Table of
Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark
One)
x
QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2010
OR
o
TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
Commission File Number: 0-19700
AMYLIN PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
Delaware
|
|
33-0266089
|
(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
x
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
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Smaller reporting company
o
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(Do not check if a smaller reporting company)
|
|
|
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 November 1, 2010
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Common Stock, $.001 par value
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143,995,577
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Table of Contents
PART I.
FINANCIAL INFORMATION
ITEM 1. Financial Statements
AMYLIN PHARMACEUTICALS, INC.
Consolidated Balance Sheets
(in thousands, except per share
data)
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September 30,
2010
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December 31,
2009
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(unaudited)
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Assets
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Current assets:
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Cash and cash equivalents
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$
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157,630
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$
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120,825
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|
Short-term investments
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380,076
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546,944
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Accounts receivable, net
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52,601
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60,732
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Inventories, net
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120,967
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99,700
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Other current assets
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36,159
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78,481
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Total current assets
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747,433
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906,682
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Property, plant and equipment, net
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814,665
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780,058
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Other long-term assets
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45,090
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39,679
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$
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1,607,188
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$
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1,726,419
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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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26,864
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$
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39,146
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|
Accrued compensation
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42,585
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70,961
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Payable to collaborative partner
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30,537
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49,645
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Restructuring liability, current portion
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6,771
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9,204
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Notes payable, current portion
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70,313
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93,750
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Convertible senior notes, current portion
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200,000
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Deferred revenue, current portion
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7,500
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7,500
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Other current liabilities
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93,251
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95,163
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Total current liabilities
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477,821
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365,369
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Deferred revenue, net of current portion
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60,625
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66,250
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Long-term deferred credit
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125,000
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125,000
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Deferred collaborative profit-sharing
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81,623
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54,570
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Restructuring liability, net of current portion
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24,312
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22,776
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Other long-term obligations, net of current
portion
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22,718
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26,158
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Convertible senior notes
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462,247
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643,762
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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 September 30, 2010 and
December 31, 2009
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Common stock, $.001 par value, 450,000 shares
authorized, 143,967 and 141,747 issued and outstanding at
September 30, 2010 and December 31, 2009, respectively
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144
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142
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Additional paid-in capital
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2,434,206
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2,371,939
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Accumulated deficit
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(2,080,998
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)
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(1,947,867
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)
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Accumulated other comprehensive loss
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(510
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)
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(1,680
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)
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Total stockholders equity
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352,842
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422,534
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|
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$
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1,607,188
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$
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1,726,419
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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
September 30,
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Nine months ended
September 30,
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2010
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2009 (1)
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2010
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2009 (1)
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Revenues:
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Net product sales
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$
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154,026
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$
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192,887
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$
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488,798
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$
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569,716
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Revenues under collaborative agreements
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2,075
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1,034
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5,825
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3,177
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Total revenues
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156,101
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193,921
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494,623
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572,893
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Costs and expenses:
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Cost of goods sold
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12,680
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22,624
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47,644
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65,549
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Selling, general and administrative
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72,731
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80,088
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223,640
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259,696
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Research and development
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48,443
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35,346
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136,265
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134,892
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Collaborative profit sharing
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61,249
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78,265
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194,056
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227,481
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Restructuring
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6,028
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|
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9,452
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|
11,376
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Total costs and expenses
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201,131
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216,323
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611,057
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698,994
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Operating loss
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|
(45,030
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)
|
(22,402
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)
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(116,434
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)
|
(126,101
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)
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Interest and other expense, net
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(5,702
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)
|
(4,257
|
)
|
(16,697
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)
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(9,884
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)
|
Net loss
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$
|
(50,732
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)
|
$
|
(26,659
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)
|
$
|
(133,131
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)
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$
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(135,985
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)
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|
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Net loss per share, basic and diluted
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$
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(0.35
|
)
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$
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(0.19
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)
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$
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(0.93
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)
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$
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(0.97
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)
|
|
|
|
|
|
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Shares used in computing net loss per share, basic
and diluted
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143,763
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141,308
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143,354
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140,350
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(1) Adjusted
for the 2009 change in our method of accounting for reimbursed research and
development costs under collaborative arrangements (Note 1).
See accompanying notes to consolidated financial statements.
4
Table of Contents
AMYLIN PHARMACEUTICALS, INC.
Consolidated
Statements of Cash Flows
(in
thousands)
(unaudited)
|
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Nine months ended
September 30,
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2010
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2009
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Operating activities:
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|
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|
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Net loss
|
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$
|
(133,131
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)
|
$
|
(135,985
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)
|
Adjustments to reconcile net loss to net cash used
for operating activities:
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Depreciation and amortization
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42,443
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26,587
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Amortization of debt discount and debt issuance
costs
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9,143
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6,055
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Employee stock-based compensation
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27,234
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33,947
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Benefit plan compensation settled in stock
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15,631
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15,719
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Restructuring
|
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833
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Other non-cash expenses
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4,060
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5,876
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Changes in operating assets and liabilities:
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Accounts receivable
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8,131
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(14,680
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)
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Inventories
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8,313
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11,992
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Other current assets
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13,526
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(28,990
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)
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Accounts payable and accrued liabilities
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|
(13,823
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)
|
(3,122
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)
|
Accrued compensation
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(24,307
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)
|
181
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Payable to collaborative partner
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(19,108
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)
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1,269
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Deferred revenue
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(5,625
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)
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(3,086
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)
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Deferred collaborative profit sharing
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27,053
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40,060
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|
Restructuring liabilities
|
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(897
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)
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(17,531
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)
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Other assets and liabilities, net
|
|
(3,061
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)
|
(9,921
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)
|
Net cash flows used for operating activities
|
|
(43,585
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)
|
(71,629
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)
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|
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Investing activities:
|
|
|
|
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Purchases of short-term investments
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(423,592
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)
|
(582,358
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)
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Sales and maturities of short-term investments
|
|
589,222
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|
659,869
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|
Purchases of property, plant and equipment
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(75,560
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)
|
(119,123
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)
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Decrease in other long-term assets
|
|
(1,476
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)
|
(273
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)
|
Net cash flows provided by (used for) investing
activities
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|
88,594
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|
(41,885
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)
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
Issuance of common stock, net
|
|
15,233
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|
10,920
|
|
Repayment of notes payable
|
|
(23,437
|
)
|
(23,437
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)
|
Net cash flows used for financing activities
|
|
(8,204
|
)
|
(12,517
|
)
|
|
|
|
|
|
|
Change in cash and cash equivalents
|
|
36,805
|
|
(126,031
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)
|
|
|
|
|
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|
Cash and cash equivalents at beginning of period
|
|
120,825
|
|
237,263
|
|
Cash and cash equivalents at end of period
|
|
$
|
157,630
|
|
$
|
111,232
|
|
|
|
|
|
|
|
Supplemental disclosure of cash
flow information:
|
|
|
|
|
|
Property, plant and equipment additions in other
current liabilities
|
|
$
|
572
|
|
$
|
|
|
Receivable arising from sale of property, plant
and equipment
|
|
$
|
6,500
|
|
|
|
Non-cash interest capitalized to property, plant
and equipment
|
|
$
|
11,626
|
|
$
|
13,118
|
|
|
|
|
|
|
|
Non-cash financing activities:
|
|
|
|
|
|
Shares contributed as employer 401(k) match
|
|
$
|
3,851
|
|
$
|
5,104
|
|
Shares contributed to employee stock ownership
plan
|
|
$
|
15,848
|
|
$
|
20,250
|
|
See accompanying notes to consolidated financial statements.
5
Table
of Contents
AMYLIN PHARMACEUTICALS, INC.
Notes to
Consolidated Financial Statements
September 30,
2010
(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 September 30,
2010, and for the three and nine months ended September 30, 2010 and 2009,
is 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, 2009 has been derived from
the audited consolidated financial statements at that date, 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 we, us or Amylin) Annual Report on
Form 10-K for the year ended December 31, 2009.
Change in Accounting Policy
During
the fourth quarter of 2009, we changed our method of accounting for reimbursed
research and development costs under collaborative arrangements from reporting
them as revenue to reporting them as a reduction of research and development
costs. We believe this method is consistent with industry practice for
companies whose primary focus is the commercialization of pharmaceutical
products. This change in accounting had no effect on operating loss or net
loss.
Consistent
with the accounting guidance addressing accounting changes, the effect of the
change in accounting method has been made retroactive to the beginning of the
earliest period presented with the accompanying consolidated financial
statements.
The
following tables summarize the impact of the change in accounting for
reimbursed research and development costs on the consolidated statements of
operations for the three and nine months ended September 30, 2009. Only the line items affected by the change in
accounting are reflected in the tables below (in thousands):
|
|
Three months ended
September 30, 2009
|
|
Nine months ended
September 30, 2009
|
|
|
|
As originally
reported
|
|
As adjusted
|
|
As originally
reported
|
|
As adjusted
|
|
Revenues under collaborative agreements
|
|
$
|
18,348
|
|
$
|
1,034
|
|
$
|
44,565
|
|
$
|
3,177
|
|
Research and development expenses
|
|
52,660
|
|
35,346
|
|
176,280
|
|
134,892
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue Recognition
Net Product Sales
We sell 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 we have no
further obligations. We record product sales net of allowances for product
returns, rebates, wholesaler chargebacks, wholesaler discounts and prescription
vouchers at the time of sale and report product sales net of such allowances.
We must make significant judgments in determining these allowances. If actual
results differ from our estimates, we will be required to make adjustments to
these allowances in the future. We
continue to record allowances related to the United States Department of
Defenses Tricare Retail Pharmacy program pursuant to a final rule that
was issued in March 2009 and became effective on May 26, 2009. In consideration of this final rule we
recorded an allowance of $1.1 million and $4.2 million for such rebates in the
three and nine months ended September 30, 2010, respectively, and $7.5
million for such rebates in the nine months ended September 30, 2009, of
which $4.8 million represents a retroactive rebate assessment recorded in the
first quarter of 2009 for sales made during 2008 that became probable of being
assessed and paid.
6
Table of Contents
In March 2010,
President Obama signed into law the Patient Protection and Affordable Care Act
(PPACA) as amended by the Health Care and Education Reconciliation Act. There are a number of provisions in the new
legislation that will impact the pharmaceutical industry through increased
discounts and an expansion of government funded insurance programs. The provisions become effective over time,
however, certain provisions became effective in the first quarter of 2010. These provisions are related to increased
Medicaid discounts, an increase in the population of patients eligible for
Medicaid discounts, and the expansion of the 340(B) Public Health Services
drug pricing program, which provides outpatient drugs at reduced rates, to
include additional hospitals, clinics and healthcare centers. These new provisions did not have a material
impact on our results for the three or nine month periods ended September 30,
2010. We are currently evaluating the
new legislation to determine its impact on our business and future financial
results. We expect the financial impact
of the new legislation to grow over time.
We record all United States
BYETTA and SYMLIN product sales. With respect to BYETTA, we have determined
that we are qualified as a principal based on our responsibilities under our
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
Revenues
under collaborative agreements consist of the amortization of product and
technology license fees and milestone payments earned. 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. 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.
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 $1.0 million and
$0.7 million at September 30, 2010 and December 31, 2009,
respectively.
Investments in Unconsolidated
Entities
We use the equity method of accounting for investments
in other companies that are not controlled by us and in which our interest is
generally between 20% and 50% of the voting shares or we have significant
influence over the entity, or both. Our
share of the income or losses of these entities is included in interest and
other expense, and the investments, which have a net book value of $3.8 million
and $3.2 million at September 30, 2010 and December 31, 2009,
respectively, are included in other long-term assets.
We recorded $0.3 million and
$1.8 million for our share of equity method
investee losses during the three months ended September 30, 2010
and 2009, respectively, and $1.9 million and $2.9 million for our share of
equity method investee losses during the nine months ended September 30,
2010 and 2009, respectively.
