UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-K

 

 

AMYLIN PHARMACEUTICALS, INC.

(Exact Name of Registrant as Specified in its Charter)

 

 

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

 

Securities registered pursuant to Section 12(b) of the Act:

NONE

 

Securities registered pursuant to Section 12(g) of the Act:

 

Common Stock, $.001 par value

(Title of Class)

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ý   No o

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes  o  No ý

 

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 ý   No o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ý

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer ý   Accelerated filer o  Non-accelerated filer o

 

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).

Yeso    No ý

 

The aggregate market value of the common stock of the registrant as of June 30, 2005 held by non-affiliates was $1,141,466,191.

 

The number of shares outstanding of the registrant’s common stock was 111,487,256 as of March 1, 2006.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the registrant’s Definitive Proxy Statement to be filed with the Securities and Exchange Commission (the “Commission”) pursuant to Regulation 14A in connection with the 2006 Annual Meeting of Stockholders to be held on May 17, 2006 are incorporated herein by reference into Part III of this Report. Such Definitive Proxy Statement will be filed with the Commission not later than 120 days after December 31, 2005.

 

 

You should read the following together with the more detailed information regarding our company, our common stock and our financial statements and notes to those statements appearing elsewhere in this document or incorporated by reference. The Securities and Exchange Commission, or SEC, allows us to “incorporate by reference” information that we file with the SEC, which means that we can disclose important information to you by referring you to those documents. The information incorporated by reference is considered to be part of this annual report on Form 10-K.

 

Except for the historical information contained herein, this annual report on Form 10-K and the information incorporated by reference 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 such differences are described in Part I, Item 1A entitled “Risk Factors,” as well as those discussed in Part II, Item 7 entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere throughout this annual report on Form 10-K and in any other documents incorporated by reference into this report. We disclaim any obligation to update any forward-looking statement.

 

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PART I

 

Item 1. Business

 

We are a biopharmaceutical company engaged in the discovery, development and commercialization of innovative medicines to improve the lives of people with diabetes, obesity and cardiovascular disease. We have two approved products, BYETTA^® (exenatide) injection and SYMLIN^® (pramlintide acetate) injection, both of which were commercially launched in the United States during the second quarter of 2005.

 

BYETTA is the first and only approved medicine in a new class of compounds called incretin mimetics. We began selling BYETTA in the United States in June 2005. It is approved as an adjunctive therapy to improve glycemic control in patients with type 2 diabetes who are taking metformin and/or sulfonylurea, two common oral therapies, but who have not achieved adequate glycemic control.

 

We have an agreement with Eli Lilly and Company, or Lilly, for the global development and commercialization of exenatide. This agreement includes BYETTA and any sustained-release formulations of exenatide such as exenatide LAR. Under the terms of the agreement, operating profits from products sold in the United States are shared equally between Lilly and us and operating profits from products sold outside of the United States will be split 80% to Lilly and 20% to us. Lilly has primary responsibility for developing and commercializing BYETTA outside of the United States, including any sustained release formulations of exenatide.

 

SYMLIN is the first and only approved medicine in a new class of compounds called amylinomimetics. We began selling SYMLIN in the United States in April 2005. 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 have a field force in excess of 400 people dedicated to marketing BYETTA and SYMLIN in the United States. Lilly also co-promotes BYETTA in the United States. Our field force includes our specialty and primary care sales forces, a managed care and government affairs organization, a medical science organization, and diabetes care specialists.

 

In addition to our marketed products, our development pipeline includes late-stage programs for diabetes and obesity, and a Phase 2 program in cardiovascular disease. We are working with Alkermes and Lilly to develop a sustained release formulation of exenatide, which we refer to as exenatide LAR, to enable once-weekly administration of exenatide for the treatment of type 2 diabetes. We also have multiple early stage programs for diabetes and obesity, maintain an active discovery research program focused on novel peptide therapeutics, and are actively seeking to in-license additional drug candidates.

 

Our principal executive offices are located at 9360 Towne Centre Drive, San Diego, CA 92121, and our telephone number is (858) 552-2200. We were incorporated in Delaware in September 1987. We maintain a website at www.amylin.com. The reference to our worldwide web address does not constitute incorporation by reference into this report of any of the information contained on our website.

 

Our periodic and current reports that we file with the SEC are available free of charge on our website at www.amylin.com as soon as reasonably practicable after we have electronically filed them with, or furnished them to, the SEC.

 

Diabetes

 

Diabetes is a major health problem worldwide and is the sixth leading cause of death by disease in the United States. Diabetes is a complex, multihormonal disorder of carbohydrate, fat and protein metabolism, primarily resulting from the failure of the beta cells to produce sufficient insulin – the hormone needed to convert sugar, starches and other foods into energy – often compounded by the body’s inabiliy to use insulin optimally. The result is that not enough glucose can enter and fuel the body’s cells and it builds up in the bloodstream causing hyperglycemia (high blood sugar), which may result in severe complications such as kidney failure, nerve damage, blindness, amputation, and cardiovascular disease. Hypoglycemia (low blood sugar), usually caused by too much insulin or oral antidiabetic medication, is also dangerous and, if untreated, can be fatal.

 

It is estimated that nearly 200 million people worldwide have diabetes. Of that population, it is estimated that approximately 90-95% have type 2 diabetes, also known as adult-onset diabetes, and the remainder have type 1 diabetes, also known as juvenile-onset diabetes. In the United States alone, in 2005 there were approximately 20.8 million people, or 7% of the population, with diabetes and there were approximately 20.6 million over the age of 20, or 9.6% of all people in this age group, with diabetes. However, only 14.6 million people in the U.S. have been diagnosed with diabetes, with approximately 1.5 million new cases – almost 30,000 a week - of diabetes being diagnosed each year. From 1997 through 2003, new cases of diagnosed diabetes among Americans aged 18-79 increased by 52%. In addition, there are currently approximately 41 million people in the United States with pre-diabetes. Pre-diabetes is a condition that raises the risk of developing type 2 diabetes, heart disease and stroke. People with pre-diabetes have

 

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blood glucose levels higher than normal but not high enough for a diabetes diagnosis.

 

Glycated hemoglobin (A1C) is the most widely accepted measure of long-term blood glucose control. A person’s A1C level is a recognized indicator of that individual’s average blood glucose concentrations over the preceeding 3 to 4-month period. Lower A1C levels indicate better average blood glucose control, with values in people without diabetes usually being less than 6%. The American Diabetes Association (ADA) suggests that people with diabetes should aim for an A1C value that is lower than 7%. It is estimated that nearly two-thirds of Americans being treated for diabetes are failing to achieve recommended blood glucose levels and, according to research studies conducted in the United States and abroad, these patients would significantly benefit from improved glycemic control. In general, for every 1-point reduction in A1C, the risk of developing microvascular diabetic complications (eye, kidney, and nerve disease) is reduced by up to 40%. However, only a minority of people diagnosed with diabetes in the United States are able to achieve the ADA’s recommended target A1C level, even with available drug therapies. Additionally, aggressive use of insulin and some oral medications to reduce glucose levels can be associated with an increased risk of hypoglycemia and weight gain. Consequently, there has long been a need to develop new treatment strategies that improve the overall health profile of patients with diabetes and reduce the risk of complications without increased pain and suffering.

 

In people without diabetes, the beta cells of the pancreas produce two hormones, insulin and amylin. Type 1 diabetes destroys beta cells, resulting in deficiency of both hormones, and most often is diagnosed in children and young adults. Replacement of beta cells through islet transplant therapy can, in some cases, temporarily render patients insulin-independent; however, life-long daily insulin therapy is eventually required to sustain life for people with type 1 diabetes. The addition of SYMLIN therapy can reduce the typical rise in blood sugars after meals contributing to a reduction in A1C levels.

 

Type 2 diabetes results from the body’s inability to make enough insulin, or to properly use available insulin, or both. Secretion of the hormone amylin is also impaired in people with type 2 diabetes. Historically, type 2 diabetes occurs later in life. However, primarily as a result of changes in diet and lifestyle, type 2 diabetes is now occurring much earlier in life for many people. Diet and exercise therapy, oral medications, BYETTA, insulin, and insulin with SYMLIN are currently used to treat type 2 diabetes.

 

Type 2 diabetes usually begins with insulin resistance, a disorder in which the cells do not use insulin properly. As the disease progresses, the beta cells in the pancreas become “tired” and gradually lose their ability to produce insulin in a timely manner. Because of the progressive nature of the disease, no single therapy is currently proven to be effective in controlling the disease over time. As the disease progresses, typically one or more oral medications become necessary, and these often become ineffective in regulating blood glucose levels. Historically, insulin therapy is then added; however, over time, the insulin dosage and number of insulin injections usually need to be increased. Even with additional insulin injections, many people are unable to control their blood glucose levels, or do so at the expense of weight gain and increased risk of hypoglycemia.

 

In 2005, we introduced two new treatment options, BYETTA and SYMLIN, for healthcare professionals to use in the diabetes care continuum. BYETTA offers patients with inadequate glycemic control using oral medications the opportunity to better control their blood glucose levels and potentially lose weight. SYMLIN offers patients with inadequate glycemic control using mealtime insulin the opportunity to also better control their blood glucose levels and lose weight. These novel first-in-class medicines have given new options in disease management and glucose control to millions of people suffering from diabetes.

 

For people suffering from diabetes, poor control of blood glucose levels has been shown to result in severe long-term complications. For instance, the Center for Disease Control has stated that complications due to diabetes include:

 

•      heart disease and stroke;

•      high blood pressure;

•      blindness due to retinopathy, a condition manifested by damage to the retina;

•      nephropathy, or kidney disease;

•      neuropathy, a condition where there is damage to the nervous system;

•      amputations due to peripheral vascular disease; and

•      periodontal disease.

 

Weight control and obesity are also major problems for patients with diabetes, particularly for those people using insulin and certain oral medications as part of their treatment regimen. In addition, patients with diabetes frequently have wide fluctuations in blood sugar following meals. These fluctuations in blood sugar can significantly affect a patient’s quality of life. Collectively, these complications and associated metabolic disorders can lead to increased pain, suffering, reduced quality of life, reduced productivity in the workplace, and early death.

 

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Marketed Products

 

BYETTA^® (exenatide) injection

 

BYETTA is the first and only approved medicine in a new class of compounds called incretin mimetics. We began selling BYETTA in the United States in June 2005 after receiving approval from the United States Food and Drug Administration, or FDA, in April 2005 to market BYETTA as adjunctive therapy to improve glycemic control in patients with type 2 diabetes who are taking metformin and/or sulfonylurea, two common oral therapies, but have not achieved adequate glycemic control. Net product sales of BYETTA were $75.2 million in 2005.

 

BYETTA provides self-regulating glucose control by augmenting the body’s natural physiologic processes, allowing the body to respond to blood glucose changes as they occur. BYETTA directly affects the beta cells’ response to elevated glucose by enhancing insulin secretion; this effect dissipates as glucose levels approach the normal range. BYETTA also restores first-phase insulin response, an effect which is evident following the initial dose. BYETTA is administered twice a day utilizing a fixed dose injection, and requires no dose adjustments due to changes in meal size or composition, exercise, or other variables. No additional glucose monitoring is required with BYETTA therapy.

 

The most common adverse effect of BYETTA is mild to moderate nausea, which tends to dissipate with time. Mild to moderate hypoglycemia has been observed, primarily in conjunction with sulfonylurea, an agent that is known to induce hypoglycemia.

 

We estimate the number of people in the United States currently using metformin and/or sulfonylurea to be approximately 6 million. In addition, we estimate that more than 60% of those patients change their oral therapy at least once a year. Approximately two-thirds of all diabetes patients using oral medications are believed to have an A1C higher than the ADA’s recommendation of less than 7%.

 

In 2005, we launched BYETTA utilizing our field force that we grew to currently include over 400 people. This field force, combined with the Lilly field organization supporting BYETTA, focused its sales efforts on an initial target list of approximately 40,000 physicians in the United States. These targeted physicians write more than half of the prescriptions for diabetes medications in the U.S. Our goal is to provide education, through both one-on-one interactions and educational programs, to ensure that these physicians understand the profile of BYETTA and its mechanisms of action, potential benefit and important use considerations, and that they are prepared to select the appropriate patients to begin BYETTA therapy.

 

Lilly has primary responsibility for developing and commercializing BYETTA outside the U.S., including any sustained release formulations such as exenatide LAR. In late 2005, Lilly filed a Marketing Authorisation Application, or MAA, with the European Medicines Evaluation Agency, or the EMEA, the European Union’s regulatory authority, which has since been accepted by the EMEA.

 

Development Activities. In September 2005, we announced results from an open-label extension study indicating that BYETTA showed sustained improvements in blood sugar control and progressive weight reduction through two years of therapy for people with type 2 diabetes failing to achieve acceptable blood sugar control on metformin and/or a sulfonylurea. After two years, patients in the study demonstrated an average reduction from baseline of 1.1% in A1C levels and an average weight reduction of 11.4 pounds. In addition, we announced data that showed improvements in patients through eighteen months of treatment in markers associated with cardiovascular risk factors, including HDL cholesterol, triglycerides, and blood pressure. In general, improvements in cardiovascular risk factors appeared greatest in patients who experienced the greatest weight reduction. Mild to moderate nausea was the most common adverse effect and dissipated over time.

 

In November 2005, we released the results from a study introducing BYETTA treatment to patients with type 2 diabetes who were not achieving adequate glucose control using a thiazolidinediene, or TZD, a common oral diabetes medication, either alone or with metformin.  Patients in the study showed an improvement in A1C by approximately 0.9% at the end of the 16-week study for subjects receiving twice daily 10 microgram subcutaneous injections of BYETTA in addition to their usual TZD or TZD plus metformin regimen, compared to subjects receiving a TZD or a TZD plus metformin and placebo. Sixty-two percent of subjects receiving BYETTA who entered the study while taking a TZD and with an A1C greater than 7% achieved an A1C of 7% or less, compared to 16% of similar subjects on placebo and a TZD. Compared to placebo, subjects receiving BYETTA experienced an average weight reduction of approximately three pounds at 16 weeks. The most common adverse event was nausea, which occurred in 40% of subjects receiving BYETTA compared to 15% of those receiving a TZD with placebo.  No severe hypoglycemia was observed. Results from this study formed the basis of our Supplemental New Drug Application, or sNDA, submission to the FDA in the first quarter of 2006. This sNDA seeks to expand our label to include patients who are taking a TZD or a TZD and metformin and have inadequate glycemic control.

 

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In addition, in 2006 we expect to commence a monotherapy (stand-alone therapy) study for BYETTA. In April 2005, the FDA issued an approvable letter for BYETTA when used as a monotherapy for patients with type 2 diabetes. Any additional data submitted to support a monotherapy indication is expected to receive a six-month review. We are also conducting other clinical trials to further our knowledge of the utility of BYETTA.

