere in this quarterly report on Form 10-Q or in our other public
disclosures. You should consider carefully those cautionary factors, together
with 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 adversely
affect our business, operating results and financial condition, as well as
adversely affect the value of an investment in our common stock. There may be
additional risks that we are not presently aware of or that we currently
believe are immaterial which could also impair our business and financial
position. We disclaim any obligation to update these forward-looking
statements.
Overview
We are a biopharmaceutical company committed to improving the lives of
people with diabetes, obesity and other diseases through the discovery,
development and commercialization of innovative medicines. We have developed
and gained approval for two first-in-class medicines to treat diabetes, BYETTA
®
(exenatide) injection and SYMLIN
®
(pramlintide acetate) injection, both of which
were commercially launched in the United States during the second quarter of
2005. BYETTA was approved in the European Union, or EU, in 2006 and our
collaboration partner, Eli Lilly and Company, or Lilly, has commercially
launched BYETTA in 54 countries as of June 30, 2009. Our near-term
business strategy is to create value for patients and our stockholders by
capitalizing on market drivers, such as the recent inclusion by the American
Diabetes Association, or ADA, of BYETTA as the only new addition to their
treatment guidelines. Our focus remains on increasing BYETTA and SYMLIN
revenue, preparing for the successful launch of exenatide once weekly, if
approved, significantly improving operating results and progressing toward
positive operating cash flow by the end of 2010. Our long-term strategy is
focused on making prudent investment decisions based on strong clinical data to
advance our obesity program. We intend to finalize our obesity funding and
development strategy by the end of 2009.
BYETTA
is the first and only approved medicine in a new class of compounds called
glucagon-like peptide-1, or GLP-1, receptor agonists. We began selling BYETTA
in the United States in June 2005. BYETTA is approved in the United States
for the treatment of patients with type 2 diabetes who have not achieved
adequate glycemic control and are using metformin, a sulfonylurea and/or a
thiazolidinediene, or TZD, three common oral therapies for type 2
diabetes. In October 2008, the ADA and the European Association for the
Study of Diabetes, or EASD, updated their type 2 diabetes treatment
guidelines, placing the GLP-1 receptor agonist class, of which BYETTA is the only
approved product, as a secondary treatment option for type 2 diabetes
patients. 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 FDA
regarding potential updates to the BYETTA label regarding pancreatitis and
other matters. Prescriptions declined in
the second half of 2008. During that time period we committed our field
resources to educating the medical community on the facts about BYETTA, pancreatitis
and the products safety profile. We believe the decline in BYETTA
prescriptions and demand for the product continued to stabilize during the
quarter ended June 30, 2009.
Net product
sales of BYETTA were $175.1 million and $177.5 million for the three months
ended June 30, 2009 and 2008, respectively, and $332.8 million and $336.0
million for the six months ended June 30, 2009 and 2008, respectively.
We have an agreement with Lilly for the global development and
commercialization of exenatide. This agreement includes BYETTA and any
sustained-release formulations of exenatide such as exenatide once weekly, our
once weekly formulation of exenatide for the treatment of type 2 diabetes.
Under the terms of the agreement, operating profits from products sold in the
United States are shared equally between Lilly and us. The agreement provides
for tiered royalties payable to us by Lilly based upon the annual gross margin
for all exenatide product sales, including any long-acting release
formulations, outside of the United States. Royalty payments for exenatide
product sales outside of the United States will commence after a one-time
cumulative gross margin threshold amount has been met. We expect royalty
payments to commence in 2010. Lilly is responsible for 100% of the costs
related to development of exenatide once weekly and twice-daily BYETTA for sale
outside of the United States. Lilly is responsible for commercialization and
all of the costs related to commercialization of all exenatide products for sale
outside of the United States.
In the second quarter of
2009, we entered into several agreements with Lilly that will enable us to
improve the operational effectiveness and efficiency of our collaboration
agreement. In April 2009, we and
Lilly announced the restructuring of our exenatide operations in order to
improve alliance effectiveness, increase financial and operational efficiencies
and maximize the value of BYETTA and exenatide once weekly. In May 2009, we and Lilly entered into
a cost allocation agreement which amends
the exenatide development and commercialization cost-sharing provisions
contained in the collaboration agreement.
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SYMLIN
is the first and only approved medicine in a new class of compounds called
amylinomimetics. We began selling SYMLIN in the United States in April 2005.
Symlin is approved in the United States for the treatment of patients with
either type 1 or type 2 diabetes who are treated with mealtime
insulin but who have not achieved adequate glycemic control. In early 2008, we
commercially launched the SymlinPen
®
120 and
SymlinPen
®
60 pen injector devices in the United States.
These pre-filled pen-injector devices feature simple, fixed dosing to improve
mealtime glucose control.
Net product sales of SYMLIN were $22.4 million and $22.8 million for
the three months ended June 30, 2009 and 2008, respectively, and $44.0
million and $43.1 million for the six months ended June 30, 2009 and 2008,
respectively.
In May 2009, we
announced a restructuring of our sales force that merged our existing primary
care and specialty sales forces into a single specialty sales
organization. This new sales force will
be focused on targeting those doctors that write the majority of BYETTA and
SYMLIN prescriptions. This sales-force restructuring reduced our total number
of sales representatives by approximately 200 employees. We incurred restructuring charges of $11.4
million during the quarter ended June 30, 2009. Following this restructuring we have a field
force of approximately 400 people dedicated to marketing BYETTA and SYMLIN in
the United States. Our field force
includes our specialty sales force, and managed care and government affairs
organizations. Lilly co-promotes BYETTA
in the United States.
In addition to our marketed
products, we are working with Lilly and Alkermes, Inc. to develop
exenatide once weekly. We are also working with Parsons, Inc. on the
construction of a manufacturing facility for exenatide once weekly in Ohio. We
substantially completed the construction of this facility in 2008. We are now
manufacturing exenatide once weekly at commercial scale in this facility and
using this material in clinical trials.
In March 2009, we reported that analysis of data from the ongoing
extension of our DURATION-1 study designed to provide the data required to
demonstrate comparability of commercial and development drug lots to support
the
regulatory
submission of exenatide once weekly have been successfully completed and are
part of the NDA submitted to FDA in May 2009. The FDA filed the NDA submission in July 2009
and the application has a ten month review period.
In March 2009, we also
announced that a meta-analysis of primary cardiovascular events across
controlled clinical studies of three months or greater, from the BYETTA
database, showed no increased risk of cardiovascular events associated with
exenatide use and that these findings will be used to support the
cardiovascular safety of exenatide once weekly.
In March 2009 and July 2009,
w
e announced positive
results from DURATION-2 and DURATION-3, respectively, the second and third in a
series of five of such studies designed to test the superiority of exenatide
once weekly compared to other diabetes therapies. In DURATION-2 exenatide once weekly
demonstrated
superior glucose control with
weight loss and no increase in hypoglycemia compared to
maximum doses
of
sitagliptin or pioglitazone. In
DURATION-3
exenatide
once weekly demonstrated
superior glucose control with
weight loss and with less hypoglycemia compared to
insulin
glargine. During the remainder of 2009, we remain focused on building a
superior profile for exenatide once weekly by conducting clinical studies that
compare exenatide once weekly against competing products. The objective of
these studies is to support the launch of exenatide once weekly and demonstrate
superiority and the transformational nature of our exenatide once weekly
therapy.
In November 2008, we announced a strategic restructuring and
workforce reduction that reduced the size of our San Diego workforce by
approximately 25%, or 330 employees. The goal of the restructuring was to
better align our cost structure with anticipated revenues and is part of our
business plan to achieve positive operating cash flow by the end of 2010.
Additionally, in May 2009, we announced the restructuring of our sales
force as discussed above. We continue to
believe we have the appropriate resources to market BYETTA and SYMLIN, bring
exenatide once weekly to market as soon as possible, and continue to advance
our obesity programs.
Our long-term growth strategy is focused on making prudent investment
decisions based on strong clinical data to advance our obesity program and
includes our
Integrated
Neurohormonal Therapies for Obesity
strategy. In July 2009 we announced positive
results from a 28-week dose-ranging study of pramlintide/metreleptin, a
combination treatment comprising pramlintide, an analog of the natural hormone
amylin, and metreleptin, an analog of the natural hormone leptin, in overweight
and obese patients. This Phase 2 study successfully characterized patients who
responded best to treatment and also provided important information to inform
dose selection. In 2009, we plan to
continue the development of a potential obesity medicine that is a combination
of pramlintide and metreleptin and the development of a second generation
amylinomimetic, now known as davalintide (formerly known as AC2307).
Davalintide is now in a Phase 2 clinical study and we expect to report
data from this study by the end of 2009. We intend to finalize our obesity
funding and development strategy by the end of 2009.
Although our efforts will remain primarily focused on our near-term
opportunities including BYETTA, SYMLIN, exenatide once weekly and select
investments in our obesity programs, we also maintain an active discovery
research program focused on novel peptide and protein therapeutics and are
actively seeking to in-license additional drug candidates.
22
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We
have also made a number of strategic investments and collaborations for the
potential development of additional drug candidates.
Since
our inception in September 1987, we have devoted substantially all of our
resources to our research and development programs and, more recently, to the
commercialization of our products. All of our revenues prior to May 2005
were derived from fees and expense reimbursements under our BYETTA
collaboration agreement with Lilly, previous SYMLIN collaborative agreements
and previous co-promotion agreements. During the second quarter of 2005, we
began to derive revenues from product sales of BYETTA and SYMLIN.
At
June 30, 2009, our accumulated deficit was approximately $1.9 billion.
At June 30,
2009, we had approximately $644.4 million in cash, cash equivalents and
short-term investments.
Additionally we
have future availability of $165 million beginning December 1, 2009
pursuant to a credit facility with Lilly. Although we may not generate positive
operating cash flows for the next few years, we intend to improve our operating
results and reduce our use of cash for operating activities from current levels
to 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 will
decrease significantly from 2008 levels following the substantial completion of
our manufacturing facility in Ohio in 2008. Refer to the discussions under the
headings
Liquidity and Capital Resources
below and
Cautionary Factors That May Affect
Future Results
in Part I, Item 1A for further discussion
regarding our anticipated future capital requirements.
Application of Critical
Accounting Policies
Our discussion and
analysis of financial condition and results of operations are based upon our
consolidated financial statements, which have been prepared in accordance with
U.S. generally accepted accounting principles. The preparation of these
financial statements requires us to make significant estimates and judgments
that affect the reported amounts of assets, liabilities, revenues and expenses,
and related disclosures. On an on-going basis, our actual results may differ
significantly from our estimates.