Fair Value Measurements
In
January 2010, we adopted a newly issued accounting standard which requires
additional disclosure about the amounts of and reasons for significant
transfers in and out of Level 1 and Level 2 fair value measurements.
This standard also clarifies existing disclosure requirements related to the
level of disaggregation of fair value measurements for each class of assets and
liabilities and disclosures about inputs and valuation techniques used to
measure fair value for both recurring and nonrecurring Level 2 and
Level 3 measurements. As this newly issued accounting standard only
requires enhanced disclosure, the adoption of this standard did not impact our
financial position or results of operations. In addition, effective for interim
and annual periods beginning after December 15, 2010, this standard will
require additional disclosure and require an entity to present disaggregated
information about activity in Level 3 fair value measurements on a gross
basis, rather than as one net amount.
The
authoritative guidance for fair value measurements 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. The guidance prioritizes the
inputs used in measuring fair value into the following hierarchy:
7
Table of Contents
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 considerations that market
participants would use in pricing.
|
There
have been no transfers of assets or liabilities between the fair value
measurement classifications.
The
following table summarizes the assets and liabilities measured at fair value on
a recurring basis (in thousands):
|
|
Fair value measurements as of September 30, 2010
|
|
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Short-term investments
|
|
$
|
380,076
|
|
$
|
380,076
|
|
$
|
|
|
$
|
|
|
Cash and cash equivalents
|
|
157,630
|
|
157,630
|
|
|
|
|
|
Derivative financial instrument contracts, net
liability
|
|
(252
|
)
|
|
|
(252
|
)
|
|
|
|
|
$
|
537,454
|
|
$
|
537,706
|
|
$
|
(252
|
)
|
$
|
|
|
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, milestone payments due under license agreements, 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. Reimbursements
for research and development costs under collaborative arrangements are
recorded as a reduction to research and development expenses and are recognized
in the period in which the related costs are incurred. 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. We accrue the costs of services
rendered in connection with such activities based on our 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.
Derivative Financial
Instruments
We
mitigate 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
income and interest and other expense. The fair value of our derivative
financial instruments was a net liability of $0.3 million and $2.9 million
at September 30, 2010 and December 31, 2009, respectively. We have determined that our derivative
financial instruments are defined as Level 2 in the fair value hierarchy.
We recognized net gains of $1.0 million and $0.4 million on derivative
financial instruments for the three months ended September 30, 2010 and
2009, respectively, and net gains of $2.6 million and $2.0 million on
derivative financial instruments for the nine months ended September 30,
2010 and 2009, respectively.
The
following table summarizes the fair value and balance sheet classification of
our derivative financial instruments (in thousands):
|
|
September 30, 2010
|
|
December 31, 2009
|
|
|
|
Fair Value
|
|
Balance sheet
location
|
|
Fair Value
|
|
Balance sheet
location
|
|
Foreign currency derivative contracts
|
|
$
|
401
|
|
Other current assets
|
|
$
|
(100
|
)
|
Other current liabilities
|
|
Interest rate derivative contract, current
|
|
(653
|
)
|
Other current liabilities
|
|
|
|
Other current liabilities
|
|
Interest rate derivative contract, long-term
|
|
$
|
|
|
Other long-term obligations, net of current portion
|
|
$
|
(2,813
|
)
|
Other long-term obligations, net of current portion
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(252
|
)
|
|
|
$
|
(2,913
|
)
|
|
|
8
Table of Contents
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. Shares used in
calculating basic and diluted net loss per common share exclude the following
common share equivalents (in thousands):
|
|
Three months ended
September 30,
|
|
Nine months ended
September 30,
|
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
Antidilutive options and awards to purchase common
stock
|
|
1,798
|
|
203
|
|
1,656
|
|
219
|
|
Antidilutive shares underlying convertible senior
notes
|
|
15,238
|
|
15,238
|
|
15,238
|
|
15,238
|
|
|
|
17,036
|
|
15,441
|
|
16,894
|
|
15,457
|
|
In
future periods, if we report 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
We
utilize the fair value method of accounting for stock-based compensation arrangements. Accordingly, we expense the estimated fair
value of non-cash stock-based awards granted to our employees over the
requisite employee service period, which is generally the vesting period. The
fair value method of accounting applies to awards granted subsequent to
January 1, 2006, the date the fair value method of accounting for
stock-based compensation arrangements became effective, and to awards that were
outstanding on the effective date and subsequently modified or cancelled.
Estimated non-cash stock-based compensation expense for awards outstanding as
of January 1, 2006 is being recognized over the remaining service period
of the award using the compensation cost calculated for pro-forma disclosure
purposes under the former guidance.
Total
estimated stock-based compensation was as follows (in thousands, except per
share data):
|
|
Three months ended
September 30,
|
|
Nine months ended
September 30,
|
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
Selling, general and administrative expenses
|
|
$
|
4,606
|
|
$
|
6,956
|
|
$
|
18,027
|
|
$
|
21,873
|
|
Research and development expenses
|
|
2,424
|
|
3,944
|
|
9,207
|
|
12,074
|
|
|
|
$
|
7,030
|
|
$
|
10,900
|
|
$
|
27,234
|
|
$
|
33,947
|
|
|
|
|
|
|
|
|
|
|
|
Net stock-based compensation expense, per
common share:
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
0.05
|
|
$
|
0.08
|
|
$
|
0.19
|
|
$
|
0.24
|
|
In
all cases non-cash stock-based compensation expense during the three and nine
month periods ended September 30, 2010 and 2009 related to stock-based
awards consisting of stock options, performance based options and restricted
stock units and employee stock purchase rights.
At September 30, 2010, total unrecognized estimated compensation
cost related to non-vested stock-based awards granted prior to that date was
$43.1 million, which is expected to be recognized over a weighted-average
period of 2.1 years. We issued 0.1
million and 0.6 million shares upon the exercise of stock options in the three
and nine months ended September 30, 2010, respectively. Stock-based
compensation expense for the three months ended September 30, 2010
includes a reversal of $3.3 million of expense associated with performance
based stock options for which vesting is contingent upon FDA approval of
BYDUREON by December 31, 2010, of which $2.6 million relates to selling,
general and administrative expenses and $0.7 million relates to research and
development expenses (see related discussion in
Subsequent
Events
).
In
addition to the stock-based compensation discussed above, we also recorded
expense associated with our Employee Stock Ownership Plan, or ESOP, and our
401(k) plan for the three and nine month periods ended September 30,
2010 and 2009, respectively. The
breakdown of non-cash ESOP and 401(k) expense by operating statement
classification is presented below (in thousands):
|
|
Three months ended
September 30,
|
|
Nine months ended
September 30,
|
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
Selling, general and administrative expenses
|
|
$
|
2,403
|
|
$
|
2,624
|
|
$
|
8,860
|
|
$
|
8,901
|
|
Research and development expenses
|
|
1,618
|
|
1,768
|
|
6,771
|
|
6,818
|
|
|
|
$
|
4,021
|
|
$
|
4,392
|
|
$
|
15,631
|
|
$
|
15,719
|
|
9
Table of Contents
Consolidation
The
consolidated financial statements include our accounts and those of our wholly
owned subsidiaries, Amylin Ohio, LLC, and Amylin Investments, LLC.
All significant intercompany transactions and balances have been eliminated in
consolidation.
Subsequent Events
On
October 18, 2010 we received a complete response letter from the U.S. Food
and Drug Administration (FDA) regarding the New Drug Application (NDA) for
BYDUREON
TM
(exenatide for
extended release injectable suspension).
In the complete response letter the FDA requested a thorough QT (tQT)
study with exposures of exenatide higher than typical therapeutic levels of
BYDUREON. A tQT study is intended to determine whether a drug has an adverse
pharmacologic effect on cardiac repolarization, as detected by QT/QTc
prolongation. The tQT protocol will be
agreed to by the FDA prior to study initiation. Additionally, the FDA has
requested the results of the DURATION-5 study, a head-to-head study comparing
BYDUREON to BYETTA® (exenatide) injection, to evaluate the efficacy, and the
labeling of the safety and effectiveness, of the commercial formulation of
BYDUREON. Amylins goal is to submit a reply to the complete response letter by
the end of 2011, pending discussions with the FDA. Based on the requirements
for additional data, this will likely be considered a Class 2 resubmission
requiring a six-month review.
This
subsequent event resulted in adjustments to estimates related to certain assets
and liabilities that were impacted by the delayed launch of BYDUREON. The impact of these changes in estimates was
immaterial to the Companys financial results for the three and nine months
ended September 30, 2010.
Recently Issued Accounting Pronouncements
Effective
January 1, 2010, we adopted a newly issued accounting standard which
amends the evaluation criteria to identify the primary beneficiary of a
variable interest entity and requires a quarterly reassessment of the treatment
of such entities. The guidance also
requires additional disclosures about an enterprises involvement in a variable
interest entity. The adoption of this
standard did not have an impact on our financial position or results of
operations.
In
October 2009, the FASB issued authoritative guidance that amends existing
revenue recognition accounting pronouncements related to multiple-deliverable
revenue arrangements. The new guidance provides accounting principles and
application guidance on whether multiple deliverables exist, how the
arrangement should be separated, and how the consideration should be allocated.
This guidance expands the methods under which a company can establish the fair
value of undelivered products and services and provides for separate revenue
recognition based upon managements estimate of the selling price for an
undelivered item when there is no other means to determine the fair value of
that undelivered item. The new guidance is effective prospectively for revenue
arrangements entered into or materially modified in fiscal years beginning on
or after June 15, 2010, which for us means fiscal 2011. Earlier
application is permitted as of the beginning of a fiscal year. We are currently
evaluating the potential impact of this standard on our financial position and
results of operations.
In
April 2010, the FASB issued Accounting Standards Update (ASU)
No. 2010-17,
Revenue Recognition
Milestone Method
(ASU 2010-017). ASU 2010-017 provides guidance in
applying the milestone method of revenue recognition to research or development
arrangements. Under this guidance management may recognize revenue contingent
upon the achievement of a milestone in its entirety, in the period in which the
milestone is achieved, only if the milestone meets all the criteria within the
guidance to be considered substantive. This ASU is effective on a prospective
basis for research and development milestones achieved in fiscal years,
beginning on or after June 15, 2010, which for us means fiscal 2011. Early
adoption is permitted; however, adoption of this guidance as of a date other
than January 1, 2011 will require us to apply this guidance
retrospectively effective as of January 1, 2010 and will require
disclosure of the effect of this guidance as applied to all previously reported
interim periods in the fiscal year of adoption. As we plan to implement ASU
No. 2010-17 prospectively, the effect of this guidance will be limited to
future transactions. We are currently evaluating the potential impact of this
standard on our financial position and results of operations.
2.
Short-term
Investment
s
Our
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 are included in interest
income and declines in value
10
Table of Contents
judged
to be other-than-temporary on available-for-sale securities are included in
impairment loss on investments, a component of other expense. In assessing
potential impairment of our short-term investments, we evaluate the impact of
interest rates, potential prepayments on mortgage-backed securities, changes in
credit quality, the length of time and extent to which the market value has
been less than cost, and our intent and ability not to sell the security 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 September 30, 2010
and December 31, 2009 (in thousands):
|
|
Available-for-Sale Securities
|
|
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains (1)
|
|
Gross
Unrealized
Losses (1)
|
|
Estimated
Fair Value
|
|
September 30,
2010
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities
|
|
$
|
98,431
|
|
$
|
9
|
|
$
|
|
|
$
|
98,440
|
|
Obligations of U.S.
Government-sponsored enterprises
|
|
25,136
|
|
280
|
|
(46
|
)
|
25,370
|
|
Corporate debt securities
|
|
251,340
|
|
752
|
|
(23
|
)
|
252,069
|
|
Asset backed securities
|
|
4,192
|
|
6
|
|
(1
|
)
|
4,197
|
|
Total
|
|
$
|
379,099
|
|
$
|
1,047
|
|
$
|
(70
|
)
|
$
|
380,076
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2009
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities
|
|
$
|
187,892
|
|
$
|
66
|
|
$
|
(2
|
)
|
$
|
187,956
|
|
Obligations of U.S.