 

SYMLIN^® (pramlintide acetate) injection

 

SYMLIN is the first and only approved medicine in a new class of compounds called amylinomimetics. We began selling SYMLIN in the United States in April 2005 after receiving approval from the FDA in March 2005 to market SYMLIN as adjunctive therapy to mealtime insulin to treat diabetes. Other than insulin and insulin analogues, SYMLIN is the first FDA-approved medication addressing glucose control for patients with type 1 diabetes since the discovery of insulin over 80 years ago. SYMLIN is intended to improve blood glucose control in people treated with insulin alone or, in the case of patients with type 2 diabetes, treated with insulin plus one or more oral medications. Net product sales of SYMLIN were $11.5 million in 2005.

 

SYMLIN is indicated for use in adults with type 2 or type 1 diabetes to control blood sugar. SYMLIN works with insulin to smooth out the peaks in blood glucose levels to give patients more stable blood glucose levels after meals and throughout the day. SYMLIN also lowers the A1C levels of most patients beyond what insulin alone can achieve. SYMLIN also induces satiety, which leads to eating less and weight loss in most patients. In addition, because SYMLIN works with insulin to control blood sugar, patients need less insulin to achieve desired blood sugar levels after meals.

 

SYMLIN is used with insulin and has been associated with an increased risk of insulin-induced severe hypoglycemia. The risk can be reduced by appropriate patient selection, careful patient instruction, and insulin dose adjustments. Other adverse effects commonly observed are primarily gastrointestinal, including nausea, which decrease over time in most patients.

 

Our initial SYMLIN launch was focused on a target physician population of 3,000, with a goal of educating these physicians on the profile of SYMLIN and its mechanisms of action, potential benefit and use considerations, and appropriate patient selection for initiating SYMLIN therapy.  SYMLIN is supported by the full Amylin field force and currently has an expanded target physician population of approximately 16,000.

 

Development Activities.     In the fourth quarter of 2005, we initiated a new study designed to evaluate the efficacy and safety of adding mealtime SYMLIN to the therapy regimen of patients who are on a stable regimen of once-daily basal insulin. The study design was reviewed by the FDA, and includes a composite endpoint that will assess the benefits of SYMLIN beyond an A1C measurement, including measurements of effects on postprandial blood glucose excursions, body weight and the avoidance of severe hypoglycemia. This study is designed to support a potential regulatory application to expand the label for SYMLIN for the use with basal insulin alone.

 

We also initiated a controlled open-label observational study of SYMLIN in the third quarter of 2005. This study is designed to evaluate SYMLIN use in the marketplace. Patients will receive SYMLIN as part of their routine diabetes management and will be followed in this real-world setting for a period of six months. The adverse event profile of these subjects will be compared with a group of similar patients with diabetes who are using insulin therapy alone. In addition, we plan to initiate a small pharmacokinetic study in pediatric age patients with type 1 diabetes (age 12 to 16) during 2006.

 

We are currently working with Ypsomed AG to develop a disposable pen for the delivery of SYMLIN in cartridges with a goal of introducing this delivery platform to the marketplace in 2007.

 

Sales, Marketing and Distribution

 

We have built a sales and marketing organization that focuses on healthcare providers, managed healthcare organizations, wholesalers and pharmacies, government purchasers, and other third-party payors. We have a field force in excess of 400 people dedicated to marketing BYETTA and SYMLIN in the United States. Lilly also co-promotes BYETTA in the United States. Our field force includes a primary care sales force as well as a specialty sales force of approximately 75 representatives who target endocrinologists and other physicians who have large diabetes care practices. In addition to our sales forces, our field force includes a managed care and government affairs organization, a medical science organization, and diabetes care specialists who support broad medical education programs for both BYETTA and SYMLIN. Members of our sales and marketing team have extensive industry experience from a wide range of large and small companies and have substantial experience in the field of diabetes, as well as in launching and marketing pharmaceutical products.

 

We utilize common pharmaceutical company practices to market our products. We call on individual physicians, pharmacists and distributors. We also provide professional symposia through our extensive medical education programs. Our medical education events are conducted live, via satellite or telephone, and through web-based, interactive programs. We will continue to

 

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focus on medical education efforts for both BYETTA and SYMLIN through thousands of programs across the United States organized through our medical affairs and professional education organizations. We train physicians and other healthcare professionals as speakers, so that they can in turn teach their peers about how best to incorporate BYETTA or SYMLIN into their patients’ diabetes treatment regimens.

 

We provide customer service and other related programs for our products, such as disease and product-specific websites, insurance research services, a customer service call center, and order, delivery and fulfillment services. We have programs in the United States that provide qualified uninsured and underinsured patients with our products at no charge.

 

We sell BYETTA and SYMLIN to wholesale distributors, who in turn, sell to retail pharmacies and government entities. Decisions made by these wholesalers and their customers regarding the levels of inventory they hold, and thus, the amount of BYETTA and SYMLIN they purchase, may affect the level of our product sales in any particular period.

 

Manufacturing

 

We have selected manufacturers that we believe comply with current Good Manufacturing Practices, or cGMP, and other regulatory standards. We have established a quality control and quality assurance program, including a set of standard operating procedures, analytical methods and specifications, designed to ensure that our products and product candidates are manufactured in accordance with applicable regulations. We require that our contract manufacturers adhere to cGMP, except for products and product candidates for toxicology and animal studies, which we require to be manufactured in accordance with current Good Laboratory Practices, or cGLP.

 

Although some materials for our drug products are currently available from a limited number of qualified sources, we will attempt to acquire a substantial inventory of such materials, establish alternative sources and/or negotiate long-term supply arrangements. We believe we will not have any significant issues obtaining suppliers; however, we cannot be certain that we will be able to obtain long-term supplies of our manufacturing materials.

 

BYETTA Manufacturing

 

We obtain exenatide, the active ingredient contained in BYETTA, from Bachem California and Mallinckrodt, Inc. pursuant to long-term agreements with each company. We have long-term agreements with CP Pharmaceuticals Ltd., a subsidiary of Wockhardt Ltd., and Baxter Pharmaceutical Solutions LLC, a subsidiary of Baxter, Inc., to supply us the dosage form of exenatide in cartridges. Currently, Baxter’s manufacturing process for BYETTA cartridges is undergoing validation. We have a long-term agreement with Lilly to supply pens for delivery of BYETTA in cartridges.

 

SYMLIN Manufacturing

 

We obtain pramlintide acetate, the active ingredient contained in SYMLIN, from Bachem and Lonza Ltd. pursuant to long-term agreements with each company. Lonza recently acquired the peptide manufacturing division of UCB S.A., our original supplier of pramlintide. We have a long-term contract with Baxter for the dosage form of SYMLIN in vials. We have an agreement with CP Pharmaceuticals for the dosage form of SYMLIN in cartridges and are working with Ypsomed to develop a disposable pen for the delivery of SYMLIN in cartridges.

 

Exenatide LAR Manufacturing

 

In October 2005, we entered into an amendment to our development and license agreement with Alkermes, Inc. for the development of exenatide LAR. Under the terms of the amendment, we will be responsible for manufacturing the once-weekly dosing formulation of exenatide LAR for commercial sale and will pay Alkermes milestone payments upon achievement of development milestones and royalties on sales of exenatide LAR. In addition, Alkermes will transfer to us its technology for manufacturing the once-weekly formulation of exenatide LAR and will supply us with the polymer materials required for the manufacture of exenatide LAR.

 

In December 2005, Amylin Ohio LLC, our wholly-owned subsidiary, completed the purchase of an existing building and 26 acres of land in West Chester, Ohio to house the planned manufacturing facility for exenatide LAR. We are actively working with Alkermes and the Parsons Corporation, a group with significant experience in the design and construction of pharmaceutical manufacturing facilities, to complete the design, construction and validation of this facility. We anticipate that the activities associated with the design, construction and validation of this manufacturing facility may cost up to $150 million over the three years ending December 31, 2008 as we work to finalize our commercial manufacturing process during that period.

 

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Lilly Collaboration

 

We entered into a collaboration agreement with Lilly in 2002 for the global development and commercialization of exenatide, including both the twice-daily version, BYETTA, and sustained-release formulations, such as exenatide LAR. Under the terms of the agreement, Lilly made initial payments to us, and purchased approximately 1.6 million shares of our common stock. In addition, Lilly has made milestone payments to us upon the achievement of development and commercial milestones for BYETTA. Lilly has also agreed to make future milestone payments to us upon the achievement of additional development milestones, which primarily relate to sustained-release formulations of exenatide. A portion of future development milestone payments relating to sustained-release formulations of exenatide may be converted into our common stock, at Lilly’s option, if the filing of the New Drug Application with the FDA for the sustained-release formulation of exenatide does not occur on or before December 31, 2007. In addition, Lilly is obligated to make additional future milestone payments to us of up to $100 million contingent upon the commercial launch of exenatide in selected territories throughout the world, including BYETTA and sustained-release formulations of exenatide. Our collaboration agreement may be terminated by Lilly at any time on 60 days notice.

 

We share exenatide U.S. development and commercialization costs with Lilly equally. Development costs outside of the United States are shared 80% by Lilly and 20% by us, and Lilly is responsible for all commercialization costs outside of the United States.

 

Each company will receive 50% of the operating profits from the sale of products in the United States. Operating profits elsewhere will be shared at 80% to Lilly and 20% to us. We record all U.S. product revenues and Lilly will record all product revenues from outside the U.S.

 

Under our co-promotion arrangement with Lilly, the parties use approximately equal efforts to co-promote BYETTA within the United States and have agreed to use approximately equal efforts to co-promote sustained-release formulations of exenatide within the United States. Lilly will be primarily responsible for commercialization efforts outside the United States. In late 2005, Lilly filed a MAA with the EMEA, the European Union’s regulatory authority, which has subsequently been accepted.

 

Research and Development

 

Product Pipeline Programs

 

We have two late-stage development programs in the therapeutic areas of diabetes and obesity, a Phase 2 program in cardiovascular disease, and multiple early stage programs in diabetes and obesity. Our years of research in diabetes and deep understanding of peptide hormones – their physiology, functionality, and impact on the disease – are being leveraged to develop potential treatments for obesity and cardiovascular disorders. The metabolic components of these diseases are linked in numerous ways, which are reflected in the impact each has on the other. Reductions in obesity reduce the incidence of diabetes, and both of these conditions, independently, are major contributors to cardiovascular disease. In addition, persons with diabetes are two to four times more likely to die from cardiovascular disease than persons without diabetes. Further evidence of the underlying metabolic links of these diseases is the fact that cardiovascular disease and stroke account for approximately 65% of deaths in people with diabetes.

 

Diabetes

 

Exenatide LAR

 

The combination of potency and the glucose-dependent mechanism of action inherent in exenatide makes it well suited to development of a sustained-release formulation. We have an agreement with Alkermes for the development, manufacture and commercialization of exenatide LAR. We are working with Alkermes and Lilly to develop a formulation that enables a once-a-week administration of exenatide for the treatment of type 2 diabetes.

 

In August 2005, we announced preliminary results of a Phase 2 multi-dose study of exenatide LAR in patients with type 2 diabetes using a once-a-week dosing regimen. The multi-dose study was a placebo-controlled, multi-center study of 45 subjects with type 2 diabetes failing to achieve adequate glucose control using diet and exercise with or without metformin. The primary objectives of the study included safety, tolerability, and the pharmacokinetics of weekly administered exenatide LAR. Secondary objectives included effects on A1C, fasting blood glucose and body weight.

 

In the study, A1C improved approximately 2% for subjects receiving the high dose of exenatide LAR, compared to placebo. At the beginning of the study, the average A1C of study participants was approximately 8.5%. The decrease in A1C was progressive with no evidence of a plateau at week 15. Twelve of the 14 high-dose subjects who entered the study with an A1C greater than 7% achieved an A1C of 7% or less at 15 weeks. None of the 14 subjects receiving placebo achieved that target. Fasting blood glucose concentrations were reduced by approximately 50 mg/dL for subjects in the high dose group compared

 

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to those receiving placebo. Subjects in this group experienced an average weight reduction of approximately 9 pounds compared to those receiving placebo. The most common adverse event was mild nausea, which occurred in approximately 20% of subjects in this group compared to approximately 7% in the placebo group. No severe gastrointestinal side effects were reported. No severe hypoglycemia was reported, and no subjects receiving exenatide LAR withdrew because of adverse events. In a 12-week follow up period after discontinuation of dosing no new safety signals were observed.

 

Obesity

 

Obesity is a condition that significantly raises the risk of illness, disability or death from serious medical conditions. It is associated with more than 30 medical conditions, including high blood pressure, type 2 diabetes, heart disease, stroke, and cancer of the breast, prostate, and colon. Obesity is the second-leading cause of preventable deaths and is a major health problem in all developed countries. In the United States, obesity-related medical costs exceed $125 billion a year. It is estimated that approximately 130 million adults in the United States are considered overweight, and approximately 60 million are obese. Of these, approximately 9 million are severely obese.

 

Genetic, metabolic, psychological, and environmental factors can all contribute to obesity. Obesity is measured by Body Mass Index, or BMI, a mathematical formula using a person’s height and weight. BMI is calculated by dividing a person’s weight in kilograms by the person’s height in meters squared. A person with a BMI between 25 and 29.9 is considered overweight. A person with a BMI of 30 or more is considered obese, and a person with a BMI of 40 or more is considered severely obese. Current treatments for obesity include diet, exercise, drug therapy and surgery.

 

Treatment of Obesity with Pramlintide

 

We are developing pramlintide acetate, the active ingredient in SYMLIN, as a potential treatment of obesity. Pramlintide acetate has been studied extensively in people with diabetes and has demonstrated the effect of lowering body weight.

 

In February 2006, we reported positive results from a Phase 2 dose-ranging study evaluating the safety and weight effects of pramlintide in obese subjects. After completing 16 weeks of treatment with pramlintide in addition to lifestyle intervention, subjects on average experienced an 8.4 to 13.4 pound weight loss from baseline, compared to a 6.2 pound weight loss with placebo plus lifestyle intervention. Several of the twice-daily and three-times-a-day pramlintide dosage arms achieved the primary study endpoint of significant difference in weight from placebo at week 16.

 

Weight loss experienced with pramlintide was typically progressive in nature, with no evidence of a plateau in effect at 16 weeks. At the end of the study, more pramlintide recipients than placebo recipients reported that study medication had helped them to control appetite and portion sizes.

 

Pramlintide was well tolerated, showed progressive weight loss at doses up to 360 micrograms, and no new safety signals were observed in this study, which included higher doses than those previously studied in obese subjects. There was clear evidence of a dose response for the twice-daily regimens. Consistent with previous observations, the most common adverse effect was mild nausea. Weight loss in subjects who did not experience nausea was similar to that seen in the overall study population.

 

Early Stage Programs

 

We are developing PYY 3-36 (AC162352) as a drug candidate for the potential treatment of obesity. Independent researchers have reported a reduction in food intake in humans using PYY 3-36. In 2003, we conducted preclinical studies on AC162352. We completed a Phase 1 study in 2004, and are currently reviewing our development options.

 

In addition, in 2006 we plan to file an IND and commence a Phase 1 clinical trial for the treatment of obesity with a molecule discovered and identified by our research program. In 2005, we conducted preclinical studies on this compound and based on our evaluation of these results, have decided to advance this program into human trials.