There were no significant
changes in critical accounting policies from those at December 31, 2008,
other than the adoption of FSP ABP 14-1 which required the estimation of the
non-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 year
ended December 31, 2008, contained in our annual report on Form 10-K
filed on February 27, 2009.
For a discussion of our
critical accounting policies, see Item 7. Managements Discussion and Analysis
of Financial Condition and Results of Operations in our annual report on Form 10-K
filed on February 27, 2009.
Results
of Operations
Comparison
of Three Months Ended June 30, 2009 to Three Months Ended June 30,
2008
Net Product Sales
Net product sales for the
three months ended June 30, 2009 and 2008 were $197.5 million and $200.3
million, respectively,
and consisted of shipments of BYETTA and SYMLIN,
less allowances for product returns, rebates, wholesaler chargebacks,
wholesaler discounts and prescription vouchers
.
The following table
provides 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 in
the current period primarily reflects a reduction in prescription demand
following the August 2008 FDA update to a prior alert referencing
pancreatitis discussed above, partially offset by higher prices in the three
months ended June 30, 2009 compared to the same period in 2008. We believe that prescription demand continued
to stabilize in the three months ended June 30, 2009.
23
Table of Contents
The slight decrease in net product sales for SYMLIN in
the current period primarily reflects a reduction in prescription demand
partially offset by higher prices in the quarter ended June 30, 2009
compared to the same period in 2008. We
believe that with the increased promotion for SYMLIN with our new specialty
sales force discussed above, we have an opportunity to increase SYMLIN demand
in the second half of 2009.
Sales of our products in future periods may be
impacted by numerous factors, including potential competition, the potential
approval of additional products including exenatide once weekly, regulatory
matters, including expected label changes for BYETTA, economic factors and
other environmental factors.
Revenues Under Collaborative Agreements
Revenues under collaborative agreements for the three
months ended June 30, 2009 were $11.9
million,
compared to $21.7 million for the same period in 2008. Substantially all of the
revenue recorded in these periods consists of amounts earned pursuant to our
BYETTA collaboration agreement with Lilly. The $9.8 million decrease in
revenues under collaborative agreements in the current quarter compared to the
same period in 2008 reflects lower cost-sharing payments from Lilly for
exenatide once weekly and BYETTA due to lower development expenses for exenatide
once weekly and BYETTA.
The following table summarizes the components of
revenues 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
|
|
In
future periods, we expect that revenues under collaborative agreements will
consist of ongoing cost-sharing payments from Lilly for sharing of development
costs, possible future milestone payments, $0.9 million of remaining
amortization of the $30 million portion of the up-front payment received
from Lilly upon signing of our collaboration agreement in 2002 and, following
the commercial launch of exenatide once weekly, the amortization of a portion
of the $125 million cash payment received in connection with the exenatide
once weekly supply agreement discussed above. Future cost-sharing revenue
recorded will be dependent on the timing, extent and relative proportion of total
development costs for the exenatide once weekly and BYETTA development programs
incurred by us and by Lilly. The receipt and recognition as revenue of future
milestone payments is subject to the achievement of performance requirements
underlying such milestone payments.
Cost
of Goods Sold
Cost of goods sold was
$24.3 million and $24.7 million, for the three months ended June 30, 2009
and 2008, respectively, representing a gross margin of 88% in both periods, and
is comprised primarily of manufacturing costs associated with BYETTA and
SYMLIN. Quarterly fluctuations in gross
margins may be influenced by product mix, pricing and the level of sales
allowances.
Selling, General
and Administrative Expenses
Selling, general and administrative expenses decreased
to $92.1 million for the three months ended June 30, 2009 from $111.1
million for the same period in 2008. The decrease primarily reflects
efficiencies driven by the Companys reduced cost structure following its
recent restructurings partially offset by costs associated with our recent
proxy contest. We expect that selling,
general and administrative expenses for 2009 will decrease from current levels
as we begin to realize the full savings of our May 2009 sales force
restructuring and the absence of proxy-contest costs in the second half of
2009.
We, along with Lilly, are jointly responsible for the co-promotion of
BYETTA within the United States, and share equally in sales force costs and
external marketing expenses. Accordingly, our selling, general and
administrative expenses include our 50% share of these costs in the United
States.
Research and
Development Expenses
Our
research and development costs are comprised of salaries and bonuses, benefits
and non-cash stock-based compensation; license fees, milestones under license
agreements and costs paid to third-party contractors to perform research,
24
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conduct
clinical trials and develop drug materials and delivery devices; and associated
overhead expenses and facilities costs. We charge direct internal and external
program costs to the respective development programs. We also incur indirect
costs that are not allocated to specific programs because such costs benefit
multiple development programs and allow us to increase our pharmaceutical
development capabilities. These consist primarily of facilities costs and other
internal shared resources related to the development and maintenance of systems
and processes applicable to all of our programs.
Our research and
development efforts are focused on diabetes, obesity and other diseases. We also maintain an active discovery research
program. In diabetes, we have two
approved products, BYETTA and SYMLIN, and we are developing exenatide once
weekly, a long-acting release formulation of exenatide, the active
pharmaceutical ingredient in BYETTA. In
obesity, we have a number of compounds in development for the potential
treatment of obesity, which are part of a broader program, which we refer to as
INTO: Integrated Neurohormonal Therapies for Obesity. As part of this program, we are currently
conducting clinical trials of our drug candidates, or combinations of our drug
candidates.
The following table
provides information regarding our research and development expenses for our
major 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 our
diabetes programs consist primarily of costs associated with BYETTA and
exenatide once weekly which are shared by Lilly pursuant to our collaboration
agreement. Cost-sharing payments
received by Lilly are included in revenues under collaborative agreements. Expenditures for our diabetes development
programs are generally partially offset by an increase in cost-sharing payments
from Lilly. Cost-sharing payments from
Lilly for BYETTA and exenatide once weekly development expenses were $10.6
million 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 three
months ended June 30, 2009 compared to the same period in 2008 primarily
reflects decreased expenses of $5.9 million for our diabetes programs and
decreased expenses of $4.2 million for our obesity development programs. The decrease in expenses for our research and
development programs primarily reflects efficiencies driven by our reduced cost
structure following our recent restructurings.
We expect
research and development expenses for 2009 to increase from current levels due
to costs necessary to prepare our Ohio manufacturing facility for the planned
launch of exenatide once weekly in 2010.
Collaborative Profit Sharing
Collaborative profit
sharing was $76.2 million and $79.0 million for the three months ended June 30,
2009 and 2008, respectively, and consists of Lillys 50% share of the gross
margin for BYETTA in the United States.
Restructuring
In May 2009, we
announced a restructuring of our sales force that merged our existing primary
care and specialty sales forces into a single specialty sales
organization. This new sales force will
be focused on targeting those doctors that write the majority of BYETTA and SYMLIN
prescriptions. This sales force restructuring reduced our total number of sales
representatives by approximately 200 employees.
We incurred restructuring charges of $11.4 million during the quarter
ended June 30, 2009 consisting primarily of employee separation costs.
Interest and Other Income and Expense
Interest and other income
consists primarily of interest income from investment of cash and other
investments. Interest and other income decreased to $0.7 million for the three
months ended June 30, 2009 from $7.0 million for the same period in
2008. The decrease primarily reflects
lower average balances available for investment, lower interest rates earned on
our
25
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short-term investments
and $1.4 million in other-than-temporary impairments on certain investments in
our portfolio discussed in Note 3 to the accompanying financial statements in
the three months ended June 30, 2009 compared to the same period in 2008.
Interest and other expense
consists primarily of interest expense resulting from our long-term debt
obligations. Interest expense in the three months ended June 30, 2009
consists of interest on our $775 million par value of outstanding convertible
senior notes and our $109.4 million of outstanding long-term note payable, the
amortization of associated debt issuance costs and recognized gains and losses
associated with recording economic hedge transactions at fair value.
Interest and other expense was $4.9
million and $5.5 million for the three months ended June 30, 2009 and
2008, respectively. The decrease in
interest and other expense for the three months ended June 30, 2009
primarily reflects an increase in capitalized interest associated with our Ohio
manufacturing facility and an increase in recognized gains associated with
economic hedge transactions, partially offset by increased non-cash interest
expense from the amortization of the debt discount on our 2007 Notes discussed
in Note 2 to the accompanying financial statements.
Net Loss
Our net loss for the
three months ended June 30, 2009 was $62.4 million compared to a net loss
of $66.6 million for the same period in 2008. The decrease in net loss
primarily reflects the decreased selling, general and administrative expenses,
decreased research and development expenses and decreased collaborative
profit-sharing, partially offset by the decreased revenue under collaborative
agreements and the restructuring charge discussed above under the heading
Restructuring.
We may incur
operating losses for the next few years. In November 2008 we announced our
restructuring and our business plan to become operating cash flow positive by
the end of 2010 and in May 2009 we announced the restructuring of our
sales force as discussed above. However,
our ability to reach profitability in the future will be heavily dependent upon
product sales that we achieve for BYETTA, SYMLIN and exenatide once weekly, if
approved. Our ability to achieve
profitability in the future will also depend our ability to continue to control
our operating expenses, including ongoing expenses associated with the continued
commercialization of BYETTA and SYMLIN, costs associated with the development
and commercialization of exenatide once weekly, if approved, and expenses
associated with our research and development programs, including our obesity
and early-stage development programs and related support infrastructure. Our
operating results may fluctuate from quarter to quarter as a result of
differences in the timing of expenses incurred and revenues recognized.
Comparison
of Six Months Ended June 30, 2009 to Six Months Ended June 30, 2008
Net Product Sales
Net product sales for the
six months ended June 30, 2009 and 2008 were $376.8 million and $379.1
million, respectively,
and consisted of shipments of BYETTA and SYMLIN,
less allowances for product returns, rebates, wholesaler chargebacks,
wholesaler discounts and prescription vouchers
.
The following table
provides 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 in
the current period primarily reflects decreased prescription demand following
the August 2008 FDA update on a prior alert referencing pancreatitis
discussed above and an allowance for rebates related to the U.S. Department of
Defenses (DOD) Tricare Retail Pharmacy program, including $4.4 million for a
retroactive rebate assessment for sales during 2008, partially offset by higher
prices in the six months ended June 30, 2009 compared to the same period
in 2008. We believe that prescription demand has stabilized in the six months
ended June 30, 2009.
The slight increases in net product sales for SYMLIN
in the current period primarily reflects higher prices partially offset by a
reserve for the DODs Tricare Retail Pharmacy program, including $0.4 million
for a retroactive rebate assessment for sales during 2008 and a reduction in
prescription demand. We believe that with the increased promotion for SYMLIN
with our new specialty sales force discussed above, we have the opportunity to
increase SYMLIN demand in the second half of 2009.
