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Executives

Michael York - Senior Director of IR

Daniel M. Bradbury - President and CEO

Mark G. Foletta - Sr. VP, Finance and CFO

Analysts

Thomas Wei - Piper Jaffray

Thomas J Russo - Robert W. Baird & Co.

Margaret (Meg) Malloy - Goldman Sachs Research

Matthew Osborne - Lazard Capital Markets

Ian Somaiya - Thomas Weisel Partners LLC

Cory Kasimov - JPMorgan

Philip Nadeau - Cowen & Company

Thomas McGahren - Merrill Lynch

William Ho - Bank of America

Amylin Pharmaceuticals, Inc. (AMLN) Q3 FY08 Earnings Call October 21, 2008 5:00 PM ET

Operator

Good afternoon. My name is Bruneil and I will be your conference operator today. At this time I would like welcome everyone to the Q3 2008 Amylin Pharmaceuticals' Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remark there will be a question-and-answer session. [Operator Instructions]. Thank you.

I would now like to turn the call over to Mr. Michael York, Senior Director of Investor Relations. Please go ahead, sir.

Michael York - Senior Director of Investor Relations

Good afternoon, and welcome to Amylin Pharmaceuticals quarterly update conference call. Today's discussion will contain forward-looking statements that involve risks and uncertainties. These risks and uncertainties are outlined in today's press release and in our recent filings with the Securities and Exchange Commission. Our actual results could differ materially from what is discussed on today's call.

Let me introduce the other members of the Amylin management team here today, Daniel Bradbury, President and Chief Executive Officer; and Mark Foletta, Senior Vice President, Finance and Chief Financial Officer.

I will now turn the call over to Dan Bradbury.

Daniel M. Bradbury - President and Chief Executive Officer

Thanks, Michael. Good afternoon, and thank you for joining us today. In the face of an increasingly challenging environment for biopharmaceutical companies, in the third quarter we reported strong quarterly revenue, while reducing our operating expenses quarter-over-quarter.

We are focused on managing our cash and maintaining a strong balance sheet. In that regard, today we're pleased to announce completion of a product supply agreement for exenatide once weekly in which Eli Lilly and Company will make an initial cash payment of $125 million to Amylin and we will reimburse this for their share up to more than $500 million capital investment in the West Chester, Ohio facility through the cost of goods sold for exenatide once weekly.

Additionally, the agreement with Lilly makes available $165 million line of credit, dollar line of credit. This agreement not only demonstrates our close working relationship with Lilly but it also further strengthens our balance sheet and provides us with financial flexibility in the future. We will continue to manage the company towards sustainable, profitable growth and we are very focused on preserving options for the future by conservatively managing our cash.

Mark and I will comment on this further later in the call.

Now, as we work towards building our diabetes product portfolio we are driving near-term value by growing BYETTA and SYMLIN and bringing exenatide once weekly to market as quickly as possible. With regards to BYETTA as you know in August the FDA updated information on its website about cases of pancreatitis that have been reported with patients taking BYETTA. To be clear we believe that the safety profile and the robust benefits of BYETTA make it a valuable medicine for patients with Type 2 diabetes.

However, the FDA update and the associated discussion and media coverage naturally impacted our BYETTA commercial efforts. To address this we and our partner Lilly developed and executed a plan to shift resources and educate the healthcare community about what the FDA's update meant and what it did not.

With these efforts the continued unmeet need in diabetes management and the overall value of this therapy to patients, decisions continued to bleed in the medicine and BYETTA prescriptions have remained resilient. We believe that BYETTA prescriptions will return to growth and I will detail our efforts to make that happen later on the call.

In light of the strategic shift to focus more commercial efforts on BYETTA during the quarter SYMLIN performed well. Now as you are aware the regulatory environment is challenging. We remain confident that within this quarter we will finalize label updates of BYETTA and I will discuss this in more detail later on the call.

Moving on to exenatide once weekly; based on our program execution in the third quarter and ongoing dialogue with the FDA, we continue on track for the exenatide once weekly regulatory submission by the end of first half of 2009. We also continue to execute our clinical strategy to establish a superior profile for exenatide once weekly compared to other diabetes medicines.