 

Cardiovascular Disease

 

Congestive heart failure, or CHF, occurs when the heart cannot adequately pump oxygenated blood throughout the body, resulting in impaired kidney function and an accumulation of fluid in the lungs and other body tissues. Many diseases or medical conditions contribute to CHF, including ischemic heart disease, high blood pressure and diabetes. CHF carries risks of morbidity and mortality above and beyond those of the underlying diseases. More than 5 million persons in the United States are affected with CHF, and it is the most frequent cause of hospitalization for persons 65 and older.

 

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AC2592 (GLP-1)

 

We are developing GLP-1, or AC2592, for the treatment of congestive heart failure. GLP-1 is a naturally occurring hormone produced in the gut in response to food intake.

 

In July 2003, we reported on an open-label Phase 2 study utilizing the continuous infusion of GLP-1 in 14 patients with New York Heart Association (NYHA) Class III or IV congestive heart failure. Patients showed general improvement in a composite score designed to quantify quality-of-life and cardiac function while receiving study medication. The composite score returned to baseline when medication was discontinued. The severity of heart failure, as indicated by NYHA class, also improved during GLP-1 administration. The most common adverse event reported was mild to moderate nausea.

 

We filed an IND for AC2592 and initiated a Phase 2 multi-dose clinical study of AC2592 in the fourth quarter of 2004. This multi-dose study of approximately 180 patients is a placebo-controlled, multi-center trial to evaluate the efficacy, safety and tolerability of AC2592 in subjects with NYHA Class III or IV congestive heart failure. The primary endpoint is peak oxygen consumption and the secondary endpoints are related to quality-of-life and cardiac function, including left ventricular ejection fraction and BNP. We expect the study to be completed in 2006.

 

Research Activities

 

A key element of our strategy is to develop first-in-class compounds for treating metabolic diseases. To achieve this goal, we are exploring hormones with multiple mechanisms of action that will potentially lead to products that have utility in treatment of more than one disease with the potential for many product forms. To do so, we take an integrated and biological, rather than a target-driven, approach to research. Our research is centered on peptide hormones that play an important metabolic role, and which we consider more likely to have an acceptable safety profile because these hormones exist naturally in the human body. Our development path begins with identifying a particular peptide, and then determining if it is a circulating hormone, a substance that travels through the bloodstream to affect bodily functions. We then attempt to understand the hormone’s functionality and potential impact on a disease. Rather than starting with a known biology and targeting molecules to modify, enhance, or block it, our scientists are discovering the biology of previously unknown peptides, and uncovering utility that could potentially translate into a new human therapy.

 

Based on a premise that every peptide hormone has a utility – and a potential therapeutic benefit – we have developed a proprietary and continually growing peptide hormone library (PHORMOLÔ). PHORMOL encompasses an extensive panel of potentially valuable biologics that have been taken from nature, including human peptides not previously described. All of these have been synthesized to create a rich source of compounds for ongoing research in their functionality, utility, and potential value in treating a range of human diseases.

 

The conventional development process emphasizes utilizing isolated cells or molecular targets to further drug discovery. Our approach to research calls for our scientists to quickly move to in vivo testing, using highly predictive animal models that allow us to design subsequent information-rich clinical trials in humans.

 

We currently have approximately 500 full-time employees dedicated to our research and development activities. We also have more than 165 employees with Ph.D., Pharm.D. or M.D. degrees, several of whom are diabetologists.

 

We are also using our resources to optimize pharmaceutical properties of peptide drugs to develop new peptide hormone analogs.

 

In the years ended December 31, 2005, 2004, and 2003, we incurred research and development expense of $132.1 million, $119.6 million, and $149.4 million, respectively.

 

In-Licensing Activities

 

To augment our internal discovery and development capabilities, we also license or acquire rights to compounds, drug candidates and technologies that have been developed outside of Amylin. We have recently completed three acquisitions which add to our intellectual property portfolio and we continue to evaluate other in-licensing opportunities.

 

Leptin    In early 2006, we acquired the exclusive rights to the leptin molecular franchise and program from Amgen, Inc. Leptin is a naturally occurring protein hormone secreted by fat cells. It plays a key role in metabolism through multiple metabolic actions and appears to act primarily at the hypothalamus to regulate food intake and energy expenditure. Under the terms of the license agreement, we made an up-front payment, may make potential future payments related to technology transfer and development

 

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and regulatory milestones and will pay royalties on any product sales. Our license includes exclusive rights to the leptin intellectual property developed by Amgen as well as intellectual property Amgen originally licensed from Rockefeller University.

 

Leptin’s roles in the treatment of obesity and lipodystrophy have been extensively studied, and the lead molecules have a strong safety profile. Humans suffering from lipodystrophy, a disease characterized by loss of body fat and consequent metabolic disorders (insulin resistance, hyperglycemia, and dyslipidemia) are rendered incapable of secreting sufficient amounts of leptin due to the loss of fat. We plan to further explore leptin’s utility for this and other metabolic disorders.

 

Gryphon. In late 2005, we acquired the chemical ligation technology and intellectual property from Gryphon Therapeutics, Inc. This acquisition expands our chemistry capabilities and improves our flexibility for the synthesis and precision engineering of larger peptides and proteins for research. This technology will enable us to create and alter longer-chain molecules using synthetic chemical processes rather than design-intensive and time-consuming recombinant processes, thus expanding our peptide and protein library.

 

Diabetica. In the first quarter of 2006, we in-licensed intellectual property and other rights to glucose-dependent insulinotropic polypeptide (GIP) agonists from Diabetica, Ltd.  The transaction included rights to certain pre-clinical GIP agonist molecules.  We plan to explore the utility of GIP compounds in diabetes and other metabolic disorders.

 

Competition

 

Biotechnology and pharmaceutical companies are highly competitive. There are many pharmaceutical companies, biotechnology companies, public and private universities and research organizations actively engaged in the research and development of products that may be similar to our products. A number of our largest competitors, including AstraZeneca, Bristol-Myers Squibb Company, GlaxoSmithKline, Lilly, Merck & Co., Novartis AG, Novo Nordisk, Pfizer, Sanofi-Aventis and Takeda Pharmaceuticals, are pursuing the development of or are marketing pharmaceuticals that target the same diseases that we are targeting, and it is probable that the number of companies seeking to develop products and therapies for the treatment of diabetes, obesity, cardiovascular disease, and other metabolic disorders will increase. Many of these and other existing or potential competitors have substantially greater financial, technical and human resources than we do and may be better equipped to develop, manufacture and market products. These companies may develop and introduce products and processes competitive with or superior to ours. In addition, other technologies or products may be developed that have an entirely different approach or means of accomplishing the intended purposes of our products, which might render our technology and products noncompetitive or obsolete. For example, all of our current drug products are injectable, and may have to compete with therapies that do not require injection. We cannot be certain that we will be able to compete successfully.

 

SYMLIN is the only non-insulin-based drug product approved for improving blood glucose control in people with type 1 diabetes. Further, insulin and oral medications are often insufficient for many people with type 2 diabetes to achieve satisfactory glucose and weight control. BYETTA or SYMLIN may be complementary to, or competitive with, these other medications.

 

BYETTA and SYMLIN must compete with established therapies for market share. In addition, many companies are pursuing the development of novel pharmaceuticals that target diabetes. These companies may develop and introduce products competitive with or superior to BYETTA or SYMLIN. Such competitive products and potential products include:

 

•     sulfonylureas;

•     metformin;

•     insulins (injectable and inhaled versions);

•     thiazolidinediones (TZDs);

•     glinides;

•     dipeptidyl peptidase type IV (DPP-IV) inhibitors

•     PPARs; and

•     alpha-glucosidase inhibitors.

 

There is substantial competition in the discovery and development of treatments for obesity, as well as emerging prescription and over-the-counter treatments for this condition. Current treatments for obesity include dietary therapy, physical activity, drug therapy and surgery. Hoffmann-LaRoche and Abbott Laboratories already market oral medicines for the treatment of obesity. Sanofi-Aventis has a product candidate that has received an approvable letter from the FDA, and a number of other pharmaceutical companies are developing new potential therapeutics.

 

Current therapies for congestive heart failure in patients include angiotensin converting enzyme inhibitors, angiotensin

 

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receptor blockers, beta blockers, aldosterone antagonists and Nesiritide (B-type natiuretic peptide). Other therapies include the use of various devices or the periodic infusion of inotropic agents. Endothelin receptor antagonist and other therapies and devices are under investigation for the treatment of heart failure. None of these aforementioned agents or therapies are directed at correcting the cardiac metabolic abnormalities associated with congestive heart failure.

 

Patents, Proprietary Rights, and Licenses

 

We believe that patents and other proprietary rights are important to our business. Our policy is to file patent applications to protect technology, inventions and improvements that may be important to the development of our business. We also rely upon trade secrets, know-how, continuing technological innovations and licensing opportunities to develop and maintain our competitive position. We plan to enforce our issued patents and our rights to proprietary information and technology. We review third-party patents and patent applications, both to shape our own patent strategy and to identify useful licensing opportunities.

 

We have a number of patents, patent applications and rights to patents related to our compounds, products and technology, but we cannot be certain that issued patents will be enforceable or provide adequate protection or that pending patent applications will result in issued patents. We have also filed foreign counterparts of many of these issued patents and applications.

 

We may obtain patents for our compounds many years before we obtain marketing approval for them. Because patents have a limited life, which may begin to run prior to the commercial sale of the related product, the commercial value of the patent may be limited. However, we may be able to apply for patent term extensions. For example, applications for patent term extensions for patents on BYETTA and SYMLIN have been filed in the United States, to compensate in part for delays in obtaining marketing approval. Similar patent term extensions may be available for other products that we are developing, but we cannot be certain we will obtain them.

 

Included within our exenatide patent portfolio are issued patents for:

 

•              pharmaceutical compositions containing exenatide;

•              modulating gastric emptying;

•              inhibiting glucagon secretion;

•              stimulating insulin release; and

•              reducing food intake.

 

These patents expire between 2013 and 2020. We do not have a composition of matter patent for the exenatide molecule.

 

Included within our pramlintide patent portfolio are issued patents for:

 

•              pramlintide and other amylin agonist analogues invented by our researchers;

•              amylin agonist pharmaceutical compositions, including compositions containing pramlintide; and

•              methods for treating diabetes and related conditions using  amylin agonists.

 

These patents expire between 2009 and 2018.

 

With respect to our drug candidates, we have patents and patent applications pending, or have licensed patents and patent applications, relevant to the development and commercialization of such drug candidates.

 

Generally, our policy is to file foreign counterpart applications in countries with significant pharmaceutical markets.

 

It is also very important that we do not infringe patents or proprietary rights of others and that we do not violate the agreements that grant proprietary rights to us. If we do infringe patents or violate these agreements, we could be prevented from developing or selling products or from using the processes covered by those patents or agreements, or we could be required to obtain a license from the third party allowing us to use their technology. We cannot be certain that, if required, we could obtain a license to any third-party technology or that we could obtain one at a reasonable cost. If we were not able to obtain a required license, we could be adversely affected. Because patent applications are confidential for at least some period of time, there may be pending patent applications from which patents will eventually issue and prevent us from developing or selling certain products unless we can obtain a license to use the patented technology.

 

Patents relating to pharmaceutical, biopharmaceutical and biotechnology products, compounds and processes such as those that cover our existing compounds, products and processes and those that we will likely file in the future do not always provide complete or adequate protection. Future litigation or reexamination proceedings regarding the enforcement or validity of our existing patents or any future patents could invalidate our patents or substantially reduce their protection. In addition, our pending patent

 

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applications and patent applications filed by our collaborative partners may not result in the issuance of any patents or may result in patents that do not provide adequate protection. As a result, we may not be able to prevent third parties from developing the same compounds and products that we have developed or are developing. In addition, certain countries do not permit enforcement of our patents, and manufacturers are able to sell generic versions of our products in those countries.

 

We also rely on unpatented trade secrets and improvements, unpatented internal know-how and technological innovation. We protect these rights mainly through confidentiality agreements with our corporate partners, employees, consultants and vendors. These agreements provide that all confidential information developed or made known to an individual during the course of their relationship with us will be kept confidential and will not be used or disclosed to third parties except in specified circumstances. In the case of employees, the agreements provide that all inventions made by the individual while employed by us will be our exclusive property. We cannot be certain that these parties will comply with these confidentiality agreements, that we have adequate remedies for any breach, or that our trade secrets will not otherwise become known or be independently discovered by our competitors. Under some of our research and development agreements, inventions discovered in certain cases become jointly owned by us and our corporate partner and in other cases become the exclusive property of one of us. It can be difficult to determine who owns a particular invention and disputes could arise regarding those inventions.

 

Government Regulation

 

Regulation by governmental authorities in the United States and foreign countries is a significant factor in the development, manufacture and marketing of pharmaceutical products. All of our potential products will require regulatory approval by governmental agencies prior to commercialization. In particular, human therapeutic products are subject to rigorous preclinical testing and clinical trials and other pre-market approval requirements by the FDA and regulatory authorities in foreign countries. Various federal, state and foreign statutes and regulations also govern or influence the manufacturing, safety, labeling, storage, record keeping and marketing of such products.

 

The activities required before a pharmaceutical agent may be marketed in the United States begin with preclinical testing. Preclinical tests include laboratory evaluation of product chemistry and animal studies to assess the potential safety and activity of the product and its formulations. The results of these studies must be submitted to the FDA as part of an IND which must be reviewed by the FDA before a proposed clinical trial can begin. Typically, clinical trials involve a three-phase process. In Phase 1, clinical trials are conducted with a small number of healthy volunteers to determine the early safety and tolerability profile and the pattern of drug distribution and metabolism. In Phase 2, clinical trials are conducted with groups of patients afflicted with a specified disease in order to determine preliminary efficacy, dosing regimens and expanded evidence of safety. In Phase 3, large-scale, multi-center, adequate and well-controlled comparative clinical trials are conducted with patients afflicted with a target disease in order to provide enough data for the statistical proof of efficacy and safety required by the FDA and others. The results of the preclinical testing and clinical trials for a pharmaceutical product are then submitted to the FDA in the form of a New Drug Application, or NDA, for approval to commence commercial sales. In responding to an NDA, the FDA may grant marketing approval, request additional information, or deny the application if it determines that the application does not satisfy its regulatory approval criteria.

 

Among the conditions for NDA approval is the requirement that the prospective manufacturer’s quality control and manufacturing procedures conform to cGMP. In complying with cGMP, manufacturers must continue to expend time, money and effort in the area of production, quality control, and quality assurance to ensure full technical compliance. Manufacturing facilities are subject to periodic inspections by the FDA to ensure compliance.

 

We are also subject to various federal, state, and local laws, regulations and recommendations relating to safe working conditions; laboratory and manufacturing practices; the experimental use of animals; and the use and disposal of hazardous or potentially hazardous substances, including radioactive compounds and infectious disease agents, used in connection with our research.