26
Table of Contents
We recorded an allowance related to the DODs Tricare
Retail Pharmacy program pursuant to a final rule that was issued in March 2009,
and is effective May 26, 2009. The
final rule clarified the DODs interpretation of the National Defense
Authorization Act of 2008, or NDAA, signed into law on January 28,
2008. The final rule changed the
process by which rebate obligations for the Tricare Retail Pharmacy program are
created such that a contractual agreement is no longer required and that
obligation to pay such rebates emanates from the NDAA itself. In consideration of this final rule we
recorded 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 for
sales made during 2008.
Sales of our products in future periods may be
impacted by numerous factors, including potential competition, the potential
approval of additional products including exenatide once weekly, regulatory
matters including expected label changes for BYETTA, economic factors and other
environmental factors.
Revenues Under Collaborative Agreements
Revenues under collaborative agreements for the six
months ended June 30, 2009 were $26.2
million,
compared to $40.2 million for the same period in 2008. Substantially all of the
revenue recorded in these periods consists of amounts earned pursuant to our
exenatide collaboration agreement with Lilly. The $14.0 million decrease in
revenues under collaborative agreements in the current quarter compared to the
same period in 2008 reflects lower cost-sharing payments from Lilly for
exenatide once weekly and BYETTA due to lower development expenses for
exenatide once weekly and BYETTA.
The following table summarizes the components of
revenues 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
|
|
In
future periods, we expect that revenues under collaborative agreements will
consist of ongoing cost-sharing payments from Lilly for sharing of development
costs, possible future milestone payments, $0.9 million of remaining
amortization of the $30 million portion of the up-front payment received
from Lilly upon signing of our collaboration agreement in 2002 and, following
the commercial launch of exenatide once weekly, the amortization of a portion
of the $125 million cash payment received in connection with the exenatide
once weekly supply agreement discussed above. Future cost-sharing revenue
recorded will be dependent on the timing, extent and relative proportion of
total development costs for the exenatide once weekly and BYETTA development
programs incurred by us and by Lilly. The receipt and recognition as revenue of
future milestone payments is subject to the achievement of performance
requirements underlying such milestone payments.
Cost
of 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, 2009
and 2008, respectively, and is comprised primarily of manufacturing costs
associated with BYETTA and SYMLIN.
The improvement
in gross margin for the six months ended June 30, 2009, compared to the
same period in 2008, primarily reflects
higher net sales prices for
BYETTA and SYMLIN.
Quarterly
fluctuations in gross margins may be influenced by product mix, pricing and the
level of sales allowances.
Selling, General
and Administrative Expenses
Selling, general and administrative expenses decreased
to $179.6 million for the six months ended June 30, 2009 from $209.3
million for the same period in 2008. The decrease primarily reflects
efficiencies driven by the Companys reduced cost structure following its recent
restructurings partially offset by costs associated with our recent proxy
contest. We expect that selling, general
and administrative expenses for 2009 will decrease from current levels as we
begin to realize the full savings impact of our May 2009 sales force
restructuring and the absence of proxy contest costs in the second half of the
year.
27
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We, along with Lilly, are jointly responsible for the co-promotion of
BYETTA within the United States, and share equally in sales force costs and
external marketing expenses. Accordingly, our selling, general and
administrative expenses include our 50% share of these costs in the United
States.
Research and
Development Expenses
Our
research and development costs are comprised of salaries and bonuses, benefits
and non-cash stock-based compensation; license fees, milestones under license
agreements and costs paid to third-party contractors to perform research,
conduct clinical trials and develop drug materials and delivery devices; and
associated overhead expenses and facilities costs. We charge direct internal
and external program costs to the respective development programs. We also
incur indirect costs that are not allocated to specific programs because such
costs benefit multiple development programs and allow us to increase our
pharmaceutical development capabilities. These consist primarily of facilities
costs and other internal shared resources related to the development and
maintenance of systems and processes applicable to all of our programs.
Our research and
development efforts are focused on diabetes, obesity and other diseases. We also maintain an active discovery research
program. In diabetes, we have two
approved products, BYETTA and SYMLIN, and we are developing exenatide once
weekly, a long-acting release formulation of exenatide, the active
pharmaceutical ingredient in BYETTA. In
obesity, we have a number of compounds in development for the potential
treatment of obesity, which are part of a broader program, which we refer to as
INTO: Integrated Neurohormonal Therapies for Obesity. As part of this program, we are currently
conducting clinical trials of our drug candidates, or combinations of our drug
candidates.
The following table
provides information regarding our research and development expenses for our
major 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) Research
and development expenses for our diabetes programs consist primarily of costs
associated with BYETTA and exenatide once weekly which are shared by Lilly
pursuant to our collaboration agreement.
Cost-sharing payments received by Lilly are included in revenues under
collaborative agreements. Expenditures
for our diabetes development programs are generally partially offset by an
increase in cost-sharing payments from Lilly.
Cost-sharing payments from Lilly for BYETTA and exenatide once weekly
development expenses were $23.5 million and $37.4 million for the six months
ended June 30, 2009 and 2008, respectively.
The
$29.0 million decrease in research and development expenses for the six months
ended June 30, 2009 compared to the same period in 2008 primarily reflects
decreased expenses of $15.4 million for our diabetes programs and decreased
expenses of $13.0 million for our obesity development programs. The decrease in expenses for our research and
development programs primarily reflects efficiencies driven by our reduced cost
structure following our recent restructurings.
We expect
research and development expenses for 2009 will increase from current levels
driven by costs necessary to prepare our Ohio manufacturing facility for the
planned launch of exenatide once weekly in 2010.
Collaborative Profit Sharing
Collaborative profit
sharing was $149.2 million and $148.9 million for the six months ended June 30,
2009 and 2008, respectively, and consists of Lillys 50% share of the gross
margin for BYETTA in the United States.
28
Table of Contents
Interest
and Other Income and Expense
Interest and other income
consist primarily of interest income from investment of cash and other
investments. Interest and other income decreased to $3.7 million for the six
months ended June 30, 2009 from $18.0 million for the same period in
2008. The decrease primarily reflects
lower average balances available for investment, lower interest rates earned on
our short-term investments and $1.4 million in other-than-temporary impairments
on certain investments in our portfolio discussed in Note 3 to the accompanying
financial statements in the six months ended June 30, 2009 compared to the
same period in 2008.
Interest and other expense
consist primarily of interest expense resulting from our long-term debt
obligations. Interest expense in the six months ended June 30, 2009
consists of interest on our $775 million par value of outstanding convertible
senior notes and our $109.4 million of outstanding long-term note payable, the
amortization of associated debt issuance costs and recognized gains and losses
associated with recording economic hedge transactions at fair value.
Interest and other expense was $9.4
million and $17.5 million for the six months ended June 30, 2009 and 2008,
respectively. The decrease in interest
and other expense for the six months ended June 30, 2009 primarily
reflects an increase in capitalized interest associated with our Ohio
manufacturing facility and an increase in recognized gains associated with
economic hedge transactions, partially offset by increased non-cash interest
expense from the amortization of the debt discount on our 2007 Notes discussed
in Note 2 to the accompanying financial statements.
Net Loss
Our net loss for the six
months 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 primarily
reflects the decreased selling, general and administrative expenses and
decreased research and development expenses, partially offset by decreased net
product sales, decreased revenue under collaborative agreements, increased
collaborative profit-sharing and the restructuring charge discussed above under
the heading
Restructuring.
We may incur operating
losses for the next few years. In November 2008 we announced our
restructuring and our business plan to become operating cash flow positive by
the end of 2010, and in May 2009 we announced the restructuring of our
sales force as discussed above. However,
our ability to reach profitability in the future will be heavily dependent upon
the product sales that we achieve for BYETTA, SYMLIN and exenatide once weekly,
if approved. Our ability to achieve
profitability in the future will also depend our ability to continue to control
our operating expenses, including ongoing expenses associated with the
continued commercialization of BYETTA and SYMLIN, costs associated with the
development and commercialization of exenatide once weekly, if approved, and
expenses associated with our research and development programs, including our
obesity and our early-stage development programs and related support
infrastructure. Our operating results may fluctuate from quarter to quarter as
a result of differences in the timing of expenses incurred and revenues
recognized.
Liquidity and Capital Resources
Since our inception, we
have financed our operations primarily through public sales and private
placements of our common and preferred stock, debt financings, payments
received pursuant to our exenatide collaboration with Lilly, reimbursement of
SYMLIN development expenses through earlier collaboration agreements and, since
the 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 and
short-term investments, compared to $816.8 million at December 31, 2008,
and we have
future availability of $165 million beginning December 1, 2009
pursuant to the loan agreement with Lilly. In November 2008, following our
restructuring, we announced our business plan to be operating cash flow
positive by the end of 2010. In
addition, in May 2009, we implemented a restructuring of our sales force. We expect that our use of cash for capital
expenditures to decrease in 2009 compared to 2008 following the substantial
completion of our manufacturing facility in Ohio in 2008, partially offset by
additional capital expenditures for the development of a pen device for
exenatide once weekly. Our current
business plan does not contemplate a need to raise additional funds from
outside sources however we will continue to evaluate the performance of our
business and strategic opportunities which may require us to raise additional
funds from outside sources in the future. If we require additional financing in
the future, we cannot assure you that it will be available to us on favorable
terms, or at all. Although we have previously been successful in obtaining
financing through our debt and equity securities offerings, there can be no
assurance that we will be able to do so in the future, especially given the
current adverse economic and credit conditions.
We used cash of
$95.1 million and $72.7 million for our operating activities in the six months
ended June 30, 2009 and 2008, respectively. Our cash used for operating activities in the
six months ended June 30, 2009 includes a net use of cash of $45.9 million
for changes in operating assets and liabilities. This includes uses of cash due to increases in
other current assets and accounts receivable of $23.3 million and $14.0
million, respectively, and decreases in accounts payable and accrued
liabilities, accrued compensation and restructuring liabilities of $10.3
million, $5.7 million and $13.7 million, respectively. This also includes sources of cash for
increases in payable to collaborative partner and long-term capital
29
Table of
Contents
reimbursement liability
and a decrease in inventories of $10.7 million, $17.9 million and $6.0 million,
respectively. The increase in other
current assets reflects prepayments for raw material inventory and the increase
in 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 accrued
liabilities primarily reflects lower expense levels. The decrease in accrued
compensation primarily reflects the payment of certain annual compensation
accruals related to fiscal year 2008, partially offset by additional annual
compensation accruals related to fiscal year 2009. The decrease in
restructuring liabilities reflects payments made in relation to our recent
restructuring activities, partially offset by additional accruals related to
our May 2009 sales force restructuring primarily related to employee
separation costs. The increase in
payable to collaborative partner reflects increased gross margin for BYETTA,
which we share equally with Lilly, and is driven by increased sales in the
quarter ended June 30, 2009 compared to the quarter ended March 31,
2009. The increase in deferred
collaborative profit-sharing reflects payments from Lilly for its 60% share of
the capital expenditures we have made for the exenatide once weekly pen
device. The decrease in inventories
primarily reflects reduction in finished goods due to the timing and volume of
production. Working capital changes may
fluctuate from quarter to quarter due to timing of inventory and other current
asset purchases and the timing of payments of accounts payable, accrued
compensation and other current liabilities.