Before I get into more detailed discussion of recent activities, I'll now turn things over to Mark Foletta to review our financial results released earlier today.

Mark G. Foletta - Senior Vice President, Finance and Chief Financial Officer

Thank you, Dan, and good afternoon.

Earlier this afternoon, we announced our financial results for the quarter ended September 30, 2008. We reported total revenue of $218.4 million for the third quarter, which includes net product sales of $201.4 million. Product sales are made up of a $179.9 million for BYETTA and $21.5 million for SYMLIN resulting in third quarter growth in product sales of approximately 14% compared to 2007 an increase of 1% from the second quarter of 2008.

Our revenue under collaborative agreements was $17 million compared to $12.6 million for the same period in 2007. The increase reflects higher cost sharing payments from Lilly to development expenses for BYETTA and exenatide once weekly. Cost of goods sold was $23.4 million reflecting a gross margin of approximately 88%. This compares to cost of goods sold of $13.8 million for the third quarter of 2007 and gross margin of approximately 92%.

Gross margin decreased year-over-year primarily because of increased discounting, higher production cost for BYETTA and our product mix including the introduction of the SYMLIN pen which has a higher cost of goods sold in the via presentation.

Selling, general, and administrative expenses for the third quarter of 2008 were $99.7 million compared to $87.7 million for the same period in 2007. The increase reflects cost associated with the company's expanded field force, investments in market development activities for exenatide once weekly and continued investment in promotional activities for BYETTA and SYMLIN.

Research and development expenses were $73.5 million for the third quarter of 2008, compared to $61.5 million for the same period in 2007. The increase primarily reflects higher development expenses for exenatide once weekly.

Non-GAAP research and development expenses net of cost sharing payments increased to $57.5 million for the quarter ended September 30, 2008 compared to $49.9 million for the same period in 2007. As a reminder we are reimbursed by Lilly to share exenatide development cost and we believe that this net R&D number is a better indicator of activities at Amylin.

I'd like to note that operating expenses in the third quarter were approximately $13 million or 7% lower than the second quarter. This reduction reflects deliberate efforts to reduce spending. I will comment more on this in a moment.

Lilly share the gross margin for BYETTA with throughput to its collaborative profit sharing was $80.6 million for the third quarter of 2008 compared to $75 million for the same period in 2007. We recorded an impairment loss of $14.9 million or $0.11 a share for the quarter ended September 30, 2008. This primarily represents a recognized impairment loss of $9 million in a minority equity investment in a privately held entity and $5.9 million associated with a corporate debt security in the company's short-term investment portfolio.

Amylin's short-term investment practices are designed to safeguard and protect investment principle in light of difficult market conditions we have and we'll continue to be conservative in our investing practices.

We reported a net loss of $77.7 million or $0.57 per share for the quarter ended September 30, 2008 compared to a net loss of $39.8 million or $0.30 per share for the same period in 2007. At the end of the third quarter, we held $805 million of cash, cash equivalents and short-term investments which does not include the $125 million we will soon receive as part of today's announced product supply agreement with Lilly, which I will discuss in more detail in a moment.

I will now quickly review top and bottom-line results for the nine months ended September 30, 2008. Total revenue was $637.6 million consisting a product sales of $580.4 million which grew nearly 15% over the prior year and revenue under collaborative agreement of $57.2 million. This compares to total revenue of $559 million and product sales of $506.7 million in 2007.

Net product sales for 2008 consist of $515.9 million for BYETTA and $64.5 million for SYMLIN. Our net loss for the nine months ended September 30, 2008 was $211.3 million or a $1.54 per share compared to a $134.2 million or $1.2 per share for the same period in 2007.

As Dan mentioned earlier today, we announced completion of a product supply agreement in which Lilly will make an initial cash payment of a $125 million in the next few days. And we will supply exenatide once weekly for sales in the U.S. and to Lilly for sales outside of the United States.

In addition, to the $125 million upfront payment, Lilly will reimburse that for their share of the more than $500 million of capital investment in the West Chester, Ohio facility through cost of goods sold for exenatide once weekly. As part of this overall supply arrangement, Lilly will make available to Amylin a $165 million line of credit that we can draw upon, beginning in the fourth quarter of 2009 through the second quarter 2011.