 

The activities required before a pharmaceutical agent may be marketed in the European Union are dictated by the International Conference on Harmonization and are generally similar to those established in the United States. Approval of new drugs across the European Union relies on either the mutual recognition process or the centralized approval process of the EMEA. Under the centralized procedure, the marketing application is referred for review to two review teams, each representing one of the member countries. Each reviewer then forwards an early assessment to the Committee for Proprietary Medicinal Products, or CPMP, for discussion and preparation of an initial consolidated assessment report, including a list of questions requesting clarification as well as additional information. This step initiates a series of dialogues, meetings and other communications among the CPMP, the two review teams and the applicant, leading in turn to clarification, education and refinement of the original assessment reports. Ultimately, a decision is reached to either grant marketing approval or deny the application if it is determined that the application does not satisfy the regulatory approval criteria. An alternative regulatory procedure in Europe to the centralized procedure for some drugs is the mutual recognition process. Under the mutual recognition process, an application is filed in one country for review. If the drug is approved in that country, it may only be marketed initially in that country. However, under the mutual recognition process, other

 

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European countries may individually recognize the approval and allow the drug to then be marketed in such countries.

 

The clinical testing, manufacture and sale of pharmaceutical products outside of the United States and the European Union are subject to regulatory approvals by other jurisdictions which may be more or less rigorous than those required by the United States or the European Union.

 

Employees

 

As of December 31, 2005, we had approximately 1,150 full-time employees. A significant number of our management and professional employees have had experience with pharmaceutical, biotechnology or medical product companies. We believe that we have been highly successful in attracting skilled and experienced personnel. None of our employees is covered by collective bargaining agreements and we consider relations with our employees to be good.

 

Directors and Executive Officers

 

The names of our directors and executive officers and certain information about them as of February 15, 2006 are set forth below:

 

Name		Age		Position
Ginger L. Graham (4)		50		President, Chief Executive Officer and Director
Joseph C. Cook, Jr. (4)		64		Chairman of the Board
Vaughn D. Bryson (1) (3)		67		Director
Karin Eastham (2)		56		Director
James R. Gavin III, M.D., Ph.D. (3)		60		Director
Howard E. Greene, Jr. (2) (4)		63		Director
Terrance H. Gregg (1) (3)		57		Director
Jay S. Skyler, M.D., MACP		59		Director
Joseph P. Sullivan (2) (4)		63		Director
Thomas R. Testman (2)		69		Director
James N. Wilson (1) (3)		62		Director
Daniel M. Bradbury		44		Chief Operating Officer
Alain D. Baron, M.D.		52		Senior Vice President, Research
Dwayne M. Elwood		57		Senior Vice President, Marketing
Orville G. Kolterman, M.D.		58		Senior Vice President, Clinical and Regulatory Affairs
Roger Marchetti		47		Senior Vice President, Human Resources and Corporate Services
Craig A. Eberhard		46		Vice President, Sales
Mark G. Foletta		45		Vice President, Finance and Chief Financial Officer
Lloyd A. Rowland		49		Vice President, Legal, General Counsel, Secretary and Chief Compliance Officer
Gregg Stetsko, Ph.D.		49		Vice President, Operations

 

(1)           Member of the Compensation and Human Resources Committee.

(2)           Member of the Audit Committee.

(3)           Member of the Nominating and Governance Committee.

(4)           Member of the Finance Committee.

 

Ms. Graham has been our President and Chief Executive Officer since September 2003. Ms. Graham has served as a director since November 1995 and currently serves on the Finance Committee. She previously served on the Audit Committee and the Nominating and Governance Committee. From February 2000 until June 2003, Ms. Graham held various positions with Guidant Corporation, notably as Advisor to the President, Group Chairman; Office of the President; and President of the Vascular Intervention Group and Vice President. Ms. Graham held various positions with Eli Lilly and Company from 1979 to 1992 including sales, marketing and strategic planning positions. She serves on the board of directors of the Pharmaceutical Research and Manufacturers of America, the California Healthcare Institute, the Harvard Business School Health Advisory Board, the Harvard Business School Dean’s Advisory Board, the Advisory Board for the Kellogg Center for Executive Women, the Advisory Board for the California Council on Science and Technology, and the University of California, San Diego Health Sciences Advisory Board. Ms. Graham received an M.B.A. from Harvard University.

 

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Mr. Cook has been our Chairman of the Board since March 1998. He currently serves as chair of our Finance Committee. He served as Chief Executive Officer from March 1998 until September 2003. From 1994 to 1998, Mr. Cook served as a member of our Board and a consultant to us. Mr. Cook is a founder and serves as Chairman of the Board of Microbia, Inc., a privately held biotechnology company. He also serves as a director of Corcept Therapeutics Incorporated. Mr. Cook is also a founder of Mountain Group Capital, LLC, Clinical Products, Inc., and Mountain Ventures, Inc. Mr. Cook also serves as Chairman of the Advisory Board of the College of Engineering, University of Tennessee, on the Board of Trustees for Louisville Presbyterian Theological Seminary and the Board of Mercy Ministries, Inc. He formerly served as Vice-Chairman of the Board of the American Diabetes Research Foundation. Mr. Cook retired as a Group Vice President of Eli Lilly and Company in 1993 after more than 28 years of service. Mr. Cook received a B.S. in Engineering from the University of Tennessee.

 

Mr. Bryson has served as a director since July 1999 and serves as the chair of our Nominating and Governance Committee and on the Compensation and Human Resources Committee. Mr. Bryson was a thirty-two year employee of Eli Lilly and Company and retired as its President and Chief Executive Officer in 1993. He was Executive Vice President from 1986 until 1991, and served as a member of Eli Lilly’s board of directors from 1984 until his retirement in 1993. Mr. Bryson was Vice Chairman of Vector Securities International from April 1994 to 1996. Mr. Bryson is President of Clinical Products, Inc., which develops and markets medical foods for people with diabetes and obesity. He serves on the board of directors of AtheroGenics, Inc., Chiron Corporation and ICOS Corporation. Mr. Bryson received a B.S. in Pharmacy from the University of North Carolina and completed the Sloan Program at the Stanford University Graduate School of Business.

 

Ms. Eastham has served as a director since September 2005 and serves on the Audit Committee. She has over 25 years experience in financial and operations management, primarily in life sciences companies. She currently serves as Executive Vice President and Chief Operating Officer, and as a member of the Board of Trustees of the Burnham Institute for Medical Research, a non-profit corporation engaged in basic biomedical research and the home to three research centers – a Cancer Center, the Del E. Webb Center for Neuroscience and Aging and a Center for Research on Infectious and Inflammatory Diseases. From April 1999 to May 2004, Ms. Eastham served as Senior Vice President, Finance, Chief Financial Officer, and Secretary of Diversa Corporation. She previously held similar positions with CombiChem, Inc., a computational chemistry company, and Cytel Corporation, a biopharmaceutical company. Ms. Eastham also held several positions, including Vice President, Finance, at Boehringer Mannheim Corporation, from 1976 to 1988. Ms. Eastham also serves as a director for Tercica, Inc., Illumina, Inc., and SGX Pharmaceuticals, Inc. Ms. Eastham received a B.S. and an M.B.A. from Indiana University and is a Certified Public Accountant and a Certified Director.

 

Dr. Gavin has served as a director since December 2005 and serves on the Nominating and Governance Committee. Dr. Gavin is currently the interim Chief Executive Officer of MicoIslets, Inc. and is Clinical Professor of Medicine, Emory University School of Medicine. He also serves as Executive Vice President for Clinical Affairs, Healing Our Village, Inc. He was President of the Morehouse School of Medicine from 2002 to 2004. Dr. Gavin is a member of the board of directors of Baxter International Inc., Anastasia Marie Laboratories, Inc., dLife, Inc., and MicroIslets, Inc. Dr. Gavin was Chairman of the board of directors of Equidyne Corporation from August 2001 to 2003. He was also a member of the board of directors of Taste for Living, Inc. from 1999 to 2002. From 1991 to 2002, Dr. Gavin was the Senior Scientific Officer of the Howard Hughes Medical Institute. From 2002 until 2005, he served as National Chairman of the National Diabetes Education Program. He completed his B.S. in Chemistry at Livingstone College, a Ph.D. in Biochemistry at Emory University and his M.D. at Duke University Medical School. Dr. Gavin has received numerous civic and academic awards and honors.

 

Mr. Greene is our co-founder and has served as a director since our inception in 1987. Mr. Greene serves on the Audit Committee and the Finance Committee. Mr. Greene is an entrepreneur who has participated in the founding and/or management of eleven medical technology companies over two decades, including three companies for which he served as chief executive officer. From 1987 to 1996, Mr. Greene served as our Chief Executive Officer. From 1986 until 1993, Mr. Greene was a founding general partner of Biovest Partners, a seed venture capital firm. He was Chief Executive Officer of Hybritech from 1979 until its acquisition by Eli Lilly and Company in 1986, and he was co-inventor of Hybritech’s patented monoclonal antibody assay technology. Prior to joining Hybritech, he was an executive with the medical diagnostics division of Baxter Healthcare Corporation from 1974 to 1979 and a consultant with McKinsey & Company from 1967 to 1974. He is a director of Biosite Incorporated. Mr. Greene received an M.B.A. from Harvard University.

 

Mr. Gregg has served as a director since October 2001 and serves on the Compensation and Human Resources Committee and the Nominating and Governance Committee. Mr. Gregg is associated with Galen-Partners, a venture capital firm, as a Special Ventures Partner. Until September 2004, Mr. Gregg served as a senior advisor to the diabetes business of Medtronic, Inc., a medical technology company. He had served in this capacity since he retired in 2002 as Vice President of Medtronic and as President of Medtronic MiniMed, positions he had held since 2001. Mr. Gregg previously served as President and Chief Operating Officer of Minimed Inc. from 1996 until its acquisition by Medtronic in 2001. Mr. Gregg joined Minimed as Vice President of Regulatory Affairs and Clinical Research in 1994 and in 1995 was promoted to Executive Vice President, Operations. Prior to joining Minimed, Mr. Gregg spent the preceding nine years as Vice President of Governmental Affairs for Ioptex Research, the ophthalmic surgical products subsidiary of Smith & Nephew, PLC. Prior to joining Ioptex Research, Mr. Gregg was responsible for Regulatory Affairs,

 

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Clinical Research and Quality Assurance for divisions of Allergan, Inc. Mr. Gregg serves on the board of directors of Vasogen, Inc., LMS Medical Systems, Ltd., and DexCom, Inc. Mr. Gregg is also an Ambassador to the President of the University of Southern California, and formerly served as the Chairman of the American Diabetes Association Research Foundation Board. Mr. Gregg received a B.S. in Zoology from Colorado State University.

 

Dr. Skyler has served as a director since August 1999. He is Professor of Medicine, Pediatrics and Psychology, in the Division of Endocrinology Diabetes and Metabolism; and Associate Director for Academic Programs at the Diabetes Research Institute; all at the University of Miami Miller School of Medicine in Florida, where he has been employed since 1976. He is also Study Chairman for the National Institute of Diabetes & Digestive & Kidney Diseases of the Type 1 Diabetes TrialNet clinical trial network, and serves on the board of directors of DexCom, Inc. Dr. Skyler has served as President of the American Diabetes Association and as Vice President of the International Diabetes Federation. Dr. Skyler serves on the editorial board of several diabetes and general medicine journals. He received his B.S. from Pennsylvania State University, his M.D. from Jefferson Medical College, and completed postdoctoral studies at Duke University Medical Center.

 

Mr. Sullivan has served as a director since September 2003 and serves on the Audit Committee and the Finance Committee. Mr. Sullivan is currently Chairman of the Board of Advisors of RAND Health and Vice Chairman of the Board of the UCLA Medical Center. From 2000 to 2003, Mr. Sullivan served as Chairman, Chief Executive Officer and a director of Protocare, Inc. From 1993 to 1999, he served as Chairman, Chief Executive Officer and a director of American Health Properties, Inc. For the previous twenty years, Mr. Sullivan was an investment banker with Goldman Sachs. Mr. Sullivan also currently serves on the board of directors of Covenant Care, Inc. (a private nursing home company) and Health Care Property Investors, Inc. (a real estate investment trust). Mr. Sullivan received his M.B.A. from Harvard University and his J.D. from the University of Minnesota Law School.

 

Mr. Testman has served as a director since December 2002 and serves as the chair of our Audit Committee. Mr. Testman is a former managing partner of Ernst & Young, LLP where, during his tenure from 1962 to 1992, he served as managing partner of both Health Care Services and Management Consulting Services for the West Coast and national practices. He also served as an area managing partner for the audit and tax practice. Mr. Testman currently serves on the board of directors of Endocare, Inc. He formerly served as Chairman of the Board of Specialty Laboratories, Inc. and on the board of directors of three other publicly held companies. He also serves on the board of four privately held health-care companies. He received an M.B.A. from Trinity University and is a Certified Public Accountant (retired).

 

Mr. Wilson has served as a director since March 2002 and serves as the chair of our Compensation and Human Resources Committee and on the Nominating and Governance Committee. He is a director and Chairman of the Board of both Corcept Therapeutics Inc. and NuGEN, Inc. From 1996 to 2001, Mr. Wilson was Chairman of the Board of Amira Medical, Inc. From 1990 to 1994, Mr. Wilson served as President and Chief Operating Officer of Syntex Corporation. Prior to 1990, he served in various senior management positions, including Chief Executive Officer for Neurex Corporation and LifeScan, Inc. Mr. Wilson serves on the board of directors of the Palo Alto Medical Foundation, A Stepping Stone Foundation (pre-school education) and the Insight Prison Project. Mr. Wilson received his B.A. and M.B.A. from the University of Arizona.

 

Mr. Bradbury has served as our Chief Operating Officer since June 2003, and previously served as Executive Vice President since June 2000. He previously served as Senior Vice President, Corporate Development from April 1998 to June 2000 and as Vice President of Marketing from 1995 to 1998. From 1994 to 1995, Mr. Bradbury, a native of the United Kingdom, served as Director of Marketing for Amylin Europe Limited. Prior to joining us, Mr. Bradbury was employed by SmithKline Beecham Pharmaceuticals from 1984 to 1994, where he held a number of positions, most recently as Associate Director, Anti-Infectives in the Worldwide Strategic Product Development Division. He is a director of Illumina, Inc. and two privately held biotechnology companies. Mr. Bradbury is a member of the Royal Pharmaceutical Society of Great Britain and serves on the Advisory Council of the Keck Graduate Institute and the University of California-San Diego Leadership Council. He received a Bachelor of Pharmacy from Nottingham University and a Diploma in Management Studies from Harrow and Ealing Colleges of Higher Education.