Our investing activities
used 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 consisted
primarily of purchases and sales of short-term investments and purchases of
property, plant and equipment and increases in other long-term assets. Purchases of property, plant and equipment
decreased 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, plant
and equipment primarily reflects reduced expenditures for our Ohio
manufacturing facility following its substantial completion in the year ended December 31,
2008.
Through June 30, 2009, we had expended approximately $615 million
associated with the construction of this facility, including the exenatide once
weekly pen device discussed below, which includes costs associated with the
construction of the facility, purchase and installation of equipment and
capitalized labor and materials required to validate the facility. We expect that our use of cash for capital
expenditures will decrease in 2009 compared to 2008 following the substantial
completion of our manufacturing facility in Ohio in 2008, partially offset by
capital investments associated with the exenatide once weekly pen device
discussed above. The initial capital
investment 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, we
had incurred $35.6 million in capital expenditures associated with the
exenatide once weekly pen device. Lillys 60% share of these expenditures is
$21.4 million, of which $17.9 million has been received to date and is included
in cash used for operating activities as discussed above. We will continue to evaluate potential
additional investments in our Ohio manufacturing facility during the product
lifecycle for exenatide once weekly.
Financing activities used
cash of $11.2 million and provided cash of $9.5 million for the six months
ended June 30, 2009 and 2008, respectively.
Financing activities in the
six months ended June 30, 2009 include $15.6 million in principal payments
on our term loan, partially offset by proceeds from the exercise of stock
options and proceeds from our employee stock purchase plan. Financing
activities for the six months ended June 30, 2008 include proceeds from
the exercise of stock options and proceeds from our employee stock purchase
plan.
At December 31, 2008, we had $200 million in aggregate
principal 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 to
5.8 million shares of our common stock at approximately $34.35 per share
and are not redeemable at our option. The 2007 Notes are currently convertible
into a total of up to 9.4 million shares of our common stock at
approximately $61.07 per share and are not redeemable at our option.
Subject to certain exceptions, if we undergo a designated
event (as defined in the associated indenture agreement) including a fundamental
change, such as if a majority of our Board of Directors ceases to be composed
of the existing directors or other individuals approved by a majority of the
existing directors, holders of the 2007 Notes will, for the duration of the
notes, have the option to require the Company to repurchase all or any portion
of their 2007 Notes.
In December 2007, we entered into a $140 million credit
agreement. The credit agreement provides for a $125 million term loan and
a $15 million revolving credit facility. The revolving credit facility
also provides for the issuance of letters of credit and foreign exchange
hedging up to the $15 million borrowing limit. The term loan is repayable
on a quarterly basis, with no 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. At June 30, 2009 we had an
outstanding balance of $109.4 million under the term loan and had issued
$7.1 million of standby letters of credit under the revolving credit
facility. 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 to
1.75% 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 an
interest rate swap agreement which resulted in a net fixed interest rate of
5.717% under the term loan. The interest rate on the credit facility is LIBOR
plus 1.0% or the Bank of America prime rate, at our election. The credit agreement provides for automatic
acceleration upon the occurrence of bankruptcy, other insolvency events and a
change in control as defined in the credit agreement, as amended.
30
Table of Contents
In October 2008, we entered into a loan agreement with Lilly
pursuant to which Lilly will make available to us a $165 million unsecured
line 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 credit
facility will bear interest at the five-day average three-month LIBOR rate
immediately prior to the date of the advance plus 5.25% and shall be due and
payable quarterly in arrears on the first business day of each quarter. All
outstanding principal, together with all accrued and unpaid interest, shall be
due and payable the earlier of 36 months following the date on which the
loan commitment is fully advanced or June 30, 2014.
The following table summarizes our contractual
obligations 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 a
rate 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 of
outstanding purchase orders, cancelable by us upon 30 days written notice, subject
to reimbursement of costs incurred through the date of cancellation.
(3)
Excludes long-term obligation
of $7.8 million related to deferred compensation, the payment of which is
subject to elections made by participants that are subject to change.
In
addition, under certain license and collaboration agreements we are required to
pay royalties and/or milestone payments upon the successful development and
commercialization of related products.
We expect to make development milestone payments up to $2.5 million
associated 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 and
commercialization of all our early stage programs continue and are
successful. The significant majority of
these milestones relate to potential future regulatory approvals and subsequent
sales thresholds. Given the inherent
risk in pharmaceutical development, it is highly unlikely that we will
ultimately make all of these milestone payments; however, we would consider
these payments as positive because they would signify that the related products
are 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, if
approved, and we achieve for SYMLIN; costs associated with the continued
commercialization of BYETTA and SYMLIN; costs associated with the operation of
our exenatide once weekly manufacturing facility; costs of potential licenses
or acquisitions; the potential need to repay existing indebtedness; our ability
to receive or need to make milestone payments; our ability, and the extent to
which we establish collaborative arrangements for SYMLIN or any of our product
candidates; progress in our research and development programs and the magnitude
of these programs; costs involved in preparing, filing, prosecuting,
maintaining, enforcing or defending our patents; competing technological and
market developments; and costs of manufacturing, including costs associated
with establishing our own manufacturing capabilities or obtaining and
validating additional manufacturers of our products; and scale-up costs for our
drug candidates.
31
Table
of Contents
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that are currently or
reasonably likely to be material to our consolidated financial position or
results of operations.
ITEM
3.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
We
invest our excess cash primarily in United States Government securities,
asset-backed securities, and debt instruments of financial institutions and
corporations with investment-grade credit ratings. These instruments have
various short-term maturities. We do not utilize derivative financial
instruments, derivative commodity instruments or other market risk sensitive
instruments, positions or transactions in any material fashion. Accordingly, we
believe that, while the instruments held are subject to changes in the
financial standing of the issuer of such securities, we are not subject to any
material risks arising from changes in interest rates, foreign currency
exchange rates, commodity prices, equity prices or other market changes that
affect market risk sensitive investments. Our debt is not subject to
significant swings in valuation due to changes in interest rates as interest
rates on our debt are fixed.
The fair value of
our 2004 Notes and 2007 Notes at June 30, 2009 was approximately $178.4
million and $373.7 million, respectively.
We have entered into an interest rate swap in connection with our
$125 million term loan. The fair
value 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 would
not materially affect the fair value of our financial instruments that are
exposed 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 of
our management, including our President and Chief Executive Officer (referred
to as our CEO) and our Senior Vice President, Finance and Chief Financial
Officer (referred to as our CFO), of the effectiveness of the design and
operation of our disclosure controls and procedures. In designing and
evaluating the disclosure controls and procedures, management recognizes that
any controls and procedures, no matter how well designed and operated, can
provide only reasonable assurance of achieving the desired control objectives,
and management necessarily is required to apply its judgment in evaluating the
cost-benefit relationship of possible controls and procedures. Based on that
evaluation, our management, including our CEO and CFO, concluded that our
disclosure controls and procedures were effective at a reasonable level of
assurance as of June 30, 2009.
Our management does not
expect that our disclosure control and procedures or our internal control over
financial reporting will prevent all error and all fraud. A control system, no
matter how well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system are met. Because
of the inherent limitations in all control systems, no evaluation of controls
can provide absolute assurance that all control issues and instances of fraud,
if any, or misstatements due to error, if any, within the company have been
detected. While we believe that our disclosure controls and procedures and
internal control over financial reporting are and have been effective, in light
of the foregoing we intend to continue to examine and refine our disclosure
controls and procedures and internal control over financial reporting.
An evaluation was
also performed under the supervision and with the participation of our management,
including our CEO and CFO, of any change in our internal control over financial
reporting that occurred during our last fiscal quarter and that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting. That evaluation did not identify any change in our
internal control over financial reporting that occurred during our latest
fiscal quarter and that has materially affected, or is reasonably likely to
affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Product Liability and Other Claims
From
time to time in the ordinary course of business, we become involved in various
lawsuits, claims and proceedings relating to the conduct of our business,
including those pertaining to product liability, patent infringement and
employment claims. Since August 2008,
we and Lilly have been named as defendants in 21 separate product liability
cases involving approximately 110 plaintiffs in various courts in the United
States and a putative class action lawsuit that has been filed in
Louisiana. These cases have been brought
by individuals who allege they have used BYETTA. They generally seek compensatory and punitive
damages for alleged injuries, consisting primarily of pancreatitis, and in a
few cases, wrongful death. Most of the
cases are pending in California state court, where the Judicial Council
recently granted our petition for a coordinated proceeding for all California
state court cases alleging harm allegedly as a result of BYETTA use. We
also have received notice from plaintiffs counsel of
additional claims by individuals who have not filed suit
. While we cannot predict the outcome of any
lawsuit, claim or proceeding, we and Lilly intend to vigorously defend these
matters.
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Stockholder
Litigation
On
March 24, 2009, a putative class action titled San Antonio Fire &
Police Fund v. Bradbury et al. (Case No. 4446-VCL) was filed by a
stockholder of ours in the Court of Chancery of the State of Delaware. The original complaint asserted claims for
breach of fiduciary duty against us and our current directors arising out of
certain provisions contained in our outstanding debt instruments relating to a
change in a majority of the directors of the Board. The plaintiff subsequently amended the
complaint adding the indenture trustee under the 2007 Notes and the
administrative agent under the Credit Agreement as defendants. The complaint sought to invalidate those debt
instrument provisions or permit our Board to approve shareholder nominees,
thus nullifying any potential default which might force us to repay the
outstanding balance. On April 13,
2009, a settlement was reached with the plaintiff to withdraw all allegations
that our Board has not acted in good faith or has acted to entrench itself or
interfere with stockholder voting rights.
The plaintiff also withdrew all claims that the Board is breaching its
ongoing duties to our stockholders.
On
May 6, 2009, we entered into an amendment of the Credit Agreement. The amendment provides that lenders under the
Credit Agreement agree to consent to the election of six or more stockholder
nominees to our Board at our 2009 annual meeting of stockholders upon payment
of a fee and the satisfaction of certain conditions as set forth in the
amendment. A hearing of this case was
held on May 4, 2009. On May 12,
2009 the court (i) entered a judgment in favor of the defendants for a
claim alleging breach of the duty of care by defendant directors; (ii) rendered
moot a claim seeking declaration of the invalidity and unenforceability of a
continuing directors provision in a credit agreement with Bank of America and (iii) declared
that our Board was entitled to approve dissident nominees for purposes of its
indenture with Bank of New York, dismissing without prejudice other claims as
being unripe for adjudication. On June 5,
2009, the plaintiff appealed the courts decision. A hearing has been set for September 30,
2009.
