AMLN Amylin Pharmaceuticals, Inc. (MM)

Amylin Pharmaceuticals, Inc. (AMLN) and Eli Lilly and Company (LLY) recently decided to terminate their long-standing partnership for the worldwide development and commercialization of exenatide. The news sent Amylin’s shares tumbling almost 11%.

Amylin and Eli Lilly’s partnership dates back to 2002 when the companies entered into a global development and commercialization agreement for exenatide. Exenatide is currently available under the trade name, Byetta. It has also been developed as a once-weekly treatment (Bydureon) of type II diabetes. While Bydureon is available in the EU, it is yet to gain approval in the US where it has received two complete response letters. The Food and Drug Administration (FDA) expects to respond on Bydureon’s approvability by Jan 28, 2012.

Cracks in the partnership emerged earlier this year when Amylin filed a lawsuit against Eli Lilly in May 2011. Amylin claimed that Eli Lilly was engaging in anti-competitive activities, thereby breaching its agreement for the maximization of sales of exenatide. Amylin’s main complaint was regarding Eli Lilly’s global alliance with Boehringer Ingelheim for the development and commercialization of type II diabetes product, Tradjenta (linagliptin). According to Amylin, Tradjenta, which received FDA approval in early May, would compete directly with the exenatide family.

The company said that the manner in which Eli Lilly intended to implement the Tradjenta agreement showed that Eli Lilly was behaving in an improper, unlawful and anticompetitive manner. Amylin was looking to stop Eli Lilly from using the same sales force for promoting both Byetta and Tradjenta.

The termination of the partnership resolves the outstanding litigation between the companies.

Key Points of the Termination Agreement

Full responsibility for the worldwide development and commercialization of exenatide will be transitioned to Amylin, starting in the US on November 30, 2011. Responsibility for the commercialization of Byetta (exenatide) injection and Bydureon in ex-US markets will be transferred to Amylin on a market-by-market basis in 2012 and 2013. Amylin said that it will work with Eli Lilly on all plans for ex-US markets during the transition period and will guarantee that Eli Lilly does not experience losses on exenatide-related activities during that period, up to a total of $60 million.

Amylin will make a one-time, upfront payment of $250 million to Eli Lilly by November 22. Moreover, Amylin will pay 15% of global sales of exenatide products (under a revenue sharing obligation) up to $1.2 billion plus accrued interest. Amylin will issued a secured note worth $1.2 billion to Eli Lilly and the above-mentioned revenue sharing payments will be adjusted against the outstanding amount of the note. These payments will commence from Nov. 2012.

However, if Bydureon (Amylin’s once-weekly version of exenatide) fails to gain FDA approval by June 30, 2014, Amylin’s revenue sharing obligations will terminate and it will be required to pay Eli Lilly 8% of global net sales of exenatide products.

Meanwhile, Eli Lilly is also entitled to receive a $150 million milestone payment on the FDA approval of a once monthly suspension version of exenatide (currently in phase II development).

As far as the maturity date of the $165 million line of credit drawn by Amylin from Eli Lilly earlier this year is concerned, the same will now fall due in the second quarter of 2016 instead of the second quarter of 2014.

The Path Forward

Amylin said that it will seek one or more partners outside the US for exenatide. The company will also continue with the development of Bydureon Pen and the once-monthly suspension formulation.

Amylin continues with its pre-launch commercial activities in anticipation of the potential approval and launch of Bydureon in the US in 2012. The company intends to bring a new exenatide sales force into place which will consist of 325 representatives who will provide more first- and second-position details. The company will continue promoting Byetta and Symlin with its existing 325-person diabetes specialty sales force to primary-care physicians and endocrinologists.

Financial Implications for Amylin

With the termination of the deal, Amylin’s operating expenses will go up by $150 million to $170 million annually. Amylin expects its pro forma cash balance to decline to about $210 million. However, the company believes this agreement will be accretive to its cash flow by the end of 2013.

Our Take

The termination of the agreement brings with it some pros and cons. On the positive side, the deal provides Amylin with full control over exenatide, which should bode well in the long-term. Even though Amylin has a revenue sharing obligation to Eli Lilly, it will not be required to share profits with Eli Lilly.

However, nearer term, there are some concerns. The main concern is regarding the company’s debt situation and cash position. The company expects a cash balance of about $210 million and has an outstanding debt of $575 million due June 15, 2014.

With the deal, the company now has a $1.2 billion bond from Eli Lilly which comes with an interest rate of 9.5%. Amylin is also losing a strong marketing partner in Eli Lilly. There is also some concern that the termination of the deal signifies Eli Lilly’s lack of confidence in Bydureon’s US approval.

We currently have a Neutral recommendation on Amylin, which carries a Zacks #3 Rank (short-term Hold rating). FDA approval for Bydureon and partnership deals for ex-US markets would be a major boost for the stock.    

 
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