 

Dr. Baron has served as our Senior Vice President, Research since September 2004, and previously served as Senior Vice President, Clinical Research since June 2002. He previously served as Vice President, Clinical Research since December 1999. Dr. Baron has been clinical Professor of Medicine at the University of California, San Diego, and Clinical VA Staff Physician at the VA Medical Center, San Diego, since 2001. From 1989 to 2000, Dr. Baron worked for the Indiana University School of Medicine, where he served as Professor of Medicine and Director, Division of Endocrinology and Metabolism. Earlier, Dr. Baron held academic and clinical positions in the Division of Endocrinology and Metabolism at the University of California, San Diego, and the Veterans Administration Medical Center in San Diego. He is the recipient of several prestigious awards for his research in diabetes and vascular disease, including the 1996 Outstanding Clinical Investigator Award from the American Federation for Medical Research, several awards from the American Diabetes Association, and is a current National Institutes of Health MERIT award recipient. He earned his M.D. from the Medical College of Georgia, Augusta, and completed postdoctoral studies at the University of California, San Diego.

 

Mr. Elwood has served as Senior Vice President, Marketing since January 2003. Prior to joining us, Mr. Elwood served as a

 

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consultant to various pharmaceutical companies and other companies regarding pharmaceutical industry matters from November 2001 to January 2003. He served as Senior Vice President, Marketing and Sales at Corixa Corporation from December 2000, when Corixa acquired Coulter Pharmaceuticals, Inc., to November 2001. Mr. Elwood served in various positions at Coulter from 1997 until its acquisition by Corixa, including as Chief Commercial Officer beginning in 1999, and Senior Vice President, Marketing and Sales beginning in 1997. Earlier, Mr. Elwood served as Executive Director, New Product Development from 1990 to 1995, and Vice President, New Product Development from 1995 to 1997 for Ortho-McNeil Pharmaceutical, a division of Johnson & Johnson. From 1983 to 1990, Mr. Elwood served in various positions at Bristol-Myers Squibb Company. He received his B.S. in Business Administration, with a special emphasis in Marketing and Accounting, from California State University.

 

Dr. Kolterman has served as Senior Vice President, Clinical and Regulatory Affairs since August 2005. Dr. Kolterman previously served as Senior Vice President, Clinical Affairs from February 1997 to August 2005, Vice President, Medical Affairs from 1993 to 1997, and Director, Medical Affairs from 1992 to 1993. From 1983 to 1992, he was Program Director of the General Clinical Research Center and Medical Director of the Diabetes Center, at the University of California, San Diego Medical Center. Since 1989, he has been Adjunct Professor of Medicine at the University of California, San Diego. From 1978 to 1983, he was Assistant Professor of Medicine in the Endocrinology and Metabolism Division at the University of Colorado School of Medicine, Denver. He was a member of the Diabetes Control and Complications Trial Study Group and presently serves as a member of the Epidemiology of Diabetes Intervention and Complications Study. He is also a past-president of the California Affiliate of the American Diabetes Association. Dr. Kolterman earned his M.D. from Stanford University School of Medicine.

 

Mr. Marchetti has served as our Senior Vice President, Human Resources and Corporate Services since November 2005. Prior to joining us, he served as Vice President, Human Resources for Guidant Corporation from July 2002 to October 2005. Prior to this role, he served as Vice President, Finance and Information Systems, Guidant Europe, Middle East, Africa, and Canada, since the beginning of 2001. From 1999 through 2000, he served as Vice President, Human Resources for Guidant’s Vascular Intervention group, and served as Guidant’s first Corporate Controller and Chief Accounting Officer from 1994 to 1999. He joined Eli Lilly and Company’s Medical Devices and Diagnostics division in 1988. In 1992, he became Financial Manager of Lilly’s pharmaceutical manufacturing operations in Indianapolis. From 1980 to 1986, he was with the audit staff of Touche Ross & Co. (currently Deloitte). He is a Certified Public Accountant, and a graduate of LaSalle University in Philadelphia. He also received a MBA from the Ross School of Business at the University of Michigan.

 

Mr. Eberhard has served as Vice President, Sales since May 2003. Prior to joining us, Mr. Eberhard was Regional Vice President, Sales, at Pharmacia Corporation, for which he had worked for 21 years. During his career with Pharmacia Corporation and its related pre-merger companies, he held positions in sales, sales management, corporate training, sales operations, and managed care before assuming the Vice President, Sales position. Mr. Eberhard received his B.S. in Biology from California Lutheran University.

 

Mr. Foletta has served as Vice President, Finance and Chief Financial Officer since March 2000. Mr. Foletta previously served as a Principal of Triton Group Management, Inc. from 1997 to 2000. From 1986 to 1997, Mr. Foletta held a number of management positions with Intermark, Inc. and Triton Group Ltd., the most recent of which was Senior Vice President, Chief Financial Officer and Corporate Secretary. From 1982 to 1986, Mr. Foletta was with Ernst & Young, most recently serving as an Audit Manager. He is a director of Anadys Pharmaceuticals, Inc. Mr. Foletta earned his B.A. in Business Economics from the University of California, Santa Barbara. He is a Certified Public Accountant and a member of the Financial Executives Institute.

 

Mr. Rowland has served as our Vice President, Legal, General Counsel, and Secretary since September 2001. In 2005, he was also appointed Chief Compliance Officer. Prior to joining us, Mr. Rowland served in various positions at Alliance Pharmaceutical Corp., including as Vice President beginning in 1999, Secretary beginning in 1998 and General Counsel and Assistant Secretary beginning in 1993. Earlier, Mr. Rowland served as Vice President and Senior Counsel, Finance and Securities, at Imperial Savings Association for four years. For the previous eight years, he was engaged in the private practice of corporate law with the San Diego, California law firm of Gray, Cary, Ames & Fry, and the Houston, Texas law firm of Bracewell & Patterson. He received a J.D. from Emory University.

 

Dr. Stetsko was appointed Vice President, Operations in September 2004. Dr. Stetsko previously served as Vice President, Product Development since July 2002, and as Executive Director of Preclinical and Product Development from September 2000 to July 2002. Prior to joining us, from 1999 to 2000 he was an independent consultant providing regulatory, quality assurance and product development support to biotech companies. From 1994 to 1999, Dr. Stetsko was responsible for product development at Ligand Pharmaceuticals, most recently as the Senior Director of Pharmaceutical and Analytical Development. From 1987 to 1994, he held a number of management positions at Sterling Winthrop, most recently Associate Director of Pharmaceutical Sciences. Prior to employment at Sterling Winthrop, from 1983 to 1987, Dr. Stetsko was a senior research scientist at Sandoz, Ltd. He received his B.S. in Pharmacy from the University of Rhode Island and his Ph.D. in Industrial and Physical Pharmacy from Purdue University.

 

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Item 1A. Risk Factors

 

CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS

 

Except for the historical information contained herein or incorporated by reference, this annual report on Form 10-K and the information incorporated by reference 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 in the following section, as well as those discussed in Part II, Item 7 entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere throughout this annual report on Form 10-K and in any other documents incorporated by reference into this report. You should consider carefully the following risk factors, together with all of the other information included or incorporated in this annual report on Form 10-K. Each of these risk 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 do not presently know of or that we currently believe are immaterial which could also impair our business and financial position.

 

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 $206.8 million in 2005, $157.2 million in 2004 and $122.8 million in 2003. As of December 31, 2005, we had an accumulated deficit of approximately $1.0 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. We may not succeed in commercializing BYETTA or SYMLIN, or any of our other drug candidates. We may incur substantial operating losses for at least the next few years as we continue to expand our commercial function in the immediate future for BYETTA and SYMLIN and our research and development activities for the other drug candidates in our development pipeline. These losses, among other things, have had and will have an adverse effect on our stockholders’ equity and working capital. Even if we become profitable, we may not remain profitable.

 

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

 

Prior to the launch of BYETTA and SYMLIN, we had never sold or marketed our own products. Our ability to generate product revenue in the foreseeable future will depend solely on the commercialization of these products. The successful commercialization of BYETTA and SYMLIN will depend on many factors, including the following:

 

•  acceptance of these first-in-class medicines by the medical community, patients receiving therapy and third party payors;

•  a satisfactory efficacy and safety profile as demonstrated in a broad patient population;

•  successfully building and sustaining manufacturing capacity to meet demand;

•  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. Any safety issues could cause us to suspend or cease marketing of our approved products, subject us to substantial liabilities, and adversely affect our revenues and financial condition.

 

Moreover, the marketing of our approved products will be subject to extensive regulatory requirements administered by the FDA and other regulatory bodies, including adverse event reporting requirements and the FDA’s general prohibition against promoting products for unapproved uses. The manufacturing facilities for our approved products are also subject to continual review and periodic

 

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inspection and approval of manufacturing modifications. Manufacturing facilities that manufacture drug products for the U.S. market, whether they are located inside or outside the United States, are subject to biennial inspections by the FDA and must comply with the FDA’s 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 do not manufacture our own drug products or 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 new and/or approved drug candidates is a time-consuming and complex process. We currently have no manufacturing capabilities. In order to successfully commercialize our products, including BYETTA and SYMLIN, and continue to develop our drug candidates, including exenatide LAR, we need to contract or otherwise arrange for the necessary manufacturing.

 

There are a limited number of manufacturers that operate under the FDA’s cGMP regulations capable of manufacturing for us. 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 manufacturers limits our control regarding 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, 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. If any of these risks occur, our product supply will be interrupted resulting in lost or delayed revenues and delayed clinical trials.

 

If any of our existing or future manufacturers cease to manufacture or are otherwise unable to timely deliver sufficient quantities of BYETTA or SYMLIN, our ability to successfully commercialize our products will be diminished. Likewise, if any of our existing or future manufacturers cease to manufacture or are otherwise unable to timely deliver sufficient quantities of BYETTA, SYMLIN, exenatide LAR or our other drug candidates, in either bulk or dosage form, or other product components, including pens for the delivery of these products, 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. As a result, using a new manufacturer 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.

 

We have entered into agreements with Bachem California and Mallinckrodt, Inc. for the long-term supply of bulk exenatide. We have long-term agreements with CP Pharmaceuticals Ltd., a subsidiary of Wockhardt Ltd., and Baxter Pharmaceutical Solutions LLC, a subsidiary of Baxter, Inc., for the dosage form of BYETTA in cartridges. Currently, Baxter’s manufacturing process for BYETTA cartridges is undergoing validation. We have an agreement with Lilly to supply pens for delivery of BYETTA in cartridges. We have long-term agreements with Bachem and Lonza for the commercial manufacture of bulk pramlintide acetate, the active ingredient contained in SYMLIN and used in our treatment of obesity with pramlintide development program. We have a long-term contract with Baxter for the dosage form of SYMLIN in vials. We have a long-term agreement with CP Pharmaceuticals for the dosage form of SYMLIN in cartridges and are working with a manufacturer, Ypsomed AG, for the manufacture of disposable pens for delivery of SYMLIN in cartridges. Our manufacturers have not produced BYETTA or SYMLIN for commercial use for a sustained period of time. As such, additional unforeseeable risks 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 supplies of products with

 

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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 on a commercial scale the once-weekly formulation of exenatide LAR, if it is approved by the FDA, we must design, construct, validate and license a new facility.  We will depend upon Alkermes and Parsons to assist us in the design, construction and validation of the manufacturing facility. We have never established or operated a manufacturing facility and cannot assure you that we will be able to successfully establish or operate such a facility in a timely or economical manner, or at all.  In addition, we will depend upon Alkermes to successfully develop and transfer to us its technology for manufacturing the once-weekly formulation of exenatide LAR.  While Alkermes has manufactured exenatide LAR in small quantities for use in clinical trials, we cannot assure you that a commercial scale manufacturing process for exenatide LAR will be successfully developed and/or transferred to us in a timely or economical manner, or at all. In addition, we are dependent upon Alkermes to supply us with commercial quantities of the polymer required to manufacture exenatide LAR. We also will need to obtain sufficient supplies of diluent necessary for commercial manufacture of exenatide LAR. If we, together with Alkermes, are unable to successfully develop a commercial scale manufacturing process and increase our manufacturing scale to a commercially viable level, we may not be able to commercially launch exenatide LAR.

 

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 payors.

 

The requirements governing product licensing, pricing and reimbursement vary widely from country to country. Some countries require approval of the sale price of a drug before it can be marketed. In many countries, the pricing review period begins after product licensing approval is granted. As a result, we may obtain regulatory approval for a product in a particular country, but then be subject to price regulations that reduce our revenues from the sale of the product. Also, in some foreign markets, pricing of prescription pharmaceuticals is subject to continuing governmental control even after initial marketing approval. With respect to BYETTA, SYMLIN, or any of our potential drug candidates, we cannot be certain that the products will be considered cost effective and that reimbursement will be available or will be sufficient to allow us to sell the products on a competitive basis.

 

The continuing efforts of government, private health insurers, and other third-party payors 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, 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 newly approved health care products such as BYETTA and SYMLIN. Third-party payors, including Medicare, are challenging the prices charged for medical products and services. Government and other third-party payors increasingly are attempting to contain health care costs by limiting both coverage and the level of reimbursement for new drugs and by refusing, in some cases, to provide coverage for uses of approved products for disease indications for which the FDA has not granted labeling approval. Third-party insurance coverage may not be available to patients for BYETTA and/or SYMLIN or any other products we discover and develop. If government and other third-party payors do not provide adequate coverage and reimbursement levels for our products, the market acceptance of these products may be reduced.

 

We may require future capital and are uncertain of the availability or terms of additional funding, and if additional capital is not available or not available on acceptable terms, we may have to reduce the size of our operations.

 

We may need to continue to find additional sources of capital in order to successfully commercialize BYETTA and SYMLIN and to complete the development and commercialization of our drug candidates. Our future capital requirements will depend on many factors, including:

 

•  the costs of marketing and selling BYETTA and SYMLIN;

•  our ability, and the ability of any partner, to effectively market, sell and distribute BYETTA and SYMLIN;

•  the costs of manufacturing BYETTA, SYMLIN, exenatide LAR, and our other drug candidates;

•  the time and costs involved in designing, constructing, validating and licensing a facility to manufacture exenatide LAR;

•  the continuation of our collaboration with Lilly for the commercialization of BYETTA and the further development of sustained-release formulations of BYETTA, including exenatide LAR;

•  our ability to meet milestone objectives under our collaboration with Lilly;

•  our access to loan amounts under our collaboration with Lilly;

•  progress with our preclinical studies and clinical trials;

•  the time and costs involved in obtaining regulatory approvals for the marketing of any of our drug candidates;

•  scientific progress in our other research programs and the magnitude of these programs;

•  our ability to establish one or more development or commercialization arrangements for our drug candidates;

 

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•   the acquisition and implementation cost of any potential realized licenses or acquisitions;

•   the costs involved in preparing, filing, prosecuting, maintaining and enforcing patents or defending ourselves against competing technological and market developments; and

•   the potential need to repay existing indebtedness.

 

You should be aware that:

 

•  we may not be able to obtain additional financial resources in the necessary time frame or on terms favorable to us, if at all;

•  any available additional financing may not be adequate; and

•  we may be required to use a portion of future financing to repay existing indebtedness to our current or future creditors.

 

In the event we are unable to obtain additional financing on acceptable terms, we may have to delay, scale back or eliminate one or more of our development or commercialization programs, or obtain funds by entering into more arrangements with collaborative partners or others that may require us to relinquish rights to certain of our drug candidates or technologies that we would not otherwise relinquish.