On
June 9, 2009, the independent Inspector of Elections for our annual
meeting of stockholders held on May 27, 2009 issued its certified final report
which indicated that two stockholder director nominees were elected to our
Board. The election of these two
nominees out of twelve Board seats at this years annual meeting will not
trigger the relevant provisions in our debt instruments.
Item 1A.
Risk Factors
CAUTIONARY
FACTORS THAT MAY AFFECT FUTURE RESULTS
The following sets forth cautionary factors that may affect our future
results, including clarifications to the cautionary factors included in our
Annual Report on Form 10-K for the fiscal year ended December 31,
2008.
We have a history of operating
losses, anticipate future losses and may never become profitable.
We have experienced significant operating losses since our inception in
1987, 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 accumulated
deficit of approximately $1.9 billion. The extent of our future losses and
the timing of potential profitability are uncertain, and we may never achieve
profitable operations. We have been engaged in discovering and developing drugs
since inception, which has required, and will continue to require, significant
research and development expenditures. We derived substantially all of our
revenues prior to 2005 from development funding, fees and milestone payments
under collaborative agreements and from interest income. BYETTA and SYMLIN may
not be as commercially successful as we expect and we may not succeed in
commercializing any of our other drug candidates. We may incur substantial
operating losses for at least the next few years. These losses, among other
things, have had and will have an adverse effect on our stockholders equity
and working capital. Even if we become profitable, we may not remain
profitable.
We began selling, marketing and
distributing our first products, BYETTA and SYMLIN, in 2005 and we will depend
heavily on the success of those products in the marketplace.
Prior to the launch of BYETTA and SYMLIN in 2005, we had never sold or
marketed our own products. Our ability to generate product revenue for the next
few years will depend solely on the success of these products. The ability of
BYETTA and SYMLIN to generate revenue at the levels we expect will depend on
many factors, including the following:
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·
the ability of patients in
the current uncertain economic climate to be able to afford our medications or
obtain health care coverage that covers our products;
·
acceptance of and ongoing
satisfaction with these first-in-class medicines in the United States and
foreign markets by the medical community, patients receiving therapy and third
party payers;
·
a satisfactory efficacy and
safety profile as demonstrated in a broad patient population;
·
successfully expanding and
sustaining manufacturing capacity to meet demand;
·
safety concerns in the
marketplace for diabetes therapies;
·
the competitive landscape
for approved and developing therapies that will compete with the products; and
·
our ability to expand the
indications for which we can market the products.
If we encounter safety issues with
BYETTA or SYMLIN or any other drugs we market or fail to comply with extensive
continuing regulations enforced by domestic and foreign regulatory authorities,
it could cause us to discontinue marketing those drugs, reduce our revenues and
harm our ability to generate future revenues, which would negatively impact our
financial position.
BYETTA and SYMLIN, in addition to any other of our drug candidates that
may be approved by the FDA, will be subject to continual review by the FDA, and
we cannot assure you that newly discovered or developed safety issues will not
arise. 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 appear
to relate to the drug itself, and only if the specific event occurs with some
regularity over a period of time does the drug become suspect as having a
causal relationship to the adverse event. Some patients taking BYETTA have
reported developing pancreatitis. We are working to better understand the
relationship between BYETTA and pancreatitis described in some spontaneously
reported cases. In keeping with our focus on patient safety, we continue to
pursue our drug safety program that includes thorough investigation of
individual spontaneous case reports along with clinical and epidemiologic
studies. Within the detection limits of an initial epidemiology study which we
provided to the FDA, we have not observed an increased incidence of pancreatitis
associated with BYETTA compared to other treatments for diabetes and thus
believe a definite causal relationship between BYETTA and pancreatitis has not
been proved. Any safety issues could cause us to suspend or cease marketing of
our approved products, cause us to modify how we market our approved products,
subject us to substantial liabilities, and adversely affect our revenues and
financial condition.
Moreover, the marketing of our approved products will be subject to
extensive regulatory requirements administered by the FDA and other regulatory
bodies, including adverse event reporting requirements and the FDAs general
prohibition against promoting products for unapproved uses. The manufacturing
facilities for our approved products are also subject to continual review and
periodic inspection and approval of manufacturing modifications. Manufacturing
facilities that manufacture drug products for the United States market, whether
they are located inside or outside the United States, are subject to biennial
inspections by the FDA and must comply with the FDAs current good
manufacturing practice, or cGMP, regulations. The FDA stringently applies
regulatory standards for manufacturing. Failure to comply with any of these
post-approval requirements can, among other things, result in warning letters,
product seizures, recalls, fines, injunctions, suspensions or revocations of
marketing licenses, operating restrictions and criminal prosecutions. Any of
these enforcement actions, any unanticipated changes in existing regulatory
requirements or the adoption of new requirements, or any safety issues that
arise with any approved products, could adversely affect our ability to market
products and generate revenues and thus adversely affect our ability to
continue our business.
The manufacturers of our products and drug candidates also are subject
to numerous federal, state, local and foreign laws relating to such matters as
safe working conditions, manufacturing practices, environmental protection,
fire hazard control and hazardous substance disposal. In the future, our
manufacturers may incur significant costs to comply with those laws and
regulations, which could increase our manufacturing costs and reduce our
ability to operate profitably.
We currently do not manufacture our
own drug products or some of our drug candidates and may not be able to obtain
adequate supplies, which could cause delays, subject us to product shortages,
or reduce product sales.
The manufacturing of sufficient quantities of newly-approved drug
products and drug candidates is a time-consuming and complex process. We
currently have no manufacturing capabilities. In order to successfully
commercialize our products, including BYETTA and SYMLIN, and continue to
develop our drug candidates, including exenatide once weekly, we rely on
various third parties to provide the necessary manufacturing.
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There are a limited number of manufacturers that operate under the FDAs
cGMP regulations capable of manufacturing for us. In addition, there are a
limited number of bulk drug substance suppliers, cartridge manufacturers and
disposable pen manufacturers. If we are not able to arrange for and maintain
third-party manufacturing on commercially reasonable terms, or we lose one of
our sole source suppliers used for our existing products or for some components
of our manufacturing processes for our products or drug candidates, we may not
be able to market our products or complete development of our drug candidates
on a timely basis, if at all.
Reliance on third-party suppliers limits our ability to control certain
aspects of the manufacturing process and therefore exposes us to a variety of
significant risks, including, but not limited to, risks to our ability to
commercialize our products or conduct clinical trials, risks of reliance on the
third-party for regulatory compliance and quality assurance, third-party
refusal to supply on a long-term basis, or at all, the possibility of breach of
the manufacturing agreement by the third-party and the possibility of termination
or non-renewal of the agreement by the third-party, based on its business
priorities, at a time that is costly or inconvenient for us. In addition,
reliance on single-source suppliers subjects us to the risk of price increases
by these suppliers which could negatively impact our operating margins. If any
of these risks occur, our product supply will be interrupted resulting in lost
or delayed revenues and delayed clinical trials. Our reliance on third-party
manufacturers for the production of our two commercial products is described in
more detail below.
We rely on Bachem and Mallinckrodt to manufacture our long-term
commercial supply of bulk exenatide, the active ingredient in BYETTA. In
addition, we rely on single-source manufacturers for some of our raw materials
used by Bachem and Mallinckrodt to produce bulk exenatide. We also rely on
Wockhardt and Baxter to manufacture the dosage form of BYETTA in cartridges. We
are further dependent upon Lilly to supply pens for delivery of BYETTA in
cartridges.
We rely on Bachem and Lonza to manufacture our commercial supply of
bulk pramlintide acetate, the active ingredient contained in SYMLIN. In
addition, 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 AG
to manufacture the components for the SYMLIN disposable pen. We also rely on
Hollister-Stier Laboratories LLC and Sharp Corporation for the assembly of
the SYMLIN pen.
If any of our existing or future manufacturers cease to manufacture or
are otherwise unable to timely deliver sufficient quantities of BYETTA or
SYMLIN, in either bulk or dosage form, or other product components, including
pens for the delivery of these products, it could disrupt our ability to market
our products, subject us to product shortages, reduce product sales and/or
reduce our profit margins. Any delay or disruption in the manufacturing of bulk
product, the dosage form of our products or other product components, including
pens for delivery of our products, could also harm our reputation in the
medical and patient communities. In addition, we may need to engage additional
manufacturers so that we will be able to continue our commercialization and
development efforts for these products or drug candidates. The cost and time to
establish these new manufacturing facilities would be substantial.
Our manufacturers have produced BYETTA and SYMLIN for commercial use
for approximately four years, however, unforeseeable risks related to
environmental, economic, technical or other issues may be encountered as we,
together with our manufacturers, continue to develop familiarity and experience
with regard to manufacturing our products. Furthermore, we and the other
manufacturers used for our drug candidates may not be able to produce supplies
in commercial quantities if our drug candidates are approved. While we believe
that business relations between us and our manufacturers are generally good, we
cannot predict whether any of the manufacturers that we may use will meet our
requirements for quality, quantity or timeliness for the manufacture of bulk
exenatide or pramlintide acetate, dosage form of BYETTA or SYMLIN, or pens.
Therefore, we may not be able to obtain necessary supplies of products with
acceptable quality, on acceptable terms or in sufficient quantities, if at all.
Our dependence on third parties for the manufacture of products may also reduce
our gross profit margins and our ability to develop and deliver products in a
timely manner.
In order to manufacture exenatide once weekly on a commercial scale, if
it is approved by the FDA, we must complete construction of and commission a
new facility and validate the manufacturing process. We are dependent on
Alkermes and Parsons to assist us in the construction and commissioning of the
manufacturing facility. We have never established, validated, and operated a
manufacturing facility and cannot assure you that we will be able to
successfully establish or operate such a facility in a timely or economical manner,
or at all. In addition, we are dependent on Alkermes to successfully develop
and transfer to us its technology for manufacturing exenatide once weekly and
to supply us with commercial quantities of the polymer required to manufacture
exenatide once weekly. We also will need to obtain sufficient supplies of
diluents, solvents, devices, packaging and other components necessary for
commercial manufacture of exenatide once weekly. If exenatide once weekly is approved, we
will be dependent upon Bachem, Mallinckrodt and Lonza to manufacture our
long-term commercial supply of bulk exenatide, the active ingredient in
exenatide once weekly, and upon single suppliers to produce components for
packaging exenatide once weekly.