Government-sponsored enterprises
|
|
60,280
|
|
47
|
|
(453
|
)
|
59,874
|
|
Corporate debt securities
|
|
278,872
|
|
917
|
|
(99
|
)
|
279,690
|
|
Asset backed securities
|
|
19,963
|
|
37
|
|
(576
|
)
|
19,424
|
|
Total
|
|
$
|
547,007
|
|
$
|
1,067
|
|
$
|
(1,130
|
)
|
$
|
546,944
|
|
(1) Other
comprehensive loss included a net unrealized loss of $0.8 million and $1.6 million
on investments underlying our 2001 Non-Qualified Deferred Compensation Plan at September 30,
2010 and December 31, 2009, respectively.
Contractual
maturities of short-term investments at September 30, 2010 were as follows
(in thousands):
|
|
Fair Value
|
|
Due within 1 year
|
|
$
|
321,311
|
|
After 1 but within 5 years
|
|
34,990
|
|
After 5 but within 10 years
|
|
209
|
|
After 10 years
|
|
23,566
|
|
Total
|
|
$
|
380,076
|
|
For
purposes of these maturity classifications, the final maturity date is used for
securities not due at a single maturity date. Securities not due at a single
maturity date include mortgage-backed securities, which are included in
Obligations of U.S. Government-sponsored enterprises in the table above, and
asset-backed securities.
The
following table shows the gross unrealized losses and fair value of our
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 September 30, 2010 (in thousands):
|
|
Less than 12 Months
|
|
12 Months or
Greater
|
|
Total
|
|
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
Obligations of U.S. Government-sponsored enterprises
|
|
$
|
426
|
|
$
|
(2
|
)
|
$
|
8,628
|
|
$
|
(44
|
)
|
$
|
9,054
|
|
$
|
(46
|
)
|
Corporate debt securities
|
|
27,698
|
|
(10
|
)
|
5,537
|
|
(13
|
)
|
33,235
|
|
(23
|
)
|
Asset backed securities
|
|
|
|
|
|
208
|
|
(1
|
)
|
208
|
|
(1
|
)
|
|
|
$
|
28,124
|
|
$
|
(12
|
)
|
$
|
14,373
|
|
$
|
(58
|
)
|
$
|
42,497
|
|
$
|
(70
|
)
|
11
Table of Contents
Our
investments had gross unrealized losses of $0.1 million and $1.1 million at September 30,
2010 and December 31, 2009, respectively.
During the three and nine months ended September 30, 2010, we
recognized a $0.2 million other-than-temporary impairment loss for
credit-related losses associated with one security in our portfolio. During the nine months ended September 30,
2009, we recognized a $1.4 million other-than-temporary impairment loss for
credit-related losses associated with two securities in our portfolio. These impairment losses were based upon the
difference between the cost basis and the observed volatility in the markets
impacting certain of the classes of securities in which we invest and not a
deterioration in credit ratings. The
unrealized losses on our investments in marketable securities are due in most
instances to the increased volatility in the markets impacting the classes of
securities in which we invest and not deterioration in credit ratings. Our
investments have a short effective duration, and since we have the ability and
intent not to sell these investments until a recovery of fair value, which may
be maturity, we do not consider these investments to be other-than-temporarily
impaired at September 30, 2010.
3. Inventories
Inventories consist of the following (in thousands):
|
|
September 30,
2010
|
|
December 31,
2009
|
|
Raw materials(1)
|
|
$
|
90,691
|
|
$
|
67,446
|
|
Work-in-process
|
|
19,720
|
|
18,335
|
|
Finished goods
|
|
10,556
|
|
13,919
|
|
|
|
$
|
120,967
|
|
$
|
99,700
|
|
(1)
Included in raw materials inventories is $29.6 million of exenatide, the active
pharmaceutical ingredient, or API, which we plan to use to manufacture BYDUREON. We expect that exenatide for BYDUREON could
also be used to manufacture BYETTA, subject to certain regulatory
requirements. As of December 31,
2009, we classified balances relating to exenatide in other current
assets. The Statements of Cash Flows
contains a non-cash adjustment of $29.6 million related to exenatide previously
recorded in other current assets that has been reflected as inventory.
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 $1.7 million and $0.3 million at September 30, 2010 and
December 31, 2009, respectively. Raw materials consist of bulk drug
material for BYETTA, SYMLIN and BYDUREON.
Work-in-process inventories consist of in-process BYETTA cartridges,
in-process SYMLIN cartridges and in-process SYMLIN vials. Finished goods inventories consist 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.
We expense costs relating to the purchase and
production of pre-approval inventories as research and development expense in
the period incurred until such time as we believe future commercialization is
probable and future economic benefit is expected to be realized.
Beginning in the second
quarter of 2010 we began capitalizing pre-approval inventory specific to
BYDUREON based upon managements judgment of probable future commercial use and
net realizable value. At June 30,
2010 we had capitalized non-API pre-approval inventories totaling $3.0 million.
As discussed in Note 1, Subsequent Events, on October 18, 2010 we
received a complete response letter from the FDA regarding the NDA for
BYDUREON. The complete response letter
has resulted in a delay in the timeline for expected approval and
commercialization of BYDUREON, which we continue to believe is probable. After considering the delay in the expected
timing of FDA approval and the expiration dates of capitalized pre-approval
inventories as of September 30, 2010, we concluded that the non-API
inventories on hand as of September 30, 2010 would expire before expected
approval and commercialization of BYDUREON and would therefore not be available
for commercial sale. Accordingly, as of September 30, 2010 we have
expensed costs relating to the purchase and production of non-API pre-approval
inventories as research and development expense, including the $3.0 million of
inventories capitalized at June 30, 2010, resulting in a charge of
approximately $1.5 million after consideration of Lilly cost-sharing. If our judgment regarding BYDUREONs probable
future commercialization and future economic benefit expected to be recognized
were to change, we expect that the API raw materials currently included in raw
materials inventory would be utilized to produce BYETTA, subject to certain
regulatory requirements, and therefore would not be at risk of impairment.
12
Table
of Contents
4.
Other Current Assets
Other current assets consist of the following (in
thousands):
|
|
September 30,
2010
|
|
December 31,
2009
|
|
Prepaid expenses
|
|
$
|
17,154
|
|
$
|
58,032
|
|
Receivable from collaborative partner
|
|
4,934
|
|
7,924
|
|
Interest and other receivables
|
|
5,062
|
|
5,816
|
|
Other current assets
|
|
9,009
|
|
6,709
|
|
|
|
$
|
36,159
|
|
$
|
78,481
|
|
5.
Other Current Liabilities
Other current liabilities consist of the following (in
thousands):
|
|
September 30,
2010
|
|
December 31,
2009
|
|
Accrued rebates
|
|
$
|
44,614
|
|
$
|
40,735
|
|
Accrued expenses
|
|
41,235
|
|
34,789
|
|
Other
current liabilities
|
|
7,402
|
|
19,639
|
|
|
|
$
|
93,251
|
|
$
|
95,163
|
|
6.
Collaborative
Agreements
We
have entered into various collaborative agreements which provide us with rights
to develop, produce and market products using certain know-how, technology and
patent rights maintained by our collaborative partners. Terms of the various
collaboration agreements may require us 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.
Amounts
due from or to our collaborative partners related to development activities are
generally reflected as either a reduction or increase of research and
development expenses, as appropriate, and amounts due from or to our
collaborative partners related to sharing of commercialization expenses are
generally reflected as either a reduction or increase of selling, general and
administrative expenses, as appropriate. 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 that we make 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.
For
collaborations with commercialized products, if we are the principal we record
revenue and the corresponding operating costs in their respective line items
within our statement of operations based on the nature of the shared expenses.
If we are not the principal, we record operating costs as a reduction of
revenue. The principal is 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, we and Lilly entered into a Collaboration Agreement for
the global development and commercialization of exenatide, or the Lilly
Agreement. The Lilly Agreement was amended in 2006 and in 2009.
The
Lilly Agreement includes BYETTA and any sustained release formulations of
exenatide such as BYDUREON, our once-weekly formulation of exenatide for the
proposed treatment of type 2 diabetes. Under the terms of the Lilly
Agreement, operating profits from products sold in the United States are shared
equally between us and Lilly. In 2005, we received FDA approval for the
twice-daily formulation of exenatide, which is marketed in the United States
under the trade name BYETTA. The Lilly 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 BYDUREON and BYETTA for sale outside of the United States and
100% of the costs related to commercialization of all exenatide products for
sale outside of the United States.
13
Table of Contents
At
signing, Lilly made initial non-refundable payments to us totaling
$80 million, of which $50 million was amortized to revenues under
collaborative agreements prior to 2004. The remaining $30 million was
amortized to revenues ratably over a seven-year period which ended in 2009 and
represented our estimate of the period of our performance of significant
development activities under the Lilly 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 BYDUREON, of which $75 million
have been paid through September 30, 2010. No additional development
milestones may be earned under the Lilly 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, of which $40 million have been paid
through September 30, 2010. Remaining milestones relate primarily to the
commercial launch of BYDUREON in selected territories throughout the world,
including $40 million for the launch in the United States.
In
December 2005, our wholly-owned subsidiary, Amylin Ohio LLC,
purchased an existing building and land to house our BYDUREON manufacturing
facility in Ohio and we are responsible for all costs and expenses associated
with the design, construction, validation and utilization of the facility. At September 30,
2010 we had capitalized $620.9 million associated with the construction
and validation of this facility. As
discussed below, through September 30, 2010 we have incurred $149.5
million in capital expenditures associated with a BYDUREON pen device, which
will be funded 60% by Lilly and 40% by us.
Through September 30, 2010, the total combined capital expenditures
for the manufacturing facility and pen device is $770.4 million.
In
October 2008, we and Lilly entered into an Exenatide Once Weekly Supply
Agreement, or the Supply Agreement, pursuant to which we will supply commercial
quantities of BYDUREON 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, we 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 us, which represents an amount to compensate us for the
estimated past and future cost of carrying Lillys share of the capital
investment made in our manufacturing facility in Ohio, that otherwise would
have been included in the cost of product produced at the facility and charged
to Lilly through our arrangements with them. In addition to this cash payment,
we will recover Lillys share of the capital investment in the facility through
an allocation of depreciation expense in cost of goods as discussed below.
Under the terms of the Supply Agreement, we have 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 we
have determined that a portion of the $125 million payment, amounting to
$43.3 million at September 30, 2010, represents a reimbursement to us
of Lillys share of interest costs capitalized to the facility that will be
credited to Lilly for its share of the amortization of capitalized interest
included in the cost of goods sold for BYDUREON as incurred. We have 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 BYDUREON product following its
commercial launch, if approved. The ultimate allocation of the
$125 million payment, which is classified as a long-term deferred credit
in the accompanying Consolidated Balance Sheets at September 30, 2010,
will be dependent upon the total amount of interest costs capitalized to the
facility. Under certain circumstances, including upon an impairment of the
BYDUREON 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 BYDUREON does not receive regulatory approval unless such
non-approval results in impairment as discussed above.
In
addition to the $125 million cash payment, we will recover Lillys share
of the initial capital investment in the facility, excluding the BYDUREON pen
device capital which is subject to a different cost-sharing arrangement
discussed below, through an allocation of depreciation to cost of goods sold in
accordance with the Lilly Agreement. Subsequent capital investments, including
those for the BYDUREON pen device, are subject to separate cost sharing terms,
as described below. We retain 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.
14
Table of Contents
In
May 2009, we and Lilly entered into a joint supply agreement for a
BYDUREON pen device. We and Lilly agreed to collaborate in the development,
manufacturing and marketing of BYDUREON in a dual chamber cartridge pen device.