 

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, Sanofi-Aventis, Lilly, GlaxoSmithKline, Merck & Co., Novartis, Novo Nordisk, Pfizer and Takeda Pharmaceuticals, are pursuing the development or marketing of pharmaceuticals that target the same diseases that we are targeting, and it is possible that the number of companies seeking to develop products and therapies for the treatment of diabetes, obesity, cardiovascular disease and other metabolic disorders will increase. Many of our competitors have substantially greater financial, technical, human and other resources than we do and may be better equipped to develop, manufacture and market technologically superior products. In addition, many of these competitors have significantly greater experience than we do in undertaking preclinical testing and human clinical studies of new pharmaceutical products and in obtaining regulatory approvals of human therapeutic products. Accordingly, our competitors may succeed in obtaining FDA approval for superior products. Furthermore, now that we have received FDA approval for BYETTA and SYMLIN, we may also be competing against other companies with respect to our manufacturing and product distribution efficiency and sales and marketing capabilities, areas in which we have limited or no experience as an organization.

 

Our initial target patient population for BYETTA is people with diabetes who have not achieved adequate glycemic control using metformin, a sulfonylurea or both two common oral therapies. Our target population for SYMLIN is people with either type 2 or type 1 diabetes whose therapy includes multiple mealtime insulin injections daily. Other products are currently in development or exist in the market that may compete directly with the products that we are developing or marketing. Various other products are available or in development to treat type 2 diabetes, including:

 

•  sulfonylureas;

•  metformin;

•  insulins, including injectable and inhaled versions;

•  glinides;

•  PPARS;

•  DPP-IV inhibitors;

•  alpha-glucosidase inhibitors; and

•  thiazolidinediones (TZDs).

 

In addition, several companies are developing various approaches 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.

 

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

 

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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.

 

We are substantially dependent on our collaboration with Lilly for the development and commercialization of BYETTA and dependent on Lilly and Alkermes for the development of exenatide LAR.

 

We have entered into collaborative arrangements with Lilly, who currently markets diabetes therapies and is developing additional diabetes drug candidates, to commercialize BYETTA and further develop sustained-release formulations of BYETTA, including exenatide LAR. We entered into this collaboration in order to:

 

•  fund some of our research and development activities;

•  assist us in seeking and obtaining regulatory approvals; and

•  assist us in the successful commercialization of BYETTA and exenatide LAR.

 

In general, we cannot control the amount and timing of resources that Lilly may devote to our collaboration. If Lilly fails to assist in the further development of exenatide LAR or the commercialization of BYETTA, or if Lilly’s efforts are not effective, our business may be negatively affected. We are primarily relying on Lilly to obtain regulatory approvals outside the United States for BYETTA and exenatide LAR. Our collaboration with Lilly may not continue or result in successfully commercialized drugs. Lilly can terminate our collaboration at any time upon 60 days notice. If Lilly ceased funding and/or developing and commercializing BYETTA or sustained-release formulations of BYETTA, we would have to seek additional sources for funding and may have to delay, reduce or eliminate one or more of our development programs for these compounds. We are also dependent on Alkermes for the development of exenatide LAR. 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.

 

We own or hold exclusive rights to many issued U.S. patents and pending U.S. patent applications related to the development and commercialization of exenatide, including BYETTA and exenatide LAR, 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 do not have a composition-of-matter patent covering exenatide. We do have issued and pending applications for formulations of BYETTA and exenatide LAR. We also own or hold exclusive rights to various foreign patent applications that correspond to issued U.S. patents or pending U.S. 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 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. In addition, because patent applications in the United States are maintained in secrecy for eighteen 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. In the event that a third party has also filed a patent on a similar invention, we may have to participate in interference proceedings declared by the U.S. Patent and Trademark Office to determine priority of invention, which could result in a loss of our patent position. Furthermore, we may not have identified all U.S. and foreign patents that pose a risk of infringement.

 

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

 

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determine that the patent is not enforceable. Proceedings involving our patents or patent applications or those of others could result in adverse decisions about:

 

•  the patentability of our inventions, products and drug candidates; and/or

•  the enforceability, validity or scope of protection offered by our patents.

 

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

 

Our business has a substantial risk of product liability claims, and insurance may be expensive or unavailable.

 

Our business exposes us to potential product liability risks that are inherent in the testing, manufacturing and marketing of human therapeutic products. Product liability claims could result in the imposition of substantial liability on us, a recall of products, or a change in the indications for which they may be used. We currently have limited product liability insurance. We cannot assure you that our insurance will provide adequate coverage against potential liabilities. Furthermore, product liability insurance is becoming increasingly expensive. As a result, we may not be able to obtain additional insurance or obtain insurance at a reasonable cost or in sufficient amounts to protect against losses that could have a material adverse effect on us.

 

Delays in the conduct or completion of our clinical trials, the analysis of the data from our clinical trials, or our manufacturing scale-up activities may result in delays in our planned filings for regulatory approvals, and may adversely affect our ability to enter into new collaborative arrangements.

 

We cannot predict whether we will encounter problems with any of our completed, ongoing or planned clinical studies that will cause us or regulatory authorities to delay or suspend our ongoing clinical studies, delay or suspend planned clinical studies, or delay the analysis of data from our completed or ongoing clinical studies. 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 large enough quantities to be economical, otherwise known as manufacturing scale-up. If the results of our ongoing or planned clinical studies for our drug candidates are not available when we expect or if we encounter any delay in the analysis of data from our clinical studies or if we encounter delays in our ability to scale-up our manufacturing processes:

 

•   we may be unable to complete our development programs for exenatide LAR, the treatment of obesity with pramlintide, or AC2592;

•   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 additional collaborative arrangements.

 

In addition, Lilly may terminate our collaboration for the development and commercialization of BYETTA and sustained-release formulations of exenatide at any time on 60 days’ notice. Moreover, if the FDA does not accept for filing an NDA for a sustained-release formulation of exenatide by December 31, 2007, Lilly will have the right to convert a portion of future milestone payments that we may receive under our collaboration into shares of our common stock at a conversion price equal to the fair market value of our common stock at the time of any such conversion.

 

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

 

•   ongoing discussions with the FDA or comparable foreign authorities regarding the scope or design of our clinical trials;

•   delays in enrolling volunteers;

•   lower than anticipated retention rate of volunteers in a clinical trial;

•   negative results of clinical studies;

•   insufficient supply or deficient quality of drug candidate materials or other materials necessary for the performance of clinical trials;

•   our inability to reach agreement with Lilly regarding the scope, design, conduct or costs of clinical trials with respect to sustained-release formulations of BYETTA; or

•   serious side effects experienced by study participants relating to a drug candidate.

 

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

 

Our drug candidates are subject to extensive government regulations related to development, clinical trials, manufacturing and commercialization. The process of obtaining FDA and other regulatory approvals is costly, time-consuming, uncertain and subject to unanticipated delays. Regulatory authorities may refuse to approve an application for approval of a drug candidate if they believe that applicable regulatory criteria are not satisfied. Regulatory authorities may also require additional testing for safety and efficacy. Moreover, if the FDA grants regulatory approval of a product, the approval may be limited to specific indications or limited with respect to its distribution, and expanded or additional indications for approved drugs may not be approved, which could limit our revenues. Foreign regulatory authorities may apply similar limitations or may refuse to grant any approval.

 

The data collected from our clinical trials may not be sufficient to support initial 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 FDA’s response is delayed or not favorable for any of our drug candidates, our stock price could decline significantly.

 

Moreover, manufacturing facilities operated 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.

 

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.

 

To market any of our products in the United States or elsewhere, we must develop internally or obtain access to sales and marketing forces with technical expertise and with supporting distribution capability in the relevant geographic territory. With respect to sales, marketing and distribution outside the United States, we will be substantially dependent on Lilly for activities relating to BYETTA and sustained-release formulations of BYETTA, including exenatide LAR. We believe that we will likely need to enter into marketing and distribution arrangements with third parties for, or find a corporate partner who can provide support for, the development and commercialization of SYMLIN or our other drug candidates outside the United States. We may also enter into arrangements with third parties for the commercialization of SYMLIN or any of our other drug candidates within the United States.

 

With respect to BYETTA and, if approved, exenatide LAR, Lilly is co-promoting within the United States. If Lilly ceased commercializing BYETTA or, if approved, exenatide LAR, for any reason, we would likely need to either enter into a marketing and distribution arrangement with a third party for those products or significantly increase our internal sales and commercialization infrastructure.

 

We may not be able to enter into marketing and distribution arrangements or find a corporate partner for SYMLIN or our other drug candidates. 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, with whom we choose to contract may not establish adequate sales and distribution capabilities or gain market acceptance for our products, if any.

 

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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.

 

We have substantial indebtedness outstanding and have the potential borrowing capacity under our collaboration with Lilly of up to $110 million. In June and July 2003, we issued $175 million of 2.25% convertible senior notes due 2008. In April 2004, we issued $200 million of 2.50% convertible senior notes due 2011. Our ability to make payments on our debt, including the notes, will depend on our future operating performance and ability to generate cash and may also depend on our ability to obtain additional debt or equity financing. During each of the last five years, our operating cash flows were negative and insufficient to cover our fixed charges. We may need to use our cash to pay principal and interest on our debt, thereby reducing the funds available to fund our research and development programs, strategic initiatives and working capital requirements. Our ability to generate sufficient operating cash flow to service our indebtedness, including the notes, 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 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.

 

Holders of our 2.25% convertible senior notes due 2008 and our 2.50% convertible senior notes due 2011 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. We may not have sufficient cash funds to redeem the notes upon a designated event. We may elect, subject to certain conditions, to pay the redemption price 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 in our common stock. In addition, although there are currently no restrictions on our ability to pay the redemption price under our existing debt agreements, future debt agreements may prohibit us from repaying the redemption price in either cash or common stock. If we are prohibited from redeeming the notes, we could seek consent from our lenders to redeem the notes. If we are unable to obtain their consent, we could attempt to refinance the notes. If we were unable to obtain a consent or refinance, we would be prohibited from redeeming the notes. If we were unable to redeem the notes upon a designated event, it would result in an event of default under the indentures governing the notes. An event of default under the indentures could result in a further event of default under our other then-existing debt. In addition, the occurrence of a designated event may be an event of default under our other debt.

 

If our research and development programs fail to result in additional drug candidates, our ability to generate revenue will be substantially limited.

 

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 revenues for us.

 

Our future success depends on our ability to retain our chief executive officer and other key executives and to attract, retain and motivate qualified personnel.

 

We are highly dependent on Ginger L. Graham, our President and Chief Executive Officer, and the other principal members of our executive and scientific teams. The 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, 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, 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 trade secrets and proprietary information.

 

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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 activities involve the use of hazardous materials, which subject us to regulation, related costs and delays and potential liabilities.

 

Our research and development involves the controlled use of hazardous materials, chemicals and various radioactive compounds. Although we believe that our 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. 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 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 plan, under which, in connection with a change in control, stock options held by our employees may become vested and our executive officers may receive severance benefits. We also have implemented a stockholder rights plan, also called a poison pill, which could make it uneconomical for a third party to acquire us on a hostile basis.

 

Our executive officers, directors and major stockholders control approximately 46% of our common stock.

 

As of December 31, 2005, executive officers, directors and holders of 5% or more of our outstanding common stock, in the aggregate, owned or controlled approximately 46% 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 and the uncertain number of additional shares that we may be required to issue under our agreements with Lilly, could adversely affect the trading price of our common stock. Our convertible notes are currently convertible into a total of up to approximately 11.2 million shares. In addition, the existence of these notes may encourage short selling of our common stock by market participants.

 

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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 operating performance of these biopharmaceutical and biotechnology companies. Since January 1, 2004, the high and low sales price of our common stock varied significantly, as shown in the following table:

 

		High			Low
Year ending December 31, 2006
First Quarter through March 1, 2006		$	45.79		$	35.58
Year ended December 31, 2005
Fourth Quarter		$	42.36		$	32.63
Third Quarter		35.47			18.50
Second Quarter		21.73			14.50
First Quarter		24.95			17.15
Year ended December 31, 2004
Fourth Quarter		$	24.01		$	18.80
Third Quarter		23.25			16.48
Second Quarter		26.80			19.69
First Quarter		25.63			18.49

 

Given the uncertainty of our future funding, the successful commercialization of BYETTA and SYMLIN 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;

•  clinical study results;

•  determinations by regulatory authorities with respect to our drug candidates;

•  developments in our relationships with current or future collaborative partners;

•  our ability to successfully implement our commercialization strategies;

•  fluctuations in our operating results;

•  developments in our relationships with third-party manufacturers of our products and other parties who provide services to us;

•  public concern as to the safety of drugs that we are developing;

•  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 continue to be the target of such litigation as a result of market price volatility in the future.

 

We are exposed to potential risks from recent legislation requiring companies to evaluate internal controls over financial reporting.

 

The Sarbanes-Oxley Act requires that we report annually on the effectiveness of our internal controls over financial reporting. Among other things, we must perform systems and processes evaluation and testing. We must also conduct an assessment of our internal controls to allow management to report on, and our independent registered public accounting firm to attest to, our assessment of our internal controls over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act. These requirements became effective for the first time for our fiscal year ended December 31, 2004, and neither we nor our independent registered public accounting firm had previously performed an evaluation of our internal controls over financial reporting under these new rules. 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 controls over financial reporting. Our future assessment, or the future assessments by our independent registered public accounting firm, may reveal material weaknesses in our internal controls. If material weaknesses are identified in the future we would be required to conclude that our internal controls over financial reporting are

 

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ineffective and we could be subject to sanctions or investigations by the SEC, the NASDAQ National Market or other regulatory authorities, which would require additional financial and management resources and could adversely affect the market price of our common stock.

 

Item 1B. Unresolved Staff Comments

 

None.

 

Item 2. Properties

 

Our primary administrative offices and research laboratories are located in San Diego, California. As of December 31, 2005, we occupied approximately 360,000 square feet of office and laboratory space. Our leases on a majority of these properties expire in 2015. We also maintain small offices in Boulder, Colorado, and Germany.

 

Our wholly-owned subsidiary, Amylin Ohio LLC, completed the purchase of an existing building and 26 acres of land located in West Chester, Ohio in December 2005. The building, once built out for the manufacture of exenatide LAR, will occupy approximately 150,000 square feet of manufacturing and office space.

 

Item 3. Legal Proceedings

 

None.

 

Item 4. Submission of Matters to a Vote of Security Holders

 

None.

 

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PART II

 

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

Our common stock is traded on The NASDAQ National Market under the symbol “AMLN.” The following table sets forth, for the periods indicated, the reported high and low sales price per share of our common stock on The NASDAQ National Market:

 

		High			Low
Year Ended December 31, 2005
Fourth Quarter		$	42.36		$	32.63
Third Quarter		35.47			18.50
Second Quarter		21.73			14.50
First Quarter		24.95			17.15
Year Ended December 31, 2004
Fourth Quarter		$	24.01		$	18.80
Third Quarter		23.25			16.48
Second Quarter		26.80			19.69
First Quarter		25.63			18.49

 

The last reported sale price of our common stock on The NASDAQ National Market on March 1, 2006 was $43.90. As of March 1, 2006, there were approximately 760 shareholders of record of our common stock.