Any debt from the credit facility will be due three years from the date of the full amount drawn over the second quarter of 2014 whichever occurs first. Importantly, this agreement strengthens our balance sheet today and provide additional financial flexibility in the future.

I would now like to highlight some information regarding key trends and assumptions for the remainder of 2008. Consistent with our strategy of managing our business to create a profitable company we will continue to manage our operating expenses in line with our revenue expectation. We have included in the numbers today non-cash stock-based compensation expense, an estimated $80 million in aggregate, covering expenses for both stock options and our employee stock ownership plan.

We are lowering our total revenue guidance for 2008 to $850 million to $875 million, this reflects reduced BYETTA expectations and lower collaborative revenue of between $80 million and $90 million consistent with an expected reduction in research and development expenses which I will discuss in a moment.

Based on our assessment of gross margins in first three quarters of the year, we believe that we will record gross margins of approximately 87% for the year. This reduction from our previous guidance of 88% reflects higher product cost as I mentioned earlier.

We now expect that our selling, general and administrative expenses will be between $410 million and $420 million for 2008. This lowered range reflects increased efficiency and focused efforts on core activity. Our SG&A expense guidance also includes approximately $50 million of stock-based compensation expense.

Consistent with our lowered expectation of collaborative revenue discussed previously, we now expect that our research and development expenses will also be lower for 2008 at a range of $300 million to $310 million. This includes approximately $30 million of stock-based compensation expense. Importantly, this reduction in spending will not impact our ability to execute on our plan as we have increased efficiency and focused our spending on activities to drive near-term value.

Furthermore, we are continuing to pursue options to offset the R&D expense associated with our obesity, an early stage program through potential partnerships and/or project plans. And, we now expect our net interest expense excluding the impairment charges I discussed earlier to be approximately $5 million.

Lastly, we expect to finish 2008 with over $800 million in cash with financial flexibility in the future. We anticipate the cash used for operations and cash used for capital expenditures will decrease going forward. We will provide additional guidance at our year end call in January.

In summary, we have taken deliberate action in our business throughout 2008 through a line of spending to revised revenue expectation. We believe the net impact of today's revised revenue and expense guidance will not result in a change in expected operating results for 2008. And improving operating results will continue to be a high priority in future quarters.

I will be available at the end of the call to answer any questions. And I will now turn the call back to Dan for an update on recent business activity.

Daniel M. Bradbury - President and Chief Executive Officer

Thanks Mark. Now, I will provide a commercial update starting with BYETTA and then moving on to SYMLIN.

BYETTA; is the first and only FDA approved incretin mimetic, a new class of drugs that mimics the action of the human hormone glucagon-like peptide-1. We have marketed BYETTA for more than three years and has been used by approximately 1 million patients. Importantly, BYETTA is the only medicine currently available that addresses the significant unmet need for a Type 2 diabetes treatment that achieves powerful, sustained glucose control with weight loss and a favorable safety profile.

As I stated earlier BYETTA prescriptions are resilient in the face of significant environmental challenges. In the third quarter, we saw modest decrease in BYETTA prescriptions compared with second quarter which we believe is mainly attributable to the FDA update.

Moving forward we expect sales to stabilize and then grow over time as doctors and patients better understand the facts about BYETTA and are able to better understand the benefit risk profile of the medicine.

Today, I am going to report on the sales progress we are seeing as a result of the key market accelerators introduced last quarter. Our enhanced marketing approach and more closely aligned sales organization. I will also detail how these initiatives enabled our response to the FDA update.

We believe these factors will drive BYETTA sales overtime and ensure we can effectively launch exenatide once weekly when approved. First, let's take a minute and discuss our response to the FDA update in August. As you know in mid-August the FDA issued an update to a prior alert for BYETTA regarding absurd cases of pancreatitis.

To address the FDA alert with our customers, our field sales and medical teams rapidly educated the healthcare community about what the FDA's update meant. In fact, Amylin and Lilly changed together re-prescribed this accounting for three quarters of BYETTA prescriptions in just two weeks. Customers told us they appreciated the education and information which enabled them to make more informed decisions about patient care.