We and Lilly 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. We and Lilly have agreed
that the estimated cost of the total capital investment will be allocated 60%
to Lilly and 40% to us, with Lilly funding its share as the capital
expenditures are incurred. Through September 30, 2010, we have incurred
$149.5 million in capital expenditures associated with the BYDUREON pen
device, which amount is included in construction in progress. We have billed
Lilly $81.6 million for these expenditures, of which $80.7 million has
been received by us. 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
BYDUREON pen device as incurred.
In
October 2008, we and Lilly also entered into a loan agreement pursuant to
which Lilly made available to us a $165 million unsecured line of credit
that we can draw upon from time to time until 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. As
of September 30, 2010 we have not drawn upon this credit facility.
The
following is a summary of activity related to our collaboration with Lilly and
the location in the consolidated statements of operations (in thousands):
|
|
Classification within
|
|
Three Months Ended
|
|
Nine months Ended
|
|
|
|
Consolidated Statements of
|
|
September 30,
|
|
September 30,
|
|
Activity
|
|
Operations
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
Amortization of up-front
payments
|
|
Revenues under collaborative agreements
|
|
$
|
|
|
$
|
943
|
|
$
|
|
|
$
|
3,086
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin cost-sharing
|
|
Collaborative profit sharing
|
|
$
|
61,249
|
|
$
|
78,265
|
|
$
|
194,056
|
|
$
|
227,481
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Development expense
cost-sharing payments received from Lilly for BYETTA and BYDUREON development
expense
|
|
Reduction of research and development expense
|
|
$
|
22,523
|
|
$
|
17,024
|
|
$
|
51,152
|
|
$
|
40,562
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost-sharing payments due
from/(to) Lilly for shared sales force expenses, marketing expenses and other
commercial or operational support
|
|
Reduction of / (increase to) selling, general and administrative
expense
|
|
$
|
4,061
|
|
$
|
(105
|
)
|
$
|
21,873
|
|
$
|
(5,783
|
)
|
Collaboration with Alkermes, Inc.
In
May 2000, we signed an agreement with Alkermes, Inc., or Alkermes, a
company specializing in the development of products based on proprietary drug
delivery technologies, for the development, manufacture and commercialization
of BYDUREON, or the Alkermes Agreement.
Under
the terms of the Alkermes Agreement, Alkermes has granted us an exclusive,
worldwide license to its Medisorb
®
technology
for the development and commercialization of injectable sustained release
formulations of exendins, such as exenatide, and other related compounds that
we may develop. In exchange, Alkermes receives funding for research and
development and may earn future milestone payments upon achieving specified
development and commercialization goals. Alkermes will also receive royalties
on any future product sales.
In
October 2005, we and Alkermes Controlled Therapeutics II, a wholly owned
subsidiary of Alkermes entered into an Amendment to Development and License
Agreement, or the Amendment, which amends the Alkermes Agreement. Under the
terms of the Amendment, we will be responsible for manufacturing for commercial
sale the once weekly dosing formulation of BYDUREON, if approved. The royalty
to be paid from us to Alkermes for commercial sales of BYDUREON was adjusted to
reflect the new manufacturing arrangement.
15
Table of Contents
Collaboration with Takeda Pharmaceutical
Company, Ltd
On
October 30, 2009, we and Takeda Pharmaceutical Company Limited, or Takeda,
entered into a License, Development and Commercialization Agreement, or the
Takeda Development Agreement, pursuant to which the companies will co-develop
and commercialize pharmaceutical products containing compounds specified in the
Takeda Development Agreement for the treatment of human indications including,
but not limited to, (i) weight management and/or obesity,
(ii) glycemic control and (iii) cardiovascular disease. We received a
one-time, nonrefundable cash payment of $75 million from Takeda in
connection with the execution of the Takeda Development Agreement. We recorded
the up-front payment as deferred revenue in our consolidated balance sheets and
will recognize the revenue over the estimated development period of ten years.
As of September 30, 2010 deferred revenue associated with the Takeda
collaboration equaled $68.1 million, of which $60.6 million is classified
as long-term.
The
following is a summary of activity related to the Takeda Development Agreement
and the location in the consolidated statements of operations (in thousands):
|
|
Classification within
|
|
Three Months Ended
|
|
Nine months Ended
|
|
|
|
Consolidated Statements of
|
|
September 30,
|
|
September 30,
|
|
Activity
|
|
Operations
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
Amortization of up-front
payments
|
|
Revenues under collaborative agreements
|
|
$
|
1,875
|
|
$
|
|
|
$
|
5,625
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost-sharing payments due
from Takeda for shared development expenses
|
|
Reduction of research and development expense
|
|
$
|
3,992
|
|
$
|
|
|
$
|
10,175
|
|
$
|
|
|
7. Restructuring
In May 2009, we
announced a restructuring of our sales force to merge our 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. We 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. No additional restructuring
charges were recorded during the quarter ended September 30, 2009. The following table summarizes the components
of the restructuring charges (in thousands):
|
|
Nine months ended September 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
|
|
During the nine months ended
September 30, 2010 we reduced our workforce by approximately 60 employees
and recorded restructuring charges of $9.5 million consisting of employee
separation costs, facilities-related expenses and asset impairments.
The
following table summarizes the components of the restructuring charges for the
three and nine months ended September 30, 2010:
|
|
Three months ended September 30, 2010
|
|
Nine months ended September 30, 2010
|
|
|
|
Accruals
|
|
Non-cash
items
|
|
Total
|
|
Accruals
|
|
Non-cash
items
|
|
Total
|
|
Facilities related charges
|
|
$
|
5,195
|
|
$
|
(1,174
|
)
|
$
|
4,021
|
|
$
|
5,195
|
|
$
|
(1,174
|
)
|
$
|
4,021
|
|
Employee separation costs
|
|
|
|
|
|
|
|
3,424
|
|
|
|
3,424
|
|
Asset impairments
|
|
|
|
1,845
|
|
1,845
|
|
|
|
1,845
|
|
1,845
|
|
Other restructuring charges
|
|
|
|
162
|
|
162
|
|
|
|
162
|
|
162
|
|
|
|
$
|
5,195
|
|
$
|
833
|
|
$
|
6,028
|
|
$
|
8,619
|
|
$
|
833
|
|
$
|
9,452
|
|
The facilities-related
charges recorded during the three months ended September 30, 2010 are
comprised of $2.3 million related to a reassessment of current market
conditions pertaining to our existing lease loss liability and $1.7 million
related to estimated losses associated with certain facility leases in our San
Diego campus which we no longer use in our operations and which we ceased using
in the quarter ended September 30, 2010, net of a non-cash credit related
to the reversal of deferred rent associated with the leases. We are continuing
to assess our facility requirements for our San Diego campus as a result of
this and our prior restructurings and may record additional facilities-related
charges over the next several quarters.
16
Table of Contents
The
following table sets forth activity in the restructuring liability for recent
restructuring activities for the nine months ended September 30, 2010 (in
thousands):
|
|
Employee
separation costs
|
|
Facilities
related
charges
|
|
Other
restructuring
charges
|
|
Total
|
|
Balance at
December 31, 2009
|
|
$
|
|
|
$
|
31,980
|
|
$
|
|
|
$
|
31,980
|
|
Accruals
|
|
3,424
|
|
5,195
|
|
833
|
|
9,452
|
|
Payments
|
|
(2,909
|
)
|
(8,531
|
)
|
(833
|
)
|
(12,273
|
)
|
Accretion of sub-lease
expense
|
|
|
|
1,924
|
|
|
|
1,924
|
|
Balance at
September 30, 2010
|
|
$
|
515
|
|
$
|
30,568
|
|
$
|
|
|
$
|
31,083
|
|
The small reduction in the
restructuring liability during the nine months ended September 30, 2010
consists primarily of ongoing rental payments for leases associated with
vacated facilities, offset by an accrual for facilities-related expenses, an
accrual for employee separation costs and the accretion of sub-lease obligation
interest expense.
8.
Comprehensive
Loss
Comprehensive
loss includes net loss and unrealized gains and losses on investments. We
disclose the accumulated balance of other comprehensive loss as a separate
component of stockholders equity. For the three and nine months ended September 30,
2010 and 2009, comprehensive loss consisted of (in thousands):
|
|
Three months ended
September 30,
|
|
Nine months
ended September 30,
|
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
Net loss
|
|
$
|
(50,732
|
)
|
$
|
(26,659
|
)
|
$
|
(133,131
|
)
|
$
|
(135,985
|
)
|
Other comprehensive loss:
|
|
|
|
|
|
|
|
|
|
Net unrealized gain on investments
|
|
754
|
|
2,203
|
|
1,170
|
|
9,033
|
|
Comprehensive loss
|
|
$
|
(49,978
|
)
|
$
|
(24,456
|
)
|
$
|
(131,961
|
)
|
$
|
(126,952
|
)
|
9.
Convertible
Senior Notes
The
following table summarizes the principal amount of the liability component, the
unamortized discount and the net carrying amount of our convertible senior
notes (in thousands):
|
|
September 30,
2010
|
|
December 31,
2009
|
|
2007 Notes
Due
June 15, 2014
|
|
|
|
|
|
Principal amount
|
|
$
|
575,000
|
|
$
|
575,000
|
|
Unamortized debt discount
|
|
(112,753
|
)
|
(131,238
|
)
|
Net carrying amount
|
|
462,247
|
|
443,762
|
|
|
|
|
|
|
|
2004 Notes
Due
April 15, 2011
|
|
|
|
|
|
Principal amount
|
|
200,000
|
|
200,000
|
|
|
|
|
|
|
|
Total convertible senior notes, net
|
|
662,247
|
|
643,762
|
|
Less current portion
|
|
(200,000
|
)
|
|
|
Non-current portion
|
|
$
|
462,247
|
|
$
|
643,762
|
|
In June 2007, we 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. We 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, we 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 our common stock unless we elect net-share settlement. If we
elect net-share settlement, we 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 our 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 our 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 our 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
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 us
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. We 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. 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 $518.9 million and
$453.0 million at September 30, 2010 and December 31, 2009,
respectively. Since we have the option
to elect net-share settlement upon conversion of the 2007 Notes, we account for
the 2007 Notes in accordance with the authoritative guidance for accounting for
convertible debt instruments that may be settled in cash upon conversion.
The
carrying amount of the equity component of the 2007 Notes was $180.3 million at
September 30, 2010 and December 31, 2009. At September 30, 2010, the unamortized
balance of the debt discount will be amortized over the remaining life of the
2007 Notes, or approximately four years.
The effective interest rate on the net carrying value of the 2007 Notes
was 9.3% for both the three and nine month periods ended September 30,
2010 and 2009.
In
April 2004, we issued the 2004 Notes, which have an aggregate principal
amount of $200 million, and are due April 15, 2011, in a private
placement. The 2004 Notes are senior unsecured 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. We may not redeem the 2004 Notes prior to
maturity.
Upon
a change in control, the holders of the 2004 Notes may elect to require us to
repurchase the 2004 Notes. We 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 our common stock for the five trading day period ending
on the third day before the purchase date.
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 $200.0
million and $192.1 million at September 30, 2010 and
December 31, 2009, respectively.
The
following table summarizes the interest expense we capitalized associated with
construction in progress for the three and nine months ended September 30,
2010 and 2009 (in thousands):
|
|
Three months ended
September 30,
|
|
Nine months
ended September 30,
|
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
Coupon interest expense
|
|
$
|
3,007
|
|
$
|
4,192
|
|
$
|
9,448
|
|
$
|
11,701
|
|
Non-cash interest from debt discount
|
|
3,768
|
|
4,764
|
|
11,626
|
|
13,118
|
|
Total capitalized interest
|
|
$
|
6,775
|
|
$
|
8,956
|
|
$
|
21,074
|
|
$
|
24,819
|
|
18
Table of Contents
10.
Note
Payable
In
December 2007, we
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 have been 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.