 

We have never declared or paid any cash dividends on our capital stock. We currently intend to retain any future earnings for funding growth and, therefore, do not anticipate paying any cash dividends in the foreseeable future.

 

For information concerning prior stockholder approval of and other matters relating to our equity incentive plans, see “Equity Compensation Plan Information” under Item 12 in this annual report on Form 10-K.

 

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Item 6. Selected Financial Data

 

Please read the following selected financial data in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Consolidated Financial Statements and related notes included elsewhere in this annual report on Form 10-K.

 

 

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Overview

 

Amylin Pharmaceuticals, Inc. is a biopharmaceutical company engaged in the discovery, development and commercialization of innovative medicines to improve the lives of people with diabetes, obesity and cardiovascular disease. We have two approved products, BYETTA^® (exenatide) injection, and SYMLIN^® (pramlintide acetate) injection, both of which were commercially launched in the United States during the second quarter of 2005.

 

BYETTA is the first and only approved medicine in a new class of compounds called incretin mimetics. We began selling BYETTA in the United States in June 2005. It is approved as an adjunctive therapy to improve glycemic control in patients with type 2 diabetes who are taking metformin and/or sulfonylurea, two common oral therapies, but have not achieved adequate glycemic control.

 

We have an agreement with Eli Lilly and Company, or Lilly, for the global development and commercialization of exenatide. This agreement includes BYETTA and any sustained-release formulations of exenatide such as exenatide LAR. Under the terms of the agreement, operating profits from products sold in the United States are shared equally between Lilly and us and operating profits from products sold outside of the United States will be split 80% to Lilly and 20% to us. Lilly has primary responsibility for developing and commercializing BYETTA outside of the United States, including any sustained release formulations of exenatide.

 

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SYMLIN is the first and only approved medicine in a new class of compounds called amylinomimetics. We began selling SYMLIN in the United States in April 2005. 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 have a field force in excess of 400 people dedicated to marketing BYETTA and SYMLIN in the United States. Lilly also co-promotes BYETTA in the United States. Our field force includes our specialty and primary care sales forces, a managed care and government affairs organization, a medical science organization, and diabetes care specialists.

 

In addition to our marketed products, our development pipeline includes late-stage programs for diabetes and obesity, and a Phase 2 program in cardiovascular disease. We are working with Alkermes and Lilly to develop a sustained release formulation of exenatide, which we refer to as exenatide LAR, to enable once-weekly administration of exenatide for the treatment of type 2 diabetes. We also have multiple early stage programs for diabetes and obesity, maintain an active discovery research program focused on novel peptide therapeutics, and are actively seeking to in-license additional drug candidates.

 

Since our inception in September 1987, we have devoted substantially all of our resources to our research and development programs and, more recently, to the commercialization of our products. All of our revenues prior to May 2005 were derived from fees and expense reimbursements under our BYETTA collaboration agreement with Lilly, previous SYMLIN collaborative agreements and co-promotion agreements with each of Lilly and Reliant Pharmaceuticals, Inc. During the second quarter of 2005, we began to derive revenues from product sales of BYETTA and SYMLIN. We have been unprofitable since inception and may incur additional operating losses for at least the next few years. At December 31, 2005, our accumulated deficit was approximately $1.0 billion.

 

At December 31, 2005, we had approximately $443.4 million in cash, cash equivalents and short-term investments. In February and September 2005 we completed public offerings of our common stock, generating net proceeds to us of approximately $190 million and $152 million, respectively. We do not expect to generate positive operating cash flows for at least the next few years and accordingly, we may need to raise additional funds from outside sources. 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.

 

Critical Accounting Policies and Estimates

 

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses, and related disclosures of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to revenue recognition, inventory costs, research and development expenses and income taxes. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

 

We believe the following critical accounting policies affect the significant judgments and estimates used in the preparation of our consolidated financial statements (see Note 1 to our consolidated financial statements on page F-7).

 

Revenue Recognition

 

We recognize revenue from the sale of our products, license fees and milestones earned and for reimbursement of development costs based on contractual arrangements.

 

We sell our products to wholesale distributors, who in turn, sell to retail pharmacies and government entities. Decisions made by these wholesalers and their customers regarding the level of inventories they hold, and thus the amount of product they purchase, can materially affect the level of our product sales in any particular period.

 

We recognize revenue from the sale of our products when delivery has occurred and title has transferred to our wholesale customers. We recognize revenue net of allowances for discounts, distributor fees and product returns at the time of sale. We are required to make significant judgments and estimates 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 do not offer our customers a general right of return. However, we will accept returns of products that are damaged or defective when received by the customer or for any unopened product during the period beginning six months prior to and up to 12 months subsequent to its expiration date. As BYETTA and SYMLIN are new products, we estimate product returns based on the experience of our collaborative partner and industry trends for other products with similar characteristics. Additionally, we consider several other factors in our estimation process

 

 

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including our internal sales forecasts, the expiration dates of product shipped and third party data to assist us in monitoring estimated channel inventory levels and prescription trends.

 

Allowances for product discounts arise from chargebacks and rebates, which currently include mandated discounts to government entities, contracted discounts with commercial payors, and discounts for prescription coupons. Chargebacks are discounts that occur when a contracted customer purchases directly from an intermediary wholesale purchaser. The contracted customer generally purchases the product at its contracted price, plus a mark-up from the wholesaler. The wholesaler, in-turn, charges back to the Company the difference between the price initially paid by the wholesaler and the contracted price paid to the wholesaler by the customer. The allowance for chargebacks is based on expected utilization of these programs and estimated wholesaler inventory levels. Rebates are amounts owed based on contractual agreements or legal requirements with private sector and public sector (e.g. Medicaid) benefit providers after the final dispensing of the product by a pharmacy to a benefit plan participant. The allowance for rebates is based on expected patient usage and contractual terms. Prescription coupon discounts are amounts owed to pharmacies for redemption of coupons for a free prescription. We provide prescription coupons to physicians, who in turn distribute these coupons to patients. Patients may redeem the coupon at a pharmacy for a free prescription. We reimburse the pharmacy for the price it paid the wholesaler for the medicine. The allowance for prescription coupon discounts is based upon the number of unredeemed coupons in circulation and the expected redemption rate.

 

Inventories and Related Reserves

 

Inventories consist of raw materials, work-in-process and finished goods for SYMLIN and BYETTA. We maintain inventory reserves primarily for production failures and potential product expiration. The manufacturing processes for our products are complex. Deviations in the manufacturing process may result in production failures and additional inventory reserves. Obsolete inventory due to expiration may also result in additional inventory reserves. In estimating inventory obsolescence reserves, we analyze the shelf life, expiration dates and internal sales forecasts, each on a product-by-product basis.

 

Research and Development Expenses

 

Research and development costs are expensed as incurred and include: salaries and benefits; costs paid to third-party contractors to perform research, conduct clinical trials and develop and manufacture drug materials and delivery devices; and associated overhead expenses and facilities costs. Clinical trial costs are a significant component of research and development expenses and include costs associated with third-party contractors. Invoicing from third-party contractors for services performed can lag several months. We accrue the costs of services rendered in connection with third-party contractor activities based on our estimate of management fees, site management and monitoring costs and data management costs. Differences between actual clinical trial costs from estimated clinical trial costs have historically not been material and are adjusted for in the period in which they become known.

 

Income Taxes

 

We have net deferred tax assets relating primarily to net operating loss carry forwards and research and development tax credits. Subject to certain limitations, these deferred tax assets may be used to offset taxable income in future periods. Since we have been unprofitable since inception and the likelihood of future profitability is not assured, we have fully reserved for these deferred tax assets in our consolidated balance sheets at December 31, 2005 and 2004, respectively. If we determine that we are able to realize a portion or all of these deferred tax assets in the future, we will record an adjustment to increase their recorded value and a corresponding adjustment to increase income in that same period.

 

Recently Issued Accounting Pronouncements

 

In December 2004, The Financial Accounting Standards Board, or “FASB”, issued SFAS 123(R) “Share-Based Payment,” which requires stock-based compensation for an award of equity instruments, including stock options and employee stock purchase rights, issued to employees to be recognized as a cost in the financial statements. The cost of these awards are measured according to the grant date fair value of the stock options and is recognized over the period during which an employee is required to provide service in exchange for the award, which is usually the vesting period. In the absence of an observable market price for the stock awards, the grant-date fair value of the stock options would be based upon a valuation methodology that takes into consideration various factors, including the exercise price of the option, the expected term of the option, the current price of the underlying shares, the expected volatility of the underlying share price, the expected dividends on the underlying shares and the risk-free interest rate.

 

SFAS 123(R)  may be adopted using one of the following two methods:

 

•         A “modified prospective” method in which cost is recognized beginning with the effective date (a) based on the requirements of SFAS 123(R)  for all share-based payments granted after the effective date of SFAS 123(R)  and (b) based

 

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on the requirements of SFAS 123(R)  for all awards granted to employees before the effective date that remain unvested as of the effective date; or

 

•         A “modified retrospective” method that includes the requirements of the modified prospective method described above, but also permits entities to restate based on the amounts previously recognized under SFAS 123(R)  for purposes of pro forma disclosures either (a) for all prior periods presented or (b) for prior interim periods of the year of adoption.

 

The requirements of SFAS 123(R)  are effective for us beginning January 1, 2006. We intend to adopt the requirements of SFAS 123(R) using the modified prospective method discussed above. The adoption of this standard is expected to increase operating expenses. We expect that stock compensation expense for 2006 will be between $50 and $60 million with the significant majority included in research and development and selling, general and administrative expenses. The actual amount of stock option expense we record for 2006 will depend on the timing and number of options granted in 2006 and underlying marketing conditions at the time of such grants.

 

Research and Development Programs

 

Currently, our research and development efforts are focused on programs for the treatment of diabetes, obesity and cardiovascular disease in various stages of development. From inception through 1998, we devoted substantially all of our research and development efforts to SYMLIN. Beginning in 1999, our research and development costs started to include costs for our other drug candidates, primarily BYETTA and exenatide LAR and in 2004 we initiated our program for the treatment of obesity with pramlintide. As we continue to expand our pipeline, our investment in other programs will continue to increase.

 

The drug development process in the U.S., from discovery through regulatory approval, takes an average of 12 years according to recent industry reports. The process includes several steps defined by the FDA. The process begins with discovery and preclinical evaluation leading up to the submission of an IND to the FDA, which allows for the initiation of the clinical evaluation in humans of a potential drug candidate. Clinical evaluation is typically comprised of three phases of study: Phase 1, Phase 2 and Phase 3. Generally, the majority of a drug candidate’s total development costs are incurred during Phase 3, as these trials are typically the longest and largest trials conducted during the drug development process. Successful completion of Phase 3 clinical testing is followed by the submission of an NDA to the FDA for marketing approval. It is not uncommon for the FDA to request additional data following its review of an NDA, which can significantly increase the drug development timeline and expenses. Following initial regulatory approval for a drug candidate, companies generally initiate additional clinical trials aimed at expanding product labeling and market potential.

 

The timing and costs to complete the successful development of any of our drug candidates are highly uncertain, and therefore difficult to estimate.

 

Our research and development expenses are comprised of salaries and benefits; costs paid to third-party contractors to perform research, conduct clinical trials, develop and manufacture drug materials and delivery devices; and a portion of our facilities costs. We charge direct internal and external program costs to the respective development programs. We also incur indirect costs that are not allocated to specific programs because such costs benefit multiple development programs and allow us to increase our overall 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.

 

The following table provides historical information regarding our research and development expenses for our major projects (in millions):

 

		Year ended December 31,
		2005			2004			2003
BYETTA		$	27.7		$	40.0		$	80.1
SYMLIN		21.1			15.8			27.3
Phase 2 programs		33.7			22.1			7.8
Early stage programs and research		25.5			12.2			12.2
Unallocated		24.1			29.5			22.0
		$	132.1		$	119.6		$	149.4

 

BYETTA

 

We began selling BYETTA in the United States in June 2005. In November 2005, we announced the positive results from a study of BYETTA used in addition to a common class of oral diabetes medication called thiazolidinediones (or TZDs), in people with type 2 diabetes who were not achieving adequate blood sugar control. Results from this study formed the basis of our Supplemental

 

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New Drug Application, or sNDA, submission to the FDA in the first quarter of 2006. This sNDA seeks to expand our label to include patients who are taking TZDs and have inadequate glycemic control. Additional development activities planned for BYETTA in 2006 include the initiation of a clinical study evaluating BYETTA for use as a monotherapy for patients with type 2 diabetes.

 

The timing of material net cash inflows from our BYETTA development program is dependent upon market acceptance following its commercial launch in the second quarter of 2005 and the other factors described in this report.

 

SYMLIN

 

We began selling SYMLIN in the United States in April 2005. In 2005, we commenced a controlled, open-label study to evaluate SYMLIN use in clinical practice, and intend to enroll approximately 1,200 patients over the two years of the study. In the fourth quarter of 2005, we also commenced a study to evaluate the addition of SYMLIN at mealtime for patients who are on a stable regimen of once-daily basal insulin. Our planned 2006 development activities for SYMLIN include the continuation of these studies, the initiation of a small pharmacokinetic study in pediatric age patients with type 1 diabetes (age 12 to 16) and the continued development of a disposable pen for the delivery of SYMLIN in cartridges.

 

The timing of material net cash inflows from SYMLIN is dependent upon market acceptance following its commercial launch in the second quarter of 2005 and the other factors described in this report.

 

Development Programs

 

We currently have late-stage development programs in diabetes and obesity and a Phase 2 program in cardiovascular disease. In diabetes, we are studying exenatide LAR, a sustained-release formulation of BYETTA. We recently completed a Phase 2 multi-dose study of exenatide LAR, utilizing a once-a-week dosing regimen. Results from this study demonstrated that both doses of exenatide LAR were well tolerated, expected therapeutic blood levels of exenatide were achieved, and dose-dependent improvements in A1C and weight were observed.

 

We are developing exenatide LAR in collaboration with Lilly and Alkermes. Pursuant to our amended development and license agreement with Alkermes for exenatide LAR, Alkermes is responsible for manufacturing exenatide LAR for use in clinical trials and we are responsible for commercial scale manufacture of exenatide LAR. We are working with Alkermes and Parsons Corporation to establish a manufacturing facility for commercial production of exenatide LAR, which we expect to complete in stages through 2008. Additional development activities planned for exenatide LAR in 2006 include the initiation of a long-term, open-label, randomized study to evaluate its safety and efficacy.

 

In obesity, we are studying pramlintide acetate, the active ingredient contained in SYMLIN. We submitted an IND to the FDA for pramlintide acetate for the treatment of obesity in the second quarter of 2005, and we commenced a 400-patient Phase 2 dose-ranging study of pramlintide acetate for obesity in the second quarter of 2005. In February 2006, we reported positive results from this study.