Although we are working diligently to qualify the
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commercial-scale
manufacturing process at this facility, we cannot be assured that we will be
able to demonstrate comparability of product manufactured at development scale
and product manufactured at commercial scale. If we are unable to demonstrate
comparability of product, we may not be able to commercially launch exenatide
once weekly in a timely manner or at all.
Our ability to generate revenues
will be diminished if we fail to obtain acceptable prices or an adequate level
of reimbursement for our products from third-party payers.
The continuing efforts of government, private health insurers and other
third-party payers to contain or reduce the costs of health care through
various means, including efforts to increase the amount of patient co-pay
obligations, may limit our commercial opportunity. In the United States, there
are a number of health care reform proposals under consideration by the Federal
government and we expect that there will continue to be a number of federal and
state proposals to implement government control over the pricing of
prescription pharmaceuticals. In addition, increasing emphasis on managed care
in the United States will continue to put pressure on the rate of adoption and
pricing of pharmaceutical products.
Significant uncertainty exists as to the reimbursement status of health
care products. Third-party payers, including Medicare, are challenging the
prices charged for medical products and services. Government and other
third-party payers increasingly are attempting to contain health care costs by
limiting both coverage and the level of reimbursement for new drugs and by
refusing to provide coverage for uses of approved products for disease
indications for which the FDA has not granted labeling approval. Third-party
insurance coverage may not be available to patients for BYETTA and/or SYMLIN or
any other products we discover and develop. If government and other third-party
payers do not provide adequate coverage and reimbursement levels for our
products, the market acceptance of these products may be reduced.
Competition in the biotechnology and
pharmaceutical industries may result in competing products, superior marketing
of other products and lower revenues or profits for us.
There are many companies that are seeking to develop products and
therapies for the treatment of diabetes and other metabolic disorders. Our
competitors include multinational pharmaceutical and chemical companies,
specialized biotechnology firms and universities and other research
institutions. A number of our largest competitors, including AstraZeneca,
Bristol-Myers Squibb, GlaxoSmithKline, Lilly, Merck & Co.,
Novartis, Novo Nordisk, Pfizer, Sanofi-Aventis and Takeda Pharmaceuticals, are
pursuing the development or marketing of pharmaceuticals that target the same
diseases that we are targeting, and it is possible that the number of companies
seeking to develop products and therapies for the treatment of diabetes,
obesity and other metabolic disorders will increase. Many of our competitors
have substantially greater financial, technical, human and other resources than
we do and may be better equipped to develop, manufacture and market
technologically superior products. In addition, many of these competitors have
significantly greater experience than we do in undertaking preclinical testing
and human clinical studies of new pharmaceutical products and in obtaining
regulatory approvals of human therapeutic products. Accordingly, our
competitors may succeed in obtaining FDA approval for superior products.
Furthermore, now that we have received FDA approval for BYETTA and SYMLIN, we
may also be competing against other companies with respect to our manufacturing
and product distribution efficiency and sales and marketing capabilities, areas
in which we have limited or no experience as an organization.
Our target patient population for BYETTA includes people with diabetes
who have not achieved adequate glycemic control using metformin, sulfonylurea
and/or a TZD, three common oral therapies for type 2 diabetes. Our target
population for SYMLIN is people with either type 2 or type 1 diabetes
whose therapy includes multiple mealtime insulin injections daily. Other
products are currently in development or exist in the market that may compete
directly with the products that we are developing or marketing. Various other
products are available or in development to treat type 2 diabetes,
including:
·
sulfonylureas;
·
metformin;
·
insulins,
including injectable and inhaled versions;
·
TZDs;
·
glinides;
·
DPP-IV
inhibitors;
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·
incretin/GLP-1
agonists;
·
PPARs; and
·
alpha-glucosidase
inhibitors.
In addition, several companies are developing various approaches,
including alternative delivery methods, to improve treatments for type 1
and type 2 diabetes. We cannot predict whether our products will have
sufficient advantages to cause health care professionals to adopt them over
other products or that our products will offer an economically feasible alternative
to other products. Our products could become obsolete before we recover
expenses incurred in developing these products.
Delays in the conduct or completion
of our clinical trials, the analysis of the data from our clinical trials or
our manufacturing scale-up activities may result in delays in our planned
filings for regulatory approvals, and may adversely affect our ability to enter
into new collaborative arrangements.
We cannot predict whether we will encounter problems with any of our
completed, ongoing or planned clinical studies that will cause us to delay or
suspend our ongoing and planned clinical studies, delay the analysis of data
from our completed or ongoing clinical studies or perform additional clinical
studies prior to receiving necessary regulatory approvals. We also cannot
predict whether we will encounter delays or an inability to create
manufacturing processes for drug candidates that allow us to produce drug
product in sufficient quantities to be economical, otherwise known as
manufacturing scale-up.
If the results of our ongoing or planned clinical studies for our drug
candidates are not available when we expect or if we encounter any delay in the
analysis of data from our clinical studies or if we encounter delays in our
ability to scale-up our manufacturing processes:
·
we may be unable to complete our development
programs for exenatide once weekly or our obesity clinical trials;
·
we may have to delay or terminate our planned
filings for regulatory approval;
·
we may not have the financial resources to
continue research and development of any of our drug candidates; and
·
we may not be able to enter into, if we chose
to do so, any additional collaborative arrangements.
Any of the following could delay the completion of our ongoing and
planned clinical studies:
·
ongoing discussions with the FDA or
comparable foreign authorities regarding the scope or design of our clinical
trials;
·
delays in enrolling volunteers;
·
lower than anticipated retention rate of
volunteers in a clinical trial;
·
negative results of clinical studies;
·
insufficient supply or deficient quality of
drug candidate materials or other materials necessary for the performance of
clinical trials;
·
our inability to reach agreement with Lilly
regarding the scope, design, conduct or costs of clinical trials with respect
to BYETTA, exenatide once weekly or nasal exenatide; or
·
serious side effects experienced by study
participants relating to a drug candidate.
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We are substantially dependent on
our collaboration with Lilly for the development and commercialization of
BYETTA and dependent on Lilly and Alkermes for the development of exenatide
once weekly.
We
have entered into a collaborative arrangement with Lilly, who currently markets
diabetes therapies and is developing additional diabetes drug candidates, to
commercialize BYETTA and further develop sustained-release formulations of
BYETTA, including exenatide once weekly. We entered into this collaboration in
order to:
·
fund some of our research and development
activities;
·
assist us in seeking and obtaining regulatory
approvals; and
·
assist us in the successful commercialization
of BYETTA and exenatide once weekly.
In general, we cannot control the amount and timing of resources that
Lilly may devote to our collaboration. If Lilly fails to assist in the further
development of exenatide once weekly or the commercialization of BYETTA, or if
Lillys efforts are not effective, our business may be negatively affected. We
are relying on Lilly to obtain regulatory approvals for and successfully
commercialize BYETTA and exenatide once weekly outside the United States. Our collaboration
with Lilly may not continue or result in additional successfully commercialized
drugs. Lilly can terminate our collaboration at any time upon twelve months
notice. If Lilly ceased funding and/or developing and commercializing BYETTA or
exenatide once weekly, we would have to seek additional sources for funding and
may have to delay, reduce or eliminate one or more of our commercialization and
development programs for these compounds. If Lilly does not successfully
commercialize BYETTA outside the United States, we may receive limited or no
revenues from them. In addition, we are dependent on Alkermes to successfully
develop and transfer to us its technology for manufacturing exenatide once
weekly. If Alkermes technology is not successfully developed to effectively
deliver exenatide in a sustained release formulation, or Alkermes does not
devote sufficient resources to the collaboration, our efforts to develop
sustained release formulations of exenatide could be delayed or curtailed.
If our patents are determined to be
unenforceable or if we are unable to obtain new patents based on current patent
applications or for future inventions, we may not be able to prevent others
from using our intellectual property. If we are unable to obtain licenses to
third party patent rights for required technologies, we could be adversely
affected.
We own or hold exclusive rights to many issued United States patents
and pending United States patent applications related to the development and
commercialization of exenatide, including BYETTA and exenatide once weekly,
SYMLIN and our other drug candidates. These patents and applications cover
composition-of-matter, medical indications, methods of use, formulations and
other inventive results. We have issued and pending applications for
formulations of BYETTA and exenatide once weekly, but we do not have a
composition-of-matter patent covering exenatide. We also own or hold exclusive
rights to various foreign patent applications that correspond to issued United
States patents or pending United States patent applications.
Our success will depend in part on our ability to obtain patent
protection for our products and drug candidates and technologies both in the
United States and other countries. We cannot guarantee that any patents will
issue from any pending or future patent applications owned by or licensed to
us. Alternatively, a third party may successfully challenge or circumvent our
patents. Our rights under any issued patents may not provide us with sufficient
protection against competitive products or otherwise cover commercially
valuable products or processes. For example, our SYMLIN and BYETTA products are
subject to the provisions of the Drug Price Competition and Patent Term
Restoration Act of 1984, also known as the Hatch-Waxman Act, which provides
data exclusivity for a certain period of time. Once this exclusivity period
expires, the Hatch-Waxman Act allows generic manufacturers to file Abbreviated
New Drug Applications, or ANDAs, with the FDA requesting approval of generic
versions of previously-approved products. For example, a generic pharmaceutical
manufacturer could file an ANDA for SYMLIN as early as March 2009 and for
BYETTA as early as April 2009. If an ANDA is filed for one of our approved
products prior to expiration of the patents covering those products, it could
result 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 any
challenge related to our patent rights.
In addition, because patent applications in the United States are
maintained, in general, in secrecy for 18 months after the filing of the
applications, and publication of discoveries in the scientific or patent
literature often lag behind actual discoveries, we cannot be sure that the
inventors of subject matter covered by our patents and patent applications were
the first to invent or the first to file patent applications for these
inventions. Third parties have filed, and in the future are likely to file,
patent applications on inventions similar to ours. From time-to-time we have
participated in, and in the future are likely to participate in, interference
proceedings declared by the United States Patent and Trademark Office to
determine priority of
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invention,
which could result in a loss of our patent position. We have also participated
in, and in the future are likely to participate in, opposition proceedings
against our patents in other jurisdictions, such as Europe and Australia.
Furthermore, we may not have identified all United States and foreign patents
that 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 patented
technologies under existing licenses or that we will be able to obtain a
license to any required third-party technology. If we lose our licensed
technology rights or if we are not able to obtain a required license, we could
be adversely affected.
We may be unable to obtain
regulatory clearance to market our drug candidates in the United States or
foreign countries on a timely basis, or at all.