We had an outstanding balance of $70.3 million and $93.8 million under
the Term Loan at September 30, 2010 and December 31, 2009,
respectively, and had issued $10.5 million and $8.9 million of stand-by letters
of credit under the revolving credit facility primarily in connection with office
leases, at September 30, 2010 and December 31, 2009, respectively.
Our
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 our (including 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 our election of either one, two, three or nine
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. We have elected to use the three month LIBOR,
which was 0.29% and 0.25% at September 30, 2010 and December 31,
2009, respectively. Interest periods on
the revolving credit facility may be either one, two, three or nine 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 us.
Both loans have a final maturity date of December 21, 2010 and are
therefore classified as current liabilities.
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 our
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%.
In
connection with the execution of the Term Loan, we 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. We
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 $0.7 million and $2.8
million at September 30, 2010 and December 31, 2009,
respectively. For the three months ended
September 30, 2010 and 2009, we recognized a gain on the interest rate
swap of $0.6 million and $0.3 million, respectively. For the nine months ended September 30,
2010 and 2009, we recognized a gain on the interest rate swap of $2.2 million
and $1.4 million, respectively.
Recognized gains and losses on the interest rate swap are included in
interest and other expense.
11.
Stockholders
Equity
In
March 2010, we contributed approximately 0.9 million newly issued shares
of our common stock, valued at $18.01 per share, to our ESOP for amounts earned
by participants during the year ended December 31, 2009.
In
March 2010, we contributed approximately 0.2 million newly issued shares
of its common stock, valued at $17.83 per share, to our 401(k) plan for
amounts earned by participants during the year ended December 31, 2009.
12.
Commitments and Contingencies
Other
Commitments
We
have 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, we have not recorded a liability on the balance sheet for any such
contingencies.
19
Table of Contents
As
of September 30, 2010, if all such milestones are successfully achieved,
the potential future milestone and other contingency payments we could be
required to make under certain contractual agreements are approximately $177.0
million in aggregate, of which $7.5 million could be paid within the next 12
months.
We have committed to make future minimum payments to third parties for
certain inventories in the normal course of business. The minimum purchase
commitments total approximately $7.5 million as of September 30, 2010 and
relate to both SYMLIN and BYDUREON. If the FDA approves BYDUREON, upon such
approval we will have additional minimum inventory purchases for BYDUREON of
$26.1 million.
As of September 30, 2010, commitments to complete construction of
our BYDUREON manufacturing facility in Ohio are $1.5 million and commitments
associated with capital investments on the BYDUREON pen device are $34.4
million.
13. Interest and other expense, net
For
the three and nine months ended September 30, 2010 and 2009, other income
(expense), net is comprised of the following (in thousands):
|
|
Three months
ended
September 30,
|
|
Nine months
ended
September 30,
|
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
Interest and other income
|
|
$
|
833
|
|
$
|
1,413
|
|
$
|
2,017
|
|
$
|
6,513
|
|
Interest and other expense
|
|
(6,337
|
)
|
(5,670
|
)
|
(18,516
|
)
|
(15,020
|
)
|
Loss on impairment of investments
|
|
(198
|
)
|
|
|
(198
|
)
|
(1,377
|
)
|
Total interest and other expense, net
|
|
$
|
(5,702
|
)
|
$
|
(4,257
|
)
|
$
|
(16,697
|
)
|
$
|
(9,884
|
)
|
14. Litigation
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. As of September 30,
2010 we and Lilly were involved in 95 separate product liability cases
involving approximately 414 plaintiffs in various courts in the United
States. Forty-three plaintiffs who
previously filed cases have subsequently dismissed their cases or claims without
prejudice. 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 some cases, wrongful death. Most of the cases are pending in California
state court, where the Judicial Council has 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. These matters
are at an early stage and, as a result, we cannot reasonably estimate potential
losses, if any, at this time. While we
cannot reasonably predict the outcome of any lawsuit, claim or proceeding, we
and Lilly intend to vigorously defend these matters. However, if we are unsuccessful in our
defense, these matters could result in a material adverse impact to our
financial position and results of operations.
20
Table
of Contents
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
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 are marketing two
first-in-class medicines to treat diabetes, BYETTA and SYMLIN and we are
currently seeking approval for BYDUREON, an investigational sustained-release
medication for type 2 diabetes that is administered once a week.
Highlights for the nine months ended September 30, 2010 and recent
activities include:
·
We received a
complete response letter regarding the BYDUREON New Drug Application, or NDA,
from the FDA, and in May 2010, the FDA classified the complete response as
a Class 2 resubmission and assigned a new Prescription Drug User Fee Act,
or PDUFA, action date of October 22, 2010. On October 18, 2010 we received
a complete response letter from the FDA in which the FDA requested a thorough
QT (tQT) study with exposures of exenatide higher than typical therapeutic
levels of BYDUREON. A tQT study is
intended to determine whether a drug has an adverse pharmacologic effect on
cardiac repolarization, as detected by QT/QTc prolongation. The tQT protocol will be agreed to by the FDA
prior to study initiation. Additionally,
the FDA has requested the results of the DURATION-5 study, a head-to head study
comparing BYDUREON to BYETTA (exenatide) injection, to evaluate the efficacy, and
the labeling of the safety and effectiveness, of the commercial formulation of
BYDUREON. Amylins goal is to submit a
reply to the complete response letter by the end of 2011, pending discussion
with the FDA. Based on the requirements for additional data, this will likely
be considered a Class 2 resubmission requiring a six-month review;
·
Our partner,
Lilly, received approval of BYETTA in Japan for the treatment of type 2
diabetes mellitus in patients who have not achieved adequate glycemic control
while taking certain oral anti-diabetes therapies in addition to diet and
exercise;
·
Our partner,
Lilly, submitted a marketing authorization application to the European
Medicines Agency for BYDUREON;
·
We initiated
our DURATION-6 clinical study, a head-to-head comparison of BYDUREON to liraglutide
(Victoza
®
), a
glucagon-like peptide-1 (GLP-1) analog, with results anticipated in the first
half of 2011;
·
We announced
results from DURATION-4, a head-to-head study that compared BYDUREON
monotherapy to Januvia® (sitagliptin), Actos® (pioglitazone HCI) or metformin.
Results demonstrated that BYDUREON efficacy and tolerability profile extended
to monotherapy treatment;
·
We completed
enrollment in a phase 2 study of a monthly-dosed suspension formulation of
exenatide during the third quarter and expect to see data from this study in
the first half of 2011;
·
We initiated
our EXSCEL (Exenatide Study of Cardiovascular Event Lowering) cardiovascular
outcomes study, with results expected in 2016; and
·
We and our
partner, Takeda, announced the combination treatment of pramlintide/metreleptin
for obesity will advance toward Phase 3 development.
21
Table of Contents
BYDUREON
We are working with Lilly and Alkermes, Inc., or Alkermes, to
develop BYDUREON, an investigational sustained-release medication for type 2
diabetes that is administered once a week.
In March 2010, we received a complete response letter from the FDA
regarding the NDA we submitted for BYDUREON in May 2009. The key components of the complete response
letter that required a response related primarily to the finalization of the
product labeling with an accompanying Risk Evaluation and Mitigation Strategy,
or REMS, and clarification of proprietary manufacturing processes. We filed our response to the FDAs complete
response letter in April 2010 and in May 2010 the FDA notified us
that they have classified the BYDUREON complete response as a Class 2
resubmission and assigned a new PDUFA action date of October 22, 2010.
On October 18, 2010 we received a second complete response letter from
the FDA in which the FDA requested a thorough QT (tQT) study designed to
evaluate exposures of exenatide higher than typical therapeutic levels of
BYDUREON. In addition, the FDA has now
requested the results of the DURATION-5 study to ensure appropriate labeling
regarding the safety and effectiveness of the commercial formulation of BYDUREON. Subject to further discussions with the
agency to gain agreement on the design of the BYDUREON tQT study, our goal is
to submit a reply to the complete response letter by the end of 2011. Based on
the requirements for additional data, this will likely be considered a Class 2
resubmission requiring a six-month review.
Throughout the remainder of 2010 and into 2011, we will work with the
FDA to gain agreement on the design of the BYDUREON tQT study requested in the
October 18, 2010 complete response letter and will continue to focus on building
a superior profile for BYDUREON by continuing our DURATION series of clinical
studies designed to compare BYDUREON against competing products. In June 2010 we announced results from
our DURATION-4 study comparing BYDUREON with metformin, sitagliptin or
pioglitazone, three oral type 2 diabetes medications commonly prescribed early
in the treatment of type 2 diabetes. The
results of DURATION-4 along with the four previously completed DURATION studies
have shown consistent clinically meaningful efficacy of BYDUREON. We have
initiated DURATION-6 comparing BYDUREON with liraglutide (Victoza
®
). In addition, we initiated
EXSCEL, a cardiovascular outcomes study, to demonstrate BYDUREONs effect on
cardiovascular endpoints and expect this study to complete in 2016. We plan to
continue making strategic investments in the exenatide franchise including the
development of a BYDUREON pen delivery system and an exenatide suspension
formulation.
BYETTA and SYMLIN
BYETTA is the first approved
medicine in a class of compounds called GLP-1 receptor agonists. In
October 2009, the FDA approved an expanded indication to include BYETTA as
a first-line, stand-alone medication (monotherapy) along with diet and exercise
to improve glycemic control in adults with type 2 diabetes and changes to
the BYETTA label to incorporate updated safety language. Previously BYETTA was
approved as an adjunctive therapy to improve glycemic control in patients with
type 2 diabetes who have not achieved adequate glycemic control by using metformin,
a sulfonylurea and/or a thiazolidinediene (TZD), three common oral therapies
for type 2 diabetes. We believe the expanded monotherapy indication and
label update present new opportunities for the BYETTA brand. Net product sales
of BYETTA were $132.4 million and $171.1 million for the three months ended
September 30, 2010 and 2009, respectively, and $422.9 million and $503.9
million for the nine months ended September 30, 2010 and 2009, respectively.
In June 2010 we
announced results from the first double-blind, placebo-controlled clinical
study to evaluate BYETTA added to insulin glargine. Data from this study showed
that the combination of BYETTA and insulin glargine helped patients with type 2
diabetes achieve glucose targets without weight gain or increasing their risk
of hypoglycemia. These data suggest that BYETTA may provide a complementary
addition to basal insulin for these hard-to-treat type 2 diabetes patients and
will form the basis of a supplemental NDA to the FDA that we plan to file by
the end of this year.
We have an agreement with Lilly for the global development and
commercialization of exenatide. This agreement includes BYETTA and other
formulations of exenatide such as BYDUREON. Under the terms of the agreement,
operating profits from products sold in the United States are shared equally
between Lilly and us, and Lilly will pay us royalties for product sales outside
of the United States. Lilly has primary responsibility for developing and
commercializing BYETTA outside of the United States, including any sustained
release formulations of exenatide such as BYDUREON. As of September 30, 2010,
BYETTA was commercially launched in 68 countries worldwide, including the
United States.
SYMLIN is the first and only
approved medicine in a class of compounds called amylinomimetics. It is
approved as an adjunctive therapy to improve glycemic control in patients with
either type 2 or type 1 diabetes who are treated with mealtime
insulin but who have not achieved adequate glycemic control. We own 100% of the
global rights to SYMLIN and are exploring partnering SYMLIN outside of the
United States. Net product sales of SYMLIN were $21.6 million and $21.8 million
for the three months ended September 30, 2010 and 2009, respectively, and $65.9
million and $65.8 million for the nine months ended September 30, 2010 and
2009, respectively.
22
Table of Contents
We have a field force of approximately 395 people dedicated to
marketing BYETTA and SYMLIN in the United States. Our field force includes our
specialty sales force and our managed care organization. Lilly co-promotes BYETTA
in the United States. Our specialty sales force brings a specialty approach to
endocrinologists and diabetes-focused primary care physicians and is focused on
targeting those doctors that write the majority of prescriptions for branded
diabetes therapies.