 

In cardiovascular disease, we have a Phase 2 program for AC2592 (GLP-1) for the treatment of congestive heart failure. We submitted an IND for AC2592 in the second half of 2004 and initiated a Phase 2 study in the fourth quarter of 2004. We expect to complete this study in 2006.

 

Early-stage Programs and Research

 

In addition to our late-stage development programs in diabetes and obesity and our Phase 2 program in cardiovascular disease, we have a research and Phase 1 program studying AC162352 (PYY 3-36) for potential utility as a treatment for obesity. We also have early-stage programs in diabetes and obesity. In early 2006, we acquired the exclusive rights to the leptin molecular franchise and program from Amgen, Inc. We plan to further explore leptin’s utility in treating metabolic disorders. We also maintain a discovery research program focused on novel peptide therapeutics and we are actively seeking to in-license additional drug candidates.

 

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Results of Operations

 

Net Product Sales

 

Net product sales were $86.7 million in 2005 and consisted of shipments of BYETTA and SYMLIN to wholesale customers, less distribution service fees and allowances for product discounts and returns. There were no net product sales in 2004 or 2003 as these products were not approved for sale until 2005. Net product sales for BYETTA and SYMLIN for the year ended December 31, 2005 were $75.2 million and $11.5 million, respectively

 

Revenues under Collaborative Agreements

 

The following table summarizes the components of revenues under collaborative agreements for the years ended December 31, 2005, 2004 and 2003 (in millions):

 

 

Substantially all of the revenue recorded in these periods consists of amounts earned pursuant to our collaboration agreement with Lilly, and consists of the amortization of up-front payments, milestone payments, cost-sharing payments and co-promotion payments.

 

The amortization of up-front payments relates to an $80 million non-refundable payment made by Lilly in September 2002, upon the signing of our collaboration agreement. In connection with this agreement we agreed to incur the first $101.2 million of development costs following the date of the agreement. Accordingly, we recorded 100% of the first $101.2 million of U.S. development costs for exenatide, whether incurred by us or by Lilly, and we recorded as revenue approximately 50% of these development costs through an amortization of $50 million of the up-front payment, which amortization was completed during the third quarter of 2003. The remaining $30 million is being amortized to revenues ratably over a seven-year period, which represents our estimate of the period of our performance of significant development activities under the agreement.

 

Milestone payments relate to certain development and commercialization events defined in the exenatide collaboration agreement. We recognize milestone payments as revenue upon the achievement of performance requirements underlying such milestone payments and, for certain development milestones, the expiration of stock conversion rights associated with such payments.

 

Cost sharing payments consist of amounts payable by Lilly to us to equalize development expenses under our collaboration agreement. Subsequent to the first $101.2 million of development expenses following the signing of our collaboration agreement, Lilly became responsible to fund, on an ongoing basis, 50% of development costs in the United States and 80% of development costs outside of the United States. While we continue to lead exenatide development efforts in the United States, Lilly also incurs exenatide development expenses and makes cost-sharing payments to us to equalize development costs, which are recorded as revenues under collaborative agreements in the period in which the related development expenses are incurred.

 

Co-promotion payments consist of small amounts of revenue earned pursuant to previous co-promotion agreements.

 

The $19.5 million increase in revenue under collaborative agreements in 2005, as compared to 2004, primarily reflects an increase in milestone revenue due to the recognition of $35 million of milestones earned in connection with the regulatory approval and commercial launch of BYETTA in the United States, of which $30 million was received in 2005, partially offset by a reduction in cost-sharing revenue due to lower development expenses for BYETTA in 2005 as compared to 2004.

 

The $51.4 million reduction in revenue under collaborative agreements in 2004, as compared to 2003, reflects a shift in the relative proportion of total development expenses related to exenatide recorded by us and by Lilly and a reduction in milestone revenue. Milestone revenue in 2004 consists of a $5 million payment from Lilly in connection with the results of a clinical study comparing exenatide to insulin glargine in the third quarter of 2004. Milestone revenue in 2003 consisted of a $30 million payment from Lilly following the completion of the pivotal Phase 3 trials for exenatide in the fourth quarter of 2003.

 

In future periods, revenues under collaborative agreements will consist of ongoing cost-sharing payments from Lilly to equalize U.S. development costs, possible future milestone payments and the continued amortization of the $30 million portion of the up-front payment.

 

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Cost of Goods Sold

 

Cost of goods sold was $14.8 million in 2005 and is comprised primarily of costs associated with the manufacture of BYETTA and SYMLIN. There was no cost of goods sold for the years ended December 31, 2004 and 2003, as we did not begin selling BYETTA and SYMLIN until the second quarter of 2005. Prior to regulatory approval of BYETTA and SYMLIN, certain indirect costs associated with the qualification of our inventory for commercial sale were expensed and recorded as research and development expenses. Beginning in the second quarter of 2005, we began including these costs in inventories and cost of goods sold.

 

Research and Development Expenses

 

Research and development expenses were $132.1 million, $119.6 million and $149.4 million in the years ended December 31, 2005, 2004 and 2003, respectively.

 

The $12.5 million increase in 2005 as compared to 2004 reflects increases of $13.3 million for our early stage programs and research, $11.6 million for our Phase 2 programs, and $5.3 million for our SYMLIN development expenses, partially offset by reductions of $12.3 million and $5.4 million for our BYETTA and unallocated research and development expenses, respectively.

 

The increase in our early stage programs and research reflects increased investments in our discovery research activities, increased costs associated with preclinical development of potential drug candidates and costs associated with an increased number of employees to support these activities.

 

The increase in expenses for our Phase 2 programs in 2005 as compared to 2004 primarily reflects costs associated with the clinical development of exenatide LAR and our obesity program for pramlintide. For exenatide LAR, this includes the recently completed multi-dose study and for our obesity program with pramlintide, this includes the recently completed dose-ranging study. The increase also reflects increased costs associated with manufacturing scale-up for exenatide LAR.

 

The increase in SYMLIN development expenses in 2005 as compared to 2004 primarily reflects increased clinical development costs associated with an ongoing open-label study evaluating SYMLIN use in clinical practice.

 

The decrease in BYETTA development expenses primarily reflects reduced clinical development costs following the completion of activities required to support regulatory approval of BYETTA in 2004, which included open-label extensions of the pivotal Phase 3 clinical studies for BYETTA and costs associated with manufacturing scale-up.

 

The decrease in unallocated research and development expenses in 2005 as compared to 2004 primarily reflects an increased emphasis on development activities in our late-stage, Phase 2 and early stage programs.

 

The $29.8 million decrease in 2004 compared to 2003 reflects reduced expenses of $40.1 million and $11.5 million for our BYETTA and SYMLIN development programs, respectively, partially offset by increased expenses of $14.3 million for our Phase 2 programs and a $7.5 million increase in unallocated research and development expenses.

 

The decrease in expenses in 2004 as compared to 2003 primarily reflects reduced clinical development costs following the completion of the pivotal Phase 3 trials for BYETTA in the fall of 2003. The decrease in SYMLIN expenses in 2004 as compared to 2003 primarily reflects reduced clinical development costs in 2004 clinical trials supporting a SYMLIN NDA submitted to the FDA in June 2003. The increase in expenses for our Phase 2 programs in 2004 as compared to 2003 primarily reflects increased clinical development costs for our obesity program with pramlintide and to a lesser extent increased development expenses for exenatide LAR.

 

The $7.5 million increase in unallocated research and development expenses in 2004 as compared to 2003 primarily reflects increased facilities costs, a portion of which are allocated to research and development expense.

 

Research and development expenses are expected to continue to increase for the year ended December 31, 2006 as compared to the same period in 2005. This expected increase reflects continued development of our late-stage programs for exenatide LAR and the treatment of obesity with pramlintide, clinical work to further our understand the utility of BYETTA and SYMLIN and the advancement of our early stage programs.

 

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Selling, General and Administrative Expenses

 

Selling, general and administrative expenses were $171.5 million, $67.0 million, and $56.8 million in the years ended December 31, 2005, 2004, and 2003, respectively.

 

The $104.5 million increase in 2005 as compared to 2004 reflects the expansion of our commercial capabilities and additions to our business infrastructure to support the commercial launches of BYETTA and SYMLIN in 2005. This includes the hiring and training of our field force, expanded marketing and medical education activities, the establishment of customer service capabilities and related administrative support. We, along with Lilly, are jointly responsible for the co-promotion of BYETTA within the United States, and share equally in sales force costs and external marketing expenses. Accordingly, our selling, general and administrative expenses include our 50% share of these costs in the United States.

 

The $10.2 million increase in 2004 as compared to 2003 primarily reflects increased business support and facilities costs, and to a lesser extent increased pre-launch costs, primarily for BYETTA, incurred in preparation of the commercial launches of BYETTA and SYMLIN.

 

Selling, general and administrative expenses are expected to continue to increase for the year ended December 31, 2006, compared to the same period in 2005. This expected increase primarily reflects the full annual cost and potential expansion of our field force, the majority of which was added in the middle of 2005 following the regulatory approvals of BYETTA and SYMLIN.

 

Collaborative Profit Sharing

 

Collaborative profit sharing was $31.4 million for the year ended December 31, 2005, and consists of amounts due to Lilly for its share of the gross margin for BYETTA in the United States. There was no collaborative profit sharing for the years ended December 31, 2004 and 2003, as we began selling BYETTA in the second quarter of 2005.

 

Other Income and Expense

 

Interest and other income consists primarily of interest income from investment of cash and investments. Interest and other income was $13.2 million in 2005, $4.7 million in 2004, and $7.1 million in 2003. The increase in 2005 primarily reflects higher average cash balances available for investment and higher interest rates in 2005 as compared to 2004. The decrease in 2004 reflects the fact that in 2003 interest and other income included a one-time $3.6 million gain on early retirement of debt at a discount.

 

Interest and other expense consists primarily of interest expense resulting from long-term debt obligations and include interest payments and the amortization of debt interest costs. Interest and other expense was $10.7 million in 2005, $9.6 million in 2004 and $6.0 million in 2003. The increase in 2005 compared to 2004 reflects a full year of interest expense for the $200 million of 2.5% convertible senior notes issued in April 2004. The increase in 2004 reflects additional interest expense associated with the issuance $200 million of 2.5% convertible senior notes in April 2004.

 

Net Loss

 

Our net loss for the year ended December 31, 2005 was $206.8 million compared to $157.2 million in 2004 and $122.8 million in 2003. The increase in the net loss in 2005 compared to 2004 reflects the increased costs and expenses, partially offset by the increases in net product sales and revenue under collaborative agreements discussed above. The increase in the net loss in 2004 compared to 2003 primarily reflects the decrease in revenue under collaborative agreements, partially offset by the decrease in operating expenses discussed above.

 

We may incur operating losses for the next few years. Our ability to reach profitability in the future will be heavily dependent upon the amount of product sales that we achieve for BYETTA and SYMLIN. We also expect increased expenses associated with the commercialization of BYETTA and SYMLIN, as well as increased expenses associated with the continuation and potential expansion of our research and development programs, including our ongoing late-stage programs and our earlier stage development programs, expenses associated with the design and construction of our manufacturing facility, and related general and administrative support that may impact our ability to reach profitability in the future. 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 and private placements of common stock and preferred stock, debt financings, payments received pursuant to our exenatide collaboration with Lilly and reimbursement of SYMLIN development expenses through earlier collaboration agreements, and more recently, from sales of BYETTA and SYMLIN.

 

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At December 31, 2005, we had $443.4 million in cash, cash equivalents and short-term investments compared to $293.8 million at December 31, 2004. The increase in our cash, cash equivalents and short-term investments in 2005 primarily reflects approximately $362.5 million provided by our financing activities, partially offset by $182.0 million used to fund operating activities and $29.6 million used for capital expenditures in 2005.

 

We used cash of $182.0 million, $162.9 million, and $143.4 million for our operating activities in the years ended December 31, 2005, 2004, and 2003, respectively. Our operating activities in 2005 benefited from a $30 million milestone payment from Lilly. In addition, operating activities in 2005 benefited from a net source of cash of $14.3 million from changes in our working capital, consisting of an increase in accounts payable, accrued expenses and other current liabilities of $57.7 million, partially offset by uses of cash due to increases in accounts receivable and inventories of $26.8 million and $9.6 million, respectively and a net use of cash of $7.0 million for other working capital changes. Our investing activities used $169.0 million, $53.8 million, and $128.3 million in the years ended December 31, 2005, 2004, and 2003, respectively. Investing activities in all three years consisted primarily of purchases and sales of short-term investments, but also included purchases of property and equipment and patent additions. Financing activities provided $362.5 million, $200.6 million, and $278.9 million in the years ended December 31, 2005, 2004, and 2003, respectively. Financing activities in 2005 include $342 million in net proceeds from public offerings of our common stock in February and September 2005 and proceeds from the exercise of stock options. These amounts consisted primarily of proceeds from sales of common stock and the issuance of convertible senior notes, partially offset by principal payments on notes payable and capital lease obligations.

 

We expect that our capital expenditures will increase significantly in future periods due primarily to costs associated with our plans to establish a manufacturing facility for exenatide LAR, which we expect to complete in phases through 2008 at an estimated cost of up to $150 million.

 

We may not generate positive operating cash flows for the next few years and our ability to do so will depend on many factors including the market acceptance and the amount of product sales we achieve for BYETTA and SYMLIN, costs to commercialize BYETTA and SYMLIN, costs associated with the continuation and potential expansion of our ongoing and recently acquired development programs, costs for related general and administrative support, and the other factors described in this annual report, including those discussed in Part I, Item 1A under the heading “Cautionary Factors That May Affect Future Results.”

 

We have a loan facility available from Lilly that, subject to certain defined development and regulatory events, over time could provide us up to $110 million to fund a portion of our development and commercialization costs for BYETTA. As of December 31, 2005, $72.5 million of this facility was available to us and there were no amounts outstanding. Any loans under this facility would be secured by some of our patents and other tangible assets and, at Lilly’s option, are convertible into our common stock if amounts remain outstanding for more than two years. Additionally, any loans under this facility must be executed prior to May 26, 2006, the first anniversary of BYETTA's product launch in the United States, at which point 50% of any outstanding loan amounts become due.

 

At December 31, 2005, we had outstanding long-term debt of $375 million. This amount includes $175 million aggregate principal amount of the 2.25% convertible senior notes issued in 2003 and due 2008, or the 2003 Notes. The 2003 Notes are currently convertible into a total of up to 5.4 million shares of our common stock at approximately $32.55 per share. Under certain circumstances, the 2003 Notes are redeemable in whole or in part, at our option, on or after June 30, 2006, at specified redemption prices plus accrued and unpaid interest. The remainder of our long-term debt balance at December 31, 2005 consists of $200 million aggregate principal amount of the 2.5% convertible senior notes issued in 2004 and due 2011, or the 2004 Notes. 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. The 2004 Notes are not redeemable at our option.

 

The following table summarizes our contractual obligations and maturity dates as of December 31, 2005 (in thousands).