Our drug candidates are subject to extensive government regulations
related 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. Regulatory
authorities may refuse to approve an application for approval of a drug
candidate if they believe that applicable regulatory criteria are not
satisfied. Regulatory authorities may also require additional testing for
safety and efficacy. Moreover, if the FDA grants regulatory approval of a
product, the approval may be limited to specific indications or limited with
respect to its distribution, and expanded or additional indications for
approved drugs may not be approved, which could limit our revenues. Foreign
regulatory authorities may apply similar limitations or may refuse to grant any
approval. Unexpected changes to the FDA or foreign regulatory approval process
could also delay or prevent the approval of our drug candidates.
The data collected from our clinical trials may not be sufficient to
support approval of our drug candidates or additional or expanded indications
by the FDA or any foreign regulatory authorities. Biotechnology stock prices
have declined significantly in certain instances where companies have failed to
meet expectations with respect to FDA approval or the timing for FDA approval.
If the FDAs or any foreign regulatory authoritys response is delayed or not
favorable for any of our drug candidates, our stock price could decline
significantly.
Moreover, manufacturing facilities operated by us or by the third-party
manufacturers with whom we may contract to manufacture our unapproved drug
candidates may not pass an FDA or other regulatory authority preapproval
inspection. Any failure or delay in obtaining these approvals could prohibit or
delay us or any of our business partners from marketing these drug candidates.
Consequently, even if we believe that preclinical and clinical data are
sufficient to support regulatory approval for our drug candidates, the FDA and
foreign regulatory authorities may not ultimately approve our drug candidates
for commercial sale in any jurisdiction. If our drug candidates are not
approved, our ability to generate revenues may be limited and our business will
be adversely affected.
Litigation regarding patents and
other proprietary rights may be expensive, cause delays in bringing products to
market and harm our ability to operate.
Our success will depend in part on our ability to operate without
infringing the proprietary rights of third parties and preventing others from
infringing our patents. Challenges by pharmaceutical companies against the
patents of competitors are common. Legal standards relating to the validity of
patents covering pharmaceutical and biotechnological inventions and the scope
of claims made under these patents are still developing. As a result, our
ability to obtain and enforce patents is uncertain and involves complex legal
and factual questions. Third parties may challenge, in courts or through patent
office proceedings, or infringe upon, existing or future patents. In the event
that a third party challenges a patent, a court or patent office may invalidate
the patent or determine that the patent is not enforceable. Proceedings
involving our patents or patent applications or those of others could result in
adverse decisions about:
·
the patentability of our inventions, products
and drug candidates; and/or
·
the enforceability, validity or scope of
protection offered by our patents.
The manufacture, use or sale of any of our products or drug candidates
may infringe on the patent rights of others. If we are unable to avoid
infringement of the patent rights of others, we may be required to seek a
license, defend an infringement action or challenge the validity of the patents
in court. Patent litigation is costly and time consuming. We may not have
sufficient resources to bring these actions to a successful conclusion. In addition,
if we do not obtain a license, develop or
39
Table of Contents
obtain
non-infringing technology, fail to successfully defend an infringement action
or have infringing patents declared invalid, we may:
·
incur substantial monetary damages;
·
encounter significant delays in bringing our
drug candidates to market; and/or
·
be precluded from participating in the
manufacture, use or sale of our products or drug candidates or methods of
treatment requiring licenses.
We are subject to fraud and abuse
and similar laws and regulations, and a failure to comply with such regulations
or prevail in any litigation related to noncompliance could harm our business.
Upon approval of BYETTA and SYMLIN by the FDA, we became subject to
various health care fraud and abuse laws, such as the Federal False Claims
Act, the federal anti-kickback statute and other state and federal laws and
regulations. Pharmaceutical companies have faced lawsuits and investigations
pertaining to violations of these laws and regulations. We cannot guarantee
that measures that we have taken to prevent such violations, including our
corporate compliance program, will protect us from future violations, lawsuits
or investigations. If any such actions are instituted against us, and we are
not successful in defending ourselves or asserting our rights, those actions
could have a significant impact on our business, including the imposition of
significant fines or other sanctions.
Our financial results will
fluctuate, and these fluctuations may cause our stock price to fall.
Forecasting future revenues is difficult, especially since we launched
our first products in 2005 and the level of market acceptance of these products
may change rapidly. In addition, our customer base is highly concentrated with
four customers accounting for most of our net product sales. Fluctuations in
the buying patterns of these customers, which may result from seasonality,
wholesaler buying decisions or other factors outside of our control, could
significantly affect the level of our net sales on a period to period basis. As
a result, it is reasonably likely that our financial results will fluctuate to
an extent that may not meet with market expectations and that also may adversely
affect our stock price. There are a number of other factors that could cause
our financial results to fluctuate unexpectedly, including:
·
product sales;
·
cost of product sales;
·
achievement and timing of research and
development 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 and
technologies and our ability to successfully integrate any such acquisitions
into our existing business.
We may require additional financing
in 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 manufacturing
sources, including our Ohio manufacturing facility;
·
Development of exenatide once weekly and
other pipeline candidates;
40
Table of Contents
·
Executing our INTO strategy;
·
Our other research and development activities;
·
Other operating expenses;
·
Potential acquisitions or investments in
complementary technologies or businesses; and
·
Other general corporate purposes.
We may also be required to use our cash to pay principal and interest
on outstanding debt, including a term loan with a current balance of $109.4
million due in 2010, referred to as the Term Loan, and $775 million in
outstanding principal amount of convertible senior notes, of which
$200 million is due in 2011, referred to as the 2004 Notes, and
$575 million is due in 2014, referred to as the 2007 Notes.
If we require additional financing in the future, we cannot assure you
that it will be available to us on favorable terms, or at all. Although we have
previously been successful in obtaining financing through our debt and equity
securities offerings, there can be no assurance that we will be able to so in
the future, especially given the current adverse economic and credit
conditions.
Our investments in marketable debt
securities are subject to credit and market risks that may adversely affect
their fair value.
We maintain a portfolio of investments in marketable debt securities
which are recorded at fair value. Although we have established investment
guidelines relative to diversification and maturity with the objective of
maintaining safety of principal and liquidity, credit rating agencies may
reduce the credit rating of our individual holdings which could adversely
affect their value. Lower credit quality and other market events, such as increases
in interest rates, and further deterioration in the credit markets may have an
adverse effect on the fair value of our investment holdings and cash position.
Our business has a substantial risk of
product liability claims, and insurance may not be adequate to cover these
claims.
Our business exposes us to potential product liability risks that are
inherent in the testing, manufacturing and marketing of human therapeutic
products. On March 4, 2009, the Supreme Court held
in
Wyeth v. Levine
that federal
law does not preempt state product liability claims involving pharmaceuticals. We are currently involved in twenty product
liability cases which have been brought by individuals who have used BYETTA and
generally 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 other
claims of individuals who have not filed suit. Product liability claims could
result in the imposition of substantial defense costs and liability on us, a
recall of products, or a change in the indications for which they may be used.
We currently have limited product liability insurance coverage. We cannot
assure you that our insurance will provide adequate coverage against potential
liabilities.
Our ability to enter into and maintain
third-party relationships is important to our successful development and
commercialization of BYETTA, SYMLIN and our other drug candidates and to our
potential profitability.
With respect to sales, marketing and distribution outside the United
States, we will be substantially dependent on Lilly for activities relating to
BYETTA and sustained-release formulations of BYETTA, including exenatide once
weekly. We believe that we will likely need to enter into marketing and
distribution arrangements with third parties for, or find a corporate partner
who can provide support for, the development and commercialization of SYMLIN or
our other drug candidates outside the United States. We may also enter into
arrangements with third parties for the commercialization of SYMLIN or any of
our other drug candidates within the United States.
With respect to BYETTA and, if approved, exenatide once weekly, Lilly
is co-promoting within the United States. If Lilly ceased commercializing
BYETTA or, if approved, exenatide once weekly, for any reason, we would likely
need to either enter into a marketing and distribution arrangement with a third
party for those products or significantly increase our internal sales and commercialization
infrastructure.
We may not be able to enter into marketing and distribution
arrangements or find a corporate partner for SYMLIN or our other drug
candidates as we deem necessary. If we are not able to enter into a marketing
or distribution arrangement or find a
41
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corporate
partner who can provide support for commercialization of our drug candidates as
we deem necessary, we may not be able to successfully perform these marketing
or distribution activities. Moreover, any new marketer or distributor or
corporate partner for our drug candidates, including Lilly, with whom we choose
to contract may not establish adequate sales and distribution capabilities or
gain market acceptance for our products, if any.
We have a significant amount of
indebtedness. We may not be able to make payments on our indebtedness, and we
may incur additional indebtedness in the future, which could adversely affect
our operations.
In April 2004, we issued $200 million of the 2004 Notes and
in June 2007, we issued $575 million of the 2007 Notes. In December 2007,
we entered into the $125 million Term Loan due in December 2010. Our
ability to make payments on our debt, including the 2004 and 2007 Notes and the
Term Loan, will depend on our future operating performance and ability to
generate cash and may also depend on our ability to obtain additional debt or
equity financing. During each of the last five years, our operating cash flows
were negative and insufficient to cover our fixed charges. We may need to use
our cash to pay principal and interest on our debt, thereby reducing the funds
available to fund our research and development programs, strategic initiatives
and working capital requirements. Our ability to generate sufficient operating
cash flow to service our indebtedness, including the 2004 and 2007 Notes and
the Term Loan, and fund our operating requirements will depend on our ability,
alone or with others, to successfully develop, manufacture, obtain required
regulatory approvals for and market our drug candidates, as well as other
factors, including general economic, financial, competitive, legislative and
regulatory conditions, some of which are beyond our control. Our debt service
obligations increase our vulnerabilities to competitive pressures, because many
of our competitors are less leveraged than we are. If we are unable to generate
sufficient operating cash flow to service our indebtedness and fund our
operating requirements, we may be forced to reduce or defer our development
programs, sell assets or seek additional debt or equity financing, which may
not be available to us on satisfactory terms or at all. Our level of
indebtedness may make us more vulnerable to economic or industry downturns. If
we incur new indebtedness, the risks relating to our business and our ability
to service our indebtedness will intensify.
We may be required to redeem our
convertible senior notes upon a designated event or repay the Term Loan upon an
event of default.