Obesity and related indications
Our long-term growth strategy is focused on making prudent investment
decisions based on strong clinical data to advance our obesity program. In
October 2009, we entered into a worldwide exclusive license, development
and commercialization agreement with Takeda Pharmaceutical Company Limited, or
Takeda, to co-develop and commercialize pharmaceutical products for the
treatment of obesity and related indications. The agreement includes products
to be developed from our product pipeline, including pramlintide/metreleptin,
which is a combination regimen currently in phase 2 development for the
treatment of obesity. In February 2010 we announced the results of a
52-week phase 2 study of this combination regimen and, based on those
results, we and Takeda plan to advance pramlintide/metreleptin toward
phase 3 development.
Later this year we plan to submit the clinical and non-clinical
sections of a rolling biologics license application, or BLA, for metreleptin as
a treatment of severe lipodystrophy, a very rare metabolic condition, followed by
the chemistry, manufacturing and controls section of the BLA. Because severe
lipodystrophy affects a very small number of patients, metreleptin as a
treatment for severe lipodystrophy has received orphan drug designation by the
FDA.
Research and Development
We maintain an active discovery research program focused on novel
peptide and protein therapeutics. We have also entered into a number of
strategic alliances and business initiatives that support our expansion into
new therapeutic areas.
Overview Summary
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 exenatide
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 September 30, 2010, our accumulated
deficit was approximately $2.1 billion.
At September 30, 2010, we had $537.7 million in cash, cash equivalents
and short-term investments. Additionally
we have availability of $165 million pursuant a loan agreement with Lilly.
Although we may not generate positive operating cash flows for the next few
years, we have demonstrated strong financial discipline over the last few years
and we remain committed to continuing to manage our expenses in-line with
expected revenues. Our goal is to continue to aggressively manage our expenses
in order to maximize our available cash to maximize revenue for BYETTA and
SYMLIN and support the approval and launch of BYDUREON. Additionally, we expect
that our use of cash for capital expenditures will continue to be significantly
lower than 2009 levels. 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 ongoing basis, our actual results may
differ significantly from our estimates.
There
were no significant changes in critical accounting policies from those at
December 31, 2009, however the information provided under the heading Inventories
and Related Reserves is in addition to, and should be read in conjunction
with, the inventories and related reserves accounting policy included in
Part II, Item 7 of our Annual report on Form 10-K for the year
ended December 31, 2009. The
financial information as of September 30, 2010 should be read in conjunction
with the financial statements for the year ended December 31, 2009,
contained in our annual report on Form 10-K filed on February 26,
2010.
23
Table of Contents
Inventories and Related Reserves
We expense costs relating to
the purchase and production of pre-approval inventories as research and development
expense in the period incurred until such time as we believe future
commercialization is probable and future economic benefit is expected to be
recognized. With respect to
capitalization of unapproved product candidates, we produce inventory in preparation
for the launch of the product and in amounts sufficient to support forecasted
initial market demand. Typically, capitalization of such inventory does not
begin until the product candidate is considered to have a high probability of
regulatory approval. This generally will occur only after we have submitted an
NDA to the FDA, and only if our assessment of the status of the regulatory
review has led us to conclude there is a high probability of receiving
regulatory approval. If we are aware of any specific risks or
contingencies that are likely to impact the regulatory approval process or if
there are any specific issues identified during our research and development
process relating to safety, efficacy and manufacturing of the product
candidate, we would not capitalize the related inventory.
We manage the levels of
inventory at each stage of the manufacturing process to optimize the shelf life
of the inventory and avoid product expiration issues relative to anticipated
market demand following launch. On a quarterly basis, we evaluate all
inventory, including inventory capitalized for which regulatory approval has
not yet been obtained, to determine if any lower of cost or market adjustment
is required. As it relates to pre-approval inventory, we consider several
factors including expected timing of FDA approval, projected sales volume,
expiration dates of the inventory and estimated selling price. Projected
sales volume is based on several factors including market research, sales of
similar products and competition in the market. Estimated sales price is
based on the price of existing products sold for the same indications and
expected market demand.
Once we have capitalized
inventory for a product candidate that is not yet approved, we will monitor, on
a quarterly basis, the status of such candidate within the regulatory approval
process. We could be required to expense previously capitalized costs
related to pre-approval inventory upon a change in our judgment of future
commercialization and future economic benefit expected to be recognized, due to
a denial or delay of approval by the FDA, a delay in the timeline for
commercialization or other potential factors.
For
a further 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 26,
2010.
Results of Operations
Comparison of Three and Nine Months Ended September 30, 2010
to Three and Nine Months Ended September 30, 2009
Net Product Sales
Net
product sales consists 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
September 30,
|
|
Increase/
|
|
Nine months ended
September 30,
|
|
Increase/
|
|
|
|
2010
|
|
2009
|
|
(Decrease)
|
|
2010
|
|
2009
|
|
(Decrease)
|
|
BYETTA
|
|
$
|
132.4
|
|
$
|
171.1
|
|
$
|
(38.7
|
)
|
$
|
422.9
|
|
$
|
503.9
|
|
$
|
(81.0
|
)
|
SYMLIN
|
|
21.6
|
|
21.8
|
|
(0.2
|
)
|
65.9
|
|
65.8
|
|
0.1
|
|
|
|
154.0
|
|
192.9
|
|
$
|
(38.9
|
)
|
$
|
488.8
|
|
$
|
569.7
|
|
$
|
(80.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The decrease in net product
sales for BYETTA for both the three and nine month periods ended September 30,
2010 compared to the same periods of 2009 primarily reflects reduced
prescription demand, partially offset by higher prices.
The slight decrease in net
product sales for SYMLIN in the three month period ended September 30, 2010,
and the slight increase in net product sales for SYMLIN in the nine month
period ended September 30, 2010 primarily reflect reduced prescription demand
offset by higher net prices during the periods compared to the same periods in
2009.
Sales of our products in
future periods may be impacted by numerous factors, including current and
potential competition, the potential approval of additional products including
BYDUREON, regulatory matters, legislative changes, economic factors and other
environmental factors. In
March 2010, President Obama signed into law the Patient Protection and
Affordable Care Act (PPACA) as amended by the Health Care and Education
Reconciliation Act. There are a number
of provisions in the new legislation that will impact the pharmaceutical
industry through increased discounts and an expansion of government funded
insurance programs. The provisions
become effective over time, however certain provisions became effective in the
first quarter of 2010. These provisions
are related to increased Medicaid discounts, an increase in the population of
patients eligible for Medicaid discounts and the expansion of the
340(B) Public Health Services drug pricing program, which provides
outpatient drugs at reduced rates, to include additional hospitals, clinics and
healthcare centers. These new provisions
did not have a material impact on our results for the three or nine months
ended September 30, 2010. We are
currently evaluating the new legislation to determine its impact on our
business and future financial results.
We expect the financial impact of the new legislation to grow over time.
24
Table of Contents
Revenues Under Collaborative
Agreements
Revenues
under collaborative agreements for the three months ended September 30, 2010
increased to $2.1
million from $1.0 million for the
same period in 2009. Revenues under
collaborative agreements for the nine months ended September 30, 2010 were $5.8
million, compared to $3.2 million for the same period in
2009. Revenues under collaborative
agreements consist of amortization of up-front payments received from our
collaborative partners and milestone payments from our collaborative partners. For the three and nine months ended September
30, 2010, the revenues consist largely of amortization of the up-front payment
we received from Takeda in late 2009 while the revenues under collaborative
agreements for the same periods in 2009 consist of amortization of the up-front
payment received in connection with our Lilly collaboration, for which
amortization ended in 2009.
For
the year ended December 31, 2010 we expect to recognize $7.5 million of
collaborative revenue in connection with the ratable amortization of the
up-front payment we received from Takeda.
Beginning in 2011, we expect to begin earning royalties on BYETTA
product sales outside of the United States, Additionally, if BYDUREON is
approved for sale outside of the United States, we expect to earn royalties on
BYDUREON product sales outside of the United States following such approval.
Costs and Expenses
The
following table provides information regarding our costs and expenses (in
millions):
|
|
Three months ended
September 30,
|
|
Increase/
|
|
Nine months ended
September 30,
|
|
Increase/
|
|
|
|
2010
|
|
2009
|
|
(Decrease)
|
|
2010
|
|
2009
|
|
(Decrease)
|
|
Cost of Goods Sold
|
|
$
|
12.7
|
|
$
|
22.6
|
|
$
|
(9.9
|
)
|
$
|
47.6
|
|
$
|
65.5
|
|
$
|
(17.9
|
)
|
Gross margin %
|
|
92
|
%
|
88
|
%
|
|
|
90
|
%
|
88
|
%
|
|
|
Selling, general and administrative
|
|
$
|
72.7
|
|
$
|
80.1
|
|
$
|
(7.4
|
)
|
$
|
223.6
|
|
$
|
259.7
|
|
$
|
(36.1
|
)
|
Research and development
|
|
$
|
48.4
|
|
$
|
35.3
|
|
$
|
13.1
|
|
$
|
136.3
|
|
$
|
134.9
|
|
$
|
(1.4
|
)
|
Collaborative profit sharing
|
|
$
|
61.2
|
|
$
|
78.3
|
|
$
|
(17.1
|
)
|
$
|
194.1
|
|
$
|
227.5
|
|
$
|
(33.4
|
)
|
Restructuring
|
|
$
|
6.0
|
|
$
|
|
|
$
|
6.0
|
|
$
|
9.5
|
|
$
|
11.4
|
|
$
|
(1.9
|
)
|
Cost of Goods Sold
Cost
of goods sold is comprised primarily of manufacturing costs associated with
BYETTA and SYMLIN sales during the period.
The improvement in gross margin for both the three and nine months ended
September 30, 2010, compared to the same period in 2009, primarily reflects
higher net sales prices and lower unit costs driven by supplier mix, production
volumes and operating efficiencies achieved during the current year. Quarterly fluctuations in gross margins may
be influenced by product mix, pricing, the level of sales allowances and the
timing and volumes of production.
Selling, General and Administrative
Expenses
The decrease in selling,
general and administrative expenses for the three months ended September 30,
2010 compared to the same period in 2009 primarily reflects lower business
infrastructure costs, the impact of a second quarter 2010 workforce reduction
and a reduction in incentive compensation costs, partially offset by pre-launch
marketing expenses for BYDUREON. The decrease in selling, general and
administrative expenses for the nine months ended September 30, 2010 compared
to the same period in 2009 primarily reflects efficiencies driven by our
reduced cost structure following our 2009 sales force restructuring, reductions
in incentive compensation costs and the absence of costs associated with the
2009 proxy contest.
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, amounts due to or from Lilly related
to sharing of these expenses are reflected as an increase to or a reduction of
selling, general and administrative expenses, as appropriate.
25
Table of Contents
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. Reimbursed research and
development costs under collaborative arrangements are recorded as a reduction
to research and development expenses and are recognized in the period in which
the related costs are incurred. 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
BYDUREON. In obesity, we are developing
a combination regimen for the potential treatment of obesity As part of this
program, we intend to conduct additional 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
September 30,
|
|
Increase/
|
|
Nine months ended
September 30,
|
|
Increase/
|
|
|
|
2010
|
|
2009(1)
|
|
(Decrease)
|
|
2010
|
|
2009(1)
|
|
(Decrease)
|
|
Diabetes (2)
|
|
$
|
29.9
|
|
$
|
13.4
|
|
$
|
16.5
|
|
$
|
77.4
|
|
$
|
61.4
|
|
$
|
16.0
|
|
Obesity
|
|
4.6
|
|
6.0
|
|
(1.4
|
)
|
10.6
|
|
22.3
|
|
(11.7
|
)
|
Research and early-stage programs
|
|
3.8
|
|
5.7
|
|
(1.9
|
)
|
17.4
|
|
17.9
|
|
(0.5
|
)
|
Indirect costs
|
|
10.1
|
|
10.2
|
|
(0.1
|
)
|
30.9
|
|
33.3
|
|
(2.4
|
)
|
Total research and development expenses
|
|
$
|
48.4
|
|
$
|
35.3
|
|
$
|
13.1
|
|
$
|
136.3
|
|
$
|
134.9
|
|
$
|
1.4
|
|
(1) Research and development
expenses by major project have been revised to conform to the current
presentation with regard to our change in method of accounting for reimbursed
research and development costs under collaborative arrangements (see
Note 1, Summary of Significant Accounting Policies in the notes to the
consolidated financial statements).