Holders of the 2004 and 2007 Notes may require us to redeem all or any
portion of their notes upon the occurrence of certain designated events which
generally involve a change in control of our company. The lenders under the
Term Loan may require us to repay outstanding principal and accrued interest
due under the Term Loan upon the occurrence of an event of default, which could
include, among other things, nonpayment of principle and interest, violation of
covenants and a change in control. We
may not have sufficient cash funds to redeem the 2004 and 2007 Notes upon a
designated 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 Notes
in our common stock or a combination of cash and our common stock. We may be
unable to satisfy the requisite conditions to enable us to pay some or all of
the redemption price for the 2004 Notes in our common stock. If we are prohibited
from redeeming the 2004 or 2007 Notes, we could seek consent from our lenders
to redeem the 2004 or 2007 notes. If we are unable to obtain their consent, we
could attempt to refinance the 2004 or 2007 Notes. If we were unable to obtain
a consent or refinance, we would be prohibited from redeeming the 2004 or 2007
Notes. If we were unable to redeem the 2004 or 2007 Notes upon a designated
event, it would result in an event of default under the indentures governing
the 2004 or 2007 Notes. An event of default under the indentures could result
in a further event of default under our other then-existing debt, including the
Term Loan. In addition, the occurrence of a designated event may be an event of
default under our other debt. Further, an event of default under the Term Loan
could result in an event of default under the indentures governing the 2004 or
2007 Notes.
If our research and development programs
fail to result in additional drug candidates, the growth of our business could
be impaired.
Certain of our research and development programs for drug candidates
are at an early stage and will require significant research, development,
preclinical and clinical testing, manufacturing scale-up activities, regulatory
approval and/or commitments of resources before commercialization. We cannot
predict whether our research will lead to the discovery of any additional drug
candidates that could generate additional revenues for us.
Our future success depends on our chief
executive officer, and other key executives and our ability to attract, retain
and motivate qualified personnel.
We are highly dependent on our chief executive officer, and the other
principal members of our executive and scientific teams. The unexpected loss of
the services of any of these persons might impede the achievement of our
research, development and commercialization objectives. Recruiting and
retaining qualified sales, marketing, regulatory, scientific and other
personnel and consultants will also be critical to our success. We may not be
able to attract and retain these personnel and consultants on acceptable terms
given the competition between numerous pharmaceutical and biotechnology
companies. We do not maintain key person insurance on any of our employees.
42
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Contents
We may be unable to adequately
prevent disclosure of trade secrets and other proprietary information.
In order to protect our proprietary technology and processes, we rely
in part on confidentiality agreements with our corporate partners, employees,
consultants, manufacturers, outside scientific collaborators and sponsored
researchers and other advisors. These agreements may not effectively prevent
disclosure of confidential information and may not provide an adequate remedy
in the event of unauthorized disclosure of confidential information. In
addition, others may independently discover our trade secrets and proprietary
information.
Costly and time-consuming litigation could be necessary to enforce and
determine the scope of our proprietary rights, and failure to obtain or
maintain trade secret protection could adversely affect our competitive
business position.
Our research and development
activities and planned manufacturing activities involve the use of hazardous
materials, which subject us to regulation, related costs and delays and
potential liabilities.
Our research and development and our planned manufacturing activities
involve the controlled use of hazardous materials, chemicals and various
radioactive compounds. Although we believe that our research and development
safety procedures for handling and disposing of these materials comply with the
standards prescribed by state and federal regulations, the risk of accidental
contamination or injury from these materials cannot be eliminated. In addition,
as part of the development of our planned manufacturing activities, we will
need to develop additional safety procedures for the handling and disposing of
hazardous materials. If an accident occurs, we could be held liable for
resulting damages, which could be substantial. We are also subject to numerous
environmental, health and workplace safety laws and regulations, including
those governing laboratory procedures, exposure to blood-borne pathogens and
the handling of biohazardous materials. Additional federal, state and local
laws and regulations affecting our operations may be adopted in the future. We
may incur substantial costs to comply with, and substantial fines or penalties
if we violate any of these laws or regulations.
We are exposed to potential risks
from legislation requiring companies to evaluate internal control over
financial reporting.
The Sarbanes-Oxley Act requires that we report annually on the
effectiveness of our internal control over financial reporting. Among other
things, we must perform systems and processes evaluation and testing. We must
also conduct an assessment of our internal control to allow management to
report on, and our independent registered public accounting firm to attest to,
our internal control over financial reporting, as required by Section 404
of the Sarbanes-Oxley Act. In connection with our Section 404 compliance
efforts, we have incurred or expended, and expect to continue to incur or
expend, substantial accounting and other expenses and significant management
time and resources. We have implemented certain remediation activities
resulting from our ongoing assessment of internal control over financial
reporting. Our future assessment, or the future assessments by our independent
registered public accounting firm, may reveal material weaknesses in our
internal control. If material weaknesses are identified in the future we would
be required to conclude that our internal control over financial reporting are
ineffective and we could be subject to sanctions or investigations by the
Securities and Exchange Commission, the NASDAQ Stock Market or other regulatory
authorities, which would require additional financial and management resources
and could adversely affect the market price of our common stock.
We have implemented anti-takeover
provisions that could discourage or prevent an acquisition of our company, even
if the acquisition would be beneficial to our stockholders, and as a result our
management may become entrenched and hard to replace.
Provisions in our certificate of incorporation and bylaws could make it
more difficult for a third party to acquire us, even if doing so would benefit
our stockholders. These provisions include:
·
allowing our
board of directors to elect a director to fill a vacancy created by the
expansion of the board of directors;
·
allowing our
board of directors to issue, without stockholder approval, up to
5.5 million shares of preferred stock with terms set by the board of
directors;
·
limiting the
ability of holders of our outstanding common stock to call a special meeting of
our stockholders; and
·
preventing
stockholders from taking actions by written consent and requiring all
stockholder actions to be taken at a meeting of our stockholders.
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Table of Contents
Each of these provisions, as well as selected provisions of Delaware
law, could discourage potential takeover attempts, could adversely affect the
trading price of our securities and could cause our management to become
entrenched and hard to replace. In addition to provisions in our charter
documents and under Delaware law, an acquisition of our company could be made
more difficult by our employee benefits plans and our employee change in
control severance plan, under which, in connection with a change in control and
termination of employment, stock options held by our employees may become
vested and our officers may receive severance benefits. We also have
implemented a stockholder rights plan, also called a poison pill, which could
make it uneconomical for a third party to acquire us on a hostile basis.
Our executive officers, directors and major
stockholders control approximately 66% of our common stock.
As of June 30, 2009, executive officers, directors and holders of
5% or more of our outstanding common stock, in the aggregate, owned or
controlled approximately 66% of our outstanding common stock. As a result,
these stockholders are able to influence all matters requiring approval by our
stockholders, including the election of directors and the approval of corporate
transactions. This concentration of ownership may also delay, deter or prevent
a change in control of our company and may make some transactions more
difficult or impossible to complete without the support of these stockholders.
Substantial future sales of our common
stock by us or our existing stockholders or the conversion of our convertible
senior notes to common stock could cause the trading price of our common stock
to fall.
Sales by existing stockholders of a large number of shares of our
common stock in the public market or the perception that additional sales could
occur could cause the trading price of our common stock to drop. Likewise, the
issuance of shares of common stock upon conversion of our convertible notes or
redemption of our convertible notes upon a designated event, or upon additional
convertible debt or equity financings or other share issuances by us, including
shares issued in connection with potential future strategic alliances, could
adversely affect the trading price of our common stock. Our convertible notes
are currently convertible into a total of up to 15.2 million shares. In
addition, the existence of these notes may encourage short selling of our
common stock by market participants.
Significant volatility in the market price
for our common stock could expose us to litigation risk.
The
market prices for securities of biopharmaceutical and biotechnology companies,
including our common stock, have historically been highly volatile, and the
market from time to time has experienced significant price and volume
fluctuations that are unrelated to the quarterly operating performance of these
biopharmaceutical and biotechnology companies. Since January 1, 2007, the
high and low sales price of our common stock varied significantly, as shown in
the 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 SYMLIN
will meet our expectations, and the regulatory approval of our other drug
candidates, we may continue to experience volatility in our stock price for the
foreseeable future. In addition, the following factors may significantly affect
the market price of our common stock:
·
our financial results and/or
fluctuations in our financial results;
·
safety issues with BYETTA,
SYMLIN or our product candidates;
·
clinical study results;
44
Table of Contents
·
determinations by regulatory
authorities with respect to our drug candidates;
·
our ability to complete our
Ohio manufacturing facility and the commercial manufacturing process for
exenatide once weekly;
·
developments in our
relationships with current or future collaborative partners;
·
our ability to successfully
execute our commercialization strategies;
·
developments in our
relationships with third-party manufacturers of our products and other parties
who provide services to us;
·
technological innovations or
new commercial therapeutic products by us or our competitors;
·
developments in patent or
other proprietary rights; and
·
governmental policy or
regulation, including with respect to pricing and reimbursement.
Broad
market and industry factors also may materially adversely affect the market
price of our common stock, regardless of our actual operating performance.
Periods of volatility in the market price of our common stock expose us to
securities class-action litigation, and we may be the target of such litigation
as a result of market price volatility in the future.
ITEM 4.
Submission of Matters to a Vote of Security Holders
Our
Annual Meeting of Stockholders was held on May 27, 2009. At the Annual Meeting, the stockholders of
the Company (i) elected Adrian Adams, Steven R. Altman, Teresa Beck, M.
Kathleen Behrens, Daniel M. Bradbury, Paul N. Clark, Paulo F. Costa, Alexander
J. 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 next
annual meeting or until his/her successor is elected, (ii) approved our
2009 Equity Incentive Plan, (iii) approved an increase of 1,500,000
million shares in the aggregate number of shares of our common stock authorized
for issuance under our 2001 Employee Stock Purchase Plan, (iv) ratified
the selection of Ernst & Young LLP as our independent registered
public accounting firm for the fiscal year ending December 31, 2009, and (v) rejected
a stockholder proposal to change the Companys jurisdiction of incorporation
from Delaware to North Dakota.
We had
140,874,975 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 present
in person or represented by proxy for the five proposals indicated above. The following sets forth detailed information
regarding 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 the
aggregate number of shares of our common stock authorized for issuance under
our 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 as
our independent registered public accounting firm.
Votes in Favor:
|
|
116,478,958
|
|
Votes Against:
|
|
756,849
|
|
Abstentions:
|
|
519,018
|
|
Proposal
5: Stockholder p
roposal
to change the Companys jurisdiction of incorporation from Delaware to North
Dakota.
Votes in Favor:
|
|
21,993,709
|
|
Votes Against:
|
|
88,194,210
|
|
Abstentions:
|
|
7,566,905
|
|
46
Table of
Contents
ITEM
6. Exhibits
The following exhibits are included as part of this
report:
Exhibit
Number
|
|
Description
|
|
|
|
3.1
|
|
Amended
and Restated Certificate of Incorporation (filed as an exhibit to
Registrants 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 Registrants 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 Registrants 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
Registrants 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 Registrants 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
Registrants 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 Registrants 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 Registrants 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 Registrants 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 the
undersigned 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
|
|
registrants principal financial and accounting officer)
|
48
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