(2)
Research and development expenses for our diabetes programs consist primarily
of costs associated with BYETTA and BYDUREON which are shared by Lilly pursuant
to our collaboration agreement.
Cost-sharing payments received by Lilly are recorded as a reduction to
research and development costs.
Cost-sharing payments from Lilly for BYETTA and BYDUREON development
expenses were $22.5 million and $17.0 million for the three months ended
September 30, 2010 and 2009, respectively, and $51.2 million and $40.6 million
for the nine months ended September 30, 2010 and 2009, respectively.
The
$13.1 million increase in research and development expenses for the three
months ended September 30, 2010 as compared to the same period in 2009
primarily reflects increased expenses of $16.5 million for our diabetes
development programs offset by decreased expenses in our obesity and research
and early-stage programs. The increased
expenses in our diabetes development programs is due primarily to expensed
pre-approval inventory for BYDUREON due to the previously discussed FDA
complete response letter regarding the NDA for BYDUREON, costs associated with
our EXSCEL study, a cardiovascular outcomes study of BYDUREONs effect on
cardiovascular endpoints, and costs associated with development activities for
the exenatide suspension formulation.
The decrease in expenses for our obesity programs is due to cost-sharing
of development expenses with Takeda. The
decrease in research and early-stage program expense is due to improvements in
general operating efficiencies.
The
$1.4 million increase in research and development expenses for the nine months
ended September 30, 2010 as compared to the same period in 2009 primarily
reflects increased expenses of $16.0 million for diabetes development programs
offset by decreased expenses of $11.7 million for our obesity development
programs and decreased indirect costs of $2.4 million. The increased expenses in our diabetes
development programs is due to pre-approval inventory expenses for BYDUREON,
costs associated with our EXSCEL study and costs associated with development
activities for the exenatide suspension formulation. As discussed in the previous paragraph,
pre-approval inventory expenses increased as a result of the FDA complete
response letter regarding the NDA for BYDUREON. The decrease in expenses in our
obesity programs reflects reduced clinical trial expense due to the completion
in 2009 of our dose-ranging clinical trial of pramlintide/metreleptin
combination therapy development program, the termination of the davalintide
development program and cost-sharing of development expenses by Takeda. The decrease in indirect costs reflects
improvements in general operating efficiencies.
26
Table of Contents
Total
research and development expenses for the three and nine months ended September
30, 2010 reflect a reduction of incentive compensation costs associated with
the delayed launch of BYDUREON resulting from the previously mentioned FDA
complete response letter.
Collaborative Profit Sharing
Collaborative
profit sharing consists of Lillys 50% share of the gross margin for BYETTA in
the United States.
Restructuring
Restructuring
charges for the three months ended September 30, 2010 consist primarily of
facilities-related charges.
Restructuring charges recorded during the nine months ended September
30, 2010 relate to a workforce reduction of approximately 60 employees during
the second quarter of 2010 and further consolidation of our San Diego
facilities. The facilities-related
restructuring charges recorded during the three months ended September 30, 2010
relate to recent further consolidation of our San Diego facilities and revised
estimated losses associated with facility leases we ceased using in 2008 based
upon recently executed sub-lease agreements and a related reassessment of
current market conditions. Restructuring
charges recorded during the nine months ended September 30, 2009 were in
connection with the May 2009 restructuring of our sales force. We are continuing to assess our facility
requirements for our San Diego campus as a result of our current year and prior
year restructurings and may record additional facilities-related charges over
the next several quarters, but cannot quantify the amount at this time.
Interest and Other Expense, net
The
following table provides information regarding our interest and other expense,
net (in millions):
|
|
Three months
ended
September 30,
|
|
(Income
decrease or
expense
increase)/
Expense
|
|
Nine months
ended
September 30,
|
|
(Income
decrease or
expense
increase)/
Expense
|
|
|
|
2010
|
|
2009
|
|
decrease
|
|
2010
|
|
2009
|
|
Decrease
|
|
Interest and other income
|
|
$
|
0.8
|
|
$
|
1.4
|
|
$
|
(0.6
|
)
|
$
|
2.0
|
|
$
|
6.5
|
|
$
|
(4.5
|
)
|
Interest and other expense
|
|
(6.3
|
)
|
(5.7
|
)
|
(0.6
|
)
|
(18.5
|
)
|
(15.0
|
)
|
(3.5
|
)
|
Loss on impairment of investments
|
|
(0.2
|
)
|
|
|
(0.2
|
)
|
(0.2
|
)
|
(1.4
|
)
|
1.2
|
|
Total interest and other expense, net
|
|
$
|
(5.7
|
)
|
$
|
(4.3
|
)
|
$
|
(1.4
|
)
|
$
|
(16.7
|
)
|
$
|
(9.9
|
)
|
$
|
(6.8
|
)
|
Interest
and other expense, net is comprised of interest and other income and interest
and other expense and loss on impairment of investments.
Interest
and other income consists primarily of interest income from investment of cash
and other investments. Interest and other income for the three months ended
September 30, 2010 decreased $0.6 million compared to the same period in
2009. Interest and other income for the
nine months ended September 30, 2010 decreased $4.5 million compared to the
same period in 2009. The decrease for
both periods primarily reflects lower average balances available for investment
and lower interest rates earned on our short-term investments for the three and
nine months ended September 30, 2010 as compared to the same periods in 2009.
Interest and other expense consists of interest on our
$775 million par value of outstanding convertible senior notes and our $70.3
million of outstanding 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 for the three
months ended September 30, 2010 increased due to a decrease in the amount of
interest capitalized to our Ohio manufacturing facility partially offset by
improvements in losses recognized in connection with our equity investments and
an increase in the amount of federal income tax benefit recognized.
Interest and other expense in the nine months ended
September 30, 2010
increased due to a decrease in capitalized interest
associated with our Ohio manufacturing facility and an increase in recognized
gains associated with economic hedge transactions, offset by a decline in the
federal income tax benefit.
Loss
on impairment of investments consists of realized credit-related losses associated
with securities in our portfolio. The
loss recorded in the three and nine months ended September 30, 2010 relates to
one security in our portfolio.
27
Table
of Contents
Net Loss
Our
net loss for the three months ended September 30, 2010 was $50.7 million
compared to a net loss of $26.7 million for the same period in 2009. The increase
in net loss primarily reflects the decreased net product sales, increased
research and development expenses and increased restructuring expenses,
partially offset by decreased selling, general and administrative expenses,
decreased collaborative profit-sharing discussed above.
Our
net loss for the nine months ended September 30, 2010 was $133.1 million
compared to a net loss of $136.0 million for the same period in 2009. The
decrease in net loss primarily reflects decreased net product sales, decreased
selling, general and administrative expenses and decreased collaborative
profit-sharing discussed above, partially offset by increased research and
development expenses discussed above.
We
may incur operating losses for the next few years. Although we have gained efficiencies in our
business, we believe the unexpected delay in receiving FDA approval for
BYDUREON will prevent us from achieving our stated goal of sustainable positive
operating cash flows by the end of 2010. However, we remain committed to
continuing to aggressively manage our expenses in line with expected revenues
in order to maximize our available cash to maximize revenue for BYETTA and
SYMLIN and support the approval and launch of BYDUREON. Additionally, our ability to reach profitability
in the future will be heavily dependent upon the level of product sales that we
achieve for BYETTA, SYMLIN and BYDUREON, if approved. Our ability to achieve profitability in the
future will also depend on 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 BYDUREON, 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 and our
obesity collaboration with Takeda, reimbursement of SYMLIN development expenses
through earlier collaboration agreements and, since the second quarter of 2005,
through product sales of BYETTA and SYMLIN.
At
September 30, 2010, we had $537.7 million in cash, cash equivalents and
short-term investments, compared to $667.8 million at December 31,
2009. We have debt maturities of $70.3
million in the fourth quarter of 2010 and $200 million in the second quarter of
2011, and we have $165 million of cash available to us pursuant to the
loan agreement with Lilly described below. We have demonstrated strong
financial discipline over the last few years and we remain committed to
continuing to manage our expenses in-line with expected revenues, however, we
believe the unexpected delay in receiving FDA approval for BYDUREON will
prevent us from achieving our stated goal of sustainable positive operating
cash flows by the end of 2010. We remain
committed to continuing to aggressively manage our expenses to maximize our
available cash to maximize revenue for BYETTA and SYMLIN and support the
approval and launch of BYDUREON. Our
current business plan does not contemplate a need to raise additional funds
from outside sources however we may evaluate opportunities to refinance
existing indebtedness from time to time.
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 during times in which economic and credit conditions
are adverse.
We
used cash of $43.6 million and $71.6 million for our operating activities in
the nine months ended September 30, 2010 and 2009, respectively. Our cash used for operating activities in the
nine months ended September 30, 2010 included uses of cash due to
decreases in accounts payable and accrued liabilities, accrued compensation and
payable to collaborative partner of $13.8 million, $24.3 million and $19.1
million, respectively. The decrease in accounts payable and accrued liabilities
primarily reflects lower expense levels for the nine months ended September 30,
2010 compared to the same period of 2009.
The decrease in accrued compensation primarily reflects the payment of
annual compensation accruals in the nine months ended September 30,
2010. The decrease in the payable to
collaborative partner reflects a reduced net payable to Lilly which resulted
from higher cost-sharing payments due from Lilly as well as lower collaborative
profit sharing due to Lilly. The higher
cost sharing payments due from Lilly was caused by increased development
expenses for BYDUREON in the nine months ended September 30, 2010; the
lower collaborative profit sharing is the result of lower BYETTA sales.
28
Table of Contents
Our
primary sources of cash for our operating activities include an increase in
deferred collaborative profit sharing of $27.1 million and decreases in
accounts receivable, other current assets and inventories of $8.1 million, $13.5
million and $8.3 million, respectively.
The increase in deferred collaborative profit sharing reflects payments
due to us from Lilly for its 60% share of the capital expenditures we have made
for the BYDUREON pen device which relate to future collaborative profit sharing
expenses. The decrease in accounts
receivable is primarily due to lower product sales. The decrease in other current assets is due
to declines in prepaid expenses. The
decrease in inventories reflects reductions in raw materials, work-in-process
and finished goods inventory due to the timing and volume of production for
BYETTA and SYMLIN. As indicated in Note
3 to the Consolidated Financial Statements, inventories as of September 30,
2010 includes $29.6 million associated raw materials specific to BYDUREON which
amount is entirely comprised of exenatide, the active pharmaceutical ingredient
for BYDUREON. As of December 31,
2009 the exenatide balance was previously recorded in other current assets
because exenatide for BYDUREON can also be used to manufacture BYETTA. We are currently manufacturing BYDUREON to
support Lillys requirements for launches outside of the United States. Lilly expects an action by the European
Medicines Agency in the first half of 2011.
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 provided cash of $88.6 million for the nine months ended September 30,
2010 and used cash of $41.9 million for the nine months ended September 30,
2009. Investing activities in both
periods consisted primarily of purchases and sales of short-term investments
and purchases of property, plant and equipment, net. Purchases of property, plant and equipment,
net decreased to $75.6 million for the nine months ended September 30,
2010 from $119.1 million for the nine months ended September 30,
2009. The decrease in purchases of
property reflects a reduction in purchases associated with our BYDUREON
manufacturing facility, offset by costs incurred in connection with the
BYDUREON pen device. Through September 30,
2010, we had expended $620.9 million associated with the construction of the
BYDUREON manufacturing facility, 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. The initial capital investment for the pen is
expected to be $216.0 million over the next few years, which will be funded 60%
by Lilly and 40% by us. Through September 30,
2010 we have incurred $149.5 million in capital expenditures associated with
the BYDUREON pen device and incurred total combined capital expenditures for
the manufacturing facility and the pen device of $770.4 million. We have billed Lilly $81.6 million for its
share of expenditures for the pen device, of which $80.7 million has been
received to date, and is included in cash used for operating activities as
discussed above. Additionally, we expect
that our use of cash for capital expenditures will continue to decrease and
will be principally focused on strategically investing in exenatide life cycle
management, of which Lilly shares 60% of the costs. We will continue to evaluate potential
additional investments in our Ohio manufacturing facility during the product
lifecycle for BYDUREON, if approved.
Financing
activities used cash of $8.2 million and $12.5 million for the nine months
ended September 30, 2010 and 2009, respectively. Financing activities in the nine months ended
September 30, 2010 include $23.4 million in principal payments of our term
loan, offset by proceeds of $15.2 million from the exercise of stock options
and proceeds from our employee stock purchase plan. Financing activities for the nine months
ended September 30, 2009 include $23.4 million in principal payments of
our term loan, offset by proceeds of $10.9 million from the exercise of stock
options and proceeds of from our employee stock purchase plan.
At September 30, 2010, we had $200 million in aggregate
principal amount of convertible senior notes due April 15, 2011, or the
2004 Notes, and $575 million of the convertible senior notes due
June 15, 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.
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. At September 30, 2010
we had an outstanding balance of $70.3 million under the term loan and had
issued $10.5 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 nine 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.
In October 2008, we entered into a loan agreement with Lilly
pursuant to which Lilly made available to us a $165 million unsecured line
of credit that we can draw upon from time to time until June 30, 2011. As
of September 30, 2010 we had not drawn upon this line of credit. 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.
29
Table of Contents
The following table summarizes our contractual
obligations and maturity dates as of September 30, 2010 (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
|
|
71,500
|
|
19,750
|
|
34,500
|
|
17,250
|
|
|
|
Long-term note payable
|
|
70,313
|
|
70,313
|
|
|
|
|
|
|
|
Interest on long-term note
payable, net of swap transactions (1)
|
|
1,005
|
|
1,005
|
|
|
|
|
|
|
|
Inventory purchase
obligations(2)
|
|
93,409
|
|
32,835
|
|
54,034
|
|
6,540
|
|
|
|
Construction contracts
|
|
36
|
|
10
|
|
26
|
|
|
|
|
|
Operating lease obligations
|
|
199,504
|
|
27,000
|
|
55,466
|
|
51,767
|
|
65,271
|
|
Total(3)
|
|
$
|
1,210,767
|
|
$
|
350,913
|
|
$
|
144,026
|
|
$
|
650,557
|
|
$
|
65,271
|
|
(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
$32.9 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 $8.3 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 could be required to make development milestone payments up to $7.5
million associated with licensing agreements in the next 12 months. Additional milestones and other contingency
payments of up to approximately $169.5 million could be paid 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, these payments would signify that the
related products are moving successfully through development and
commercialization.
Our future capital requirements will depend on many factors, including:
the level of product sales we and Lilly achieve for BYETTA and, if approved,
BYDUREON, net of profit sharing payments to Lilly, and product sales for
SYMLIN; costs associated with the continued commercialization of BYETTA and
SYMLIN and the commercialization of BYDUREON, if approved; costs associated
with the operation of our BYDUREON 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.
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 September 30, 2010 was approximately $200.0 million and $518.9 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 September 30, 2010 was a liability of $0.7 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.
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ITEM 4.
Controls and Procedures
As
of September 30, 2010, 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 September 30, 2010.
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
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. As
of September 30, 2010, we and Lilly were involved in 95 separate product
liability cases involving approximately 414 plaintiffs in various courts in the
United States. Forty-three plaintiffs
who previously filed cases have subsequently dismissed their cases or claims
without prejudice. 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 some cases,
wrongful death. Most of the cases are pending in California state court, where
the Judicial Council has 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 reasonably
predict the outcome of any lawsuit, claim or proceeding, we and Lilly intend to
vigorously defend these matters. However, if we are unsuccessful in our
defense, these matters could result in a material adverse impact to our
financial position and results of operations.
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,
2009.
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 $133.1 million for the nine months ended
September 30, 2010, $186.3 million in 2009, $321.9 million in
2008 and $216.5 million in 2007. As of September 30, 2010, we had an
accumulated deficit of approximately $2.1 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.
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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 and, if approved, BYDUREON, 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 and, if approved,
BYDUREON. The ability of BYETTA, SYMLIN and, if approved, BYDUREON to generate
revenue at the levels we expect will depend on many factors, including the
following:
·
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;
·
our ability to
obtain approval for BYDUREON and the timing of the commercial launch of BYDUREON,
if approved;
·
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. In addition, since BYETTA was introduced, we have received
other reports of adverse events, including rare reports of acute renal failure
in patients using BYETTA, and in pre-clinical studies of BYDUREON, observations
were made of C-cell tumors in animals.
Although direct relationships have not been established, it may be
difficult to rule out any particular direct relationship at any point in
time for these or other reports of adverse events or observations that may be
made. 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.
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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 for our two marketed drug
products. In order to successfully commercialize our products, including BYETTA
and SYMLIN, and continue to develop our drug candidates, including BYDUREON, we
rely on various third parties to provide the necessary manufacturing.
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
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.
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Our manufacturers have produced BYETTA and SYMLIN for commercial use
for approximately five 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 BYDUREON on a commercial scale we must complete
final validation of the manufacturing process and obtain approval for our
manufacturing facility from the FDA. 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. The FDA has inspected our manufacturing facility and has
made a number of observations all of which we believe have been addressed.
Although we are working diligently to qualify the 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 BYDUREON in
a timely manner or at all. In addition, we are dependent on Alkermes to supply
us with commercial quantities of the polymer required to manufacture BYDUREON.
We also will need to obtain sufficient supplies of diluent, solvents, devices,
packaging and other components necessary for commercial manufacture of
BYDUREON. If BYDUREON is approved, we will be dependent upon Mallinckrodt and
Lonza to manufacture our long-term commercial supply of bulk exenatide, the
active ingredient in BYDUREON, and upon single suppliers to produce components
for packaging BYDUREON.
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, the Federal
government recently passed health care reform legislation. Many of the details regarding the
implementation of this legislation have yet to be determined and implementation
may ultimately adversely affect our business.
Further, 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, including BYDUREON. 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, Roche and Takeda, 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, sales force, 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.
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Our target patient population for BYETTA includes people with diabetes
who have not achieved adequate glycemic control with diet and exercise or by
using metformin, sulfonylurea and/or a TZD, three common oral therapies for
type 2 diabetes. Our target population for SYMLIN includes 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;
·
incretin/GLP-1
receptor agonists;
·
insulin
sensitizers, including PPARs;
·
alpha-glucosidase
inhibitors; and
·
sodium-glucose
transporter-2 (SGLT-2) 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 of our products, 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 BYDUREON 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;
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·
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, BYDUREON or an exenatide suspension
formulation; or
·
serious side
effects experienced by study participants relating to a drug candidate.
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 BYDUREON.
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 BYDUREON. 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, if approved, BYDUREON.
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 BYDUREON 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 BYDUREON 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
BYDUREON, 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 BYDUREON. 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 BYDUREON, 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 BYDUREON, 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. Beginning one year before
expiration of the data exclusivity period, the Hatch-Waxman Act allows generic
manufacturers to file Abbreviated New Drug Applications, or ANDAs, requesting
the FDAs approval of generic versions of previously-approved products. For
example, generic pharmaceutical manufacturers could file an ANDA for SYMLIN as
of March 2009 and for BYETTA as of 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.
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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 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, including BYDUREON, in the United
States or foreign countries on a timely basis, or at all.
Our drug candidates, including BYDUREON, 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, including BYDUREON, 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.
37
Table of Contents
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 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 and, if approved, the launch and commercialization of
BYDUREON;
·
Establishment
of additional manufacturing sources, including our Ohio manufacturing facility;
·
Development of
BYDUREON and other pipeline candidates;
·
Our other
research and development activities;
·
Other operating
expenses;
38
Table of Contents
·
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 approximately
$70.3 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. As of September 30, 2010, we were involved in 96 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.
We currently have limited product liability insurance coverage for existing
claims and any future related claims and we expect to be largely self-insured
for any future product liability risks that are not covered by existing
insurance. 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 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 BYDUREON, if
approved. 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, BYDUREON, Lilly is
co-promoting within the United States. If Lilly ceased commercializing BYETTA
or, if approved, BYDUREON, 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.
With respect to our obesity product candidates, we will generally be
dependent upon Takeda for development activities beyond phase 2 for
approval in the United States and all development activities outside the United
States. We will also be dependent upon Takeda for commercializing approved
products that result from our co-development activities, if any, in and outside
the United States. If Takeda were to terminate our collaboration with them, we
would likely need to find a third party collaborator to continue developing our
obesity program, which we may be unable to do.
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 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 and Takeda, with whom we choose to contract may not
establish adequate sales and distribution capabilities or gain market
acceptance for our products, if any.
39
Table of Contents
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, of which
approximately $70.3 million is currently outstanding and due in 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 four of the last five years, our operating cash flows
were negative and insufficient to cover our fixed costs. 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, manufacturing, 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.
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.
40
Table of Contents
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 is
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.
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.
41
Table of Contents
Our executive officers, directors
and major stockholders control approximately 51% of our common stock.
As of September 30, 2010, executive officers, directors and
holders of approximately 5% or more of our outstanding common stock, in the
aggregate, owned or controlled approximately 51% 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, 2008, the
high and low sales price of our common stock varied significantly, as shown in
the following table:
|
|
High
|
|
Low
|
|
Year ending December 31,
2010
|
|
|
|
|
|
Fourth Quarter (through October 29, 2010)
|
|
$
|
21.95
|
|
$
|
9.51
|
|
Third Quarter
|
|
$
|
22.09
|
|
$
|
17.81
|
|
Second Quarter
|
|
$
|
24.21
|
|
$
|
14.85
|
|
First Quarter
|
|
$
|
23.93
|
|
$
|
14.13
|
|
Year ending December 31,
2009
|
|
|
|
|
|
Fourth Quarter
|
|
$
|
15.63
|
|
$
|
11.01
|
|
Third Quarter
|
|
$
|
15.69
|
|
$
|
11.73
|
|
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
|
|
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;
·
determinations
by regulatory authorities with respect to our drug candidates, including
BYDUREON;
·
our ability to
validate our Ohio manufacturing facility and the commercial manufacturing
process for BYDUREON;
·
developments in
our relationships with current or future collaborative partners;
·
our ability to
successfully execute our commercialization strategies;
42
Table of Contents
·
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.
43
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
|
|
Second
Amendment to Commercial Supply Agreement for Exenatide, between Registrant
and Bachem Inc.
|
|
|
|
10.2
|
|
Third
Amendment to Commercial Supply Agreement for Exenatide, between Registrant
and Bachem Inc.*
|
|
|
|
31.1
|
|
Certification
of Principal Financial Officer pursuant to Rule 13a-14(a) and
Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended
|
|
|
|
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
|
|
|
|
101
|
|
The
following financial statements and footnotes from the Amylin
Pharmaceuticals, Inc. Quarterly Report on Form 10-Q for the quarter
ended September 30, 2010 formatted in Extensible Business Reporting
Language (XBRL): (i) Consolidated Balance Sheets, (ii) Consolidated
Statements of Operations; and (iii) Consolidated Statements of Cash
Flows; and (iv) the notes to the consolidated financial statements
(tagged as blocks of text).
|
*
|
|
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.
|
44
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: November 8,
2010
|
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)
|
45
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