We have since seen a large drop off in questions and concerns and our sales teams have returned to our core BYETTA messages. Those are that BYETTA continues to exhibit a robust benefit risk profile to patients with Type 2 diabetes and meet the large unmet need in diabetes management offering powerful and sustained A1C reductions with weight loss, improved list of parameters, decreased blood pressure and a low risk of hypoglycemia.

I'd now like to highlight what we believe will accelerate the market for BYETTA and the class. In the third quarter, we saw continued progress with the market accelerators for BYETTA and GLP-I class that were present at the American Diabetes Association in June, where scientific presentations and conversations among the medical community focused on shifts that are needed in the treatment of Type 2 diabetes.

The potential of the class and the benefits of BYETTA. A study examining the triple combination therapy of metformin, thiazolidinedione and exenatide as early initiation therapy to address known pathophysiologic defects in Type 2 diabetes patients as advocated by Dr. Ralph DeFronzo in the influential Banting Lecture at ADA is now underway. Based on the findings expected in 2010, this study has the potential to change the way diabetes is treated in it's earlier stages and importantly establish a unique position for exenatide in the treatment paradigm.

At the associate, the European Association for the study of diabetes meeting in September, we presented the first head-to-head study comparing BYETTA and Sitigliptin a, DPP-4 inhibitor.

There has been some confusion in the marketplace about the mechanisms of action between BYETTA and Sitigliptin and data from this study show the clear difference in the therapeutic actions. Patients on BYETTA experience significantly lower post meal glucose levels, improved measures of beta cell function and decreased food intake.

As the medical community increasingly recognizes the potential of GLP-1 class, a medicine such as BYETTA which provides powerful sustained glucose control with weight loss and other benefits is uniquely poised to growth. In the third quarter we benefited from the refined sales and marketing initiatives that were fully implemented on July 1st to help us better communicate with doctors and patients. As a result of the expanded and better aligned Amylin and Lilly sales force we have seen an improvement in key performance indicators including increased share of voice, call time with physicians and cold dialogue.

Additional indicators reflect the expanded market and patient support programs for the primary care market is having a positive effect. These programs are designed to better support BYETTA patients, new starts and improved long-term patient adherence. Further, the targeted access to education program for primary care physicians which underscores to more than 85%access to BYETTA across commercial managed care providers is in place.

The results of the market accelerators and our enhanced marketing and sales efforts will be realized over the coming months towards growing BYETTA sales. We will continue to watch three key areas to determine we are on the right track towards increased prescriptions. One; an increased understanding of the importance of treating both A1C and weight in the treatment of Type 2 diabetes. Two, increased recall of BYETTA's core messages and three, increased new patient starts on BYETTA.

Now, let's move on to SYMLIN. A synthetic analog of human Amylin and naturally occurring hormone that is made in the beta cells of the pancreas, the same cells that make insulin. SYMLIN; is the first and only Amylin mimetic, it's key benefits are that it provides mealtime glucose control and weight loss to patients who use mealtime insulin.

In light of the strategic shift to focus more commercial efforts on BYETTA during the quarter, SYMLIN performed well, with a modest reduction in revenue to $21.5 million. As a result of our field force retaining to core BYETTA messages in customer interactions, we have also retained our focus to SYMLIN core messages, which will aid our efforts in growing the SYMLIN brand going forward.

I'd now like to provide an update on regulatory discussions and development programs. At this time, we are in discussion with the FDA on label updates for BYETTA including the monotherapy indication, revision of safety language, data on exenatide use in patients between the ages of 12 and 16. Concomitant use with oral contraceptives and conversion of the package insert to the recently mandated physician labeling roll format referred to as PLR format. The key goal of both the FDA and Amylin is to ensure labeling provides adequate information for prescribers so they are able to prescribe medicines with full knowledge of the medicines benefit risk profile. We anticipate finalizing these by the label changes by the end of 2008.

As a reminder we submitted our regulatory application for use of BYETTA as monotheraphy in the first quarter of 2008. Though the FDA has a heavy work load, and there are internal resource constraints of the agency, we are having ongoing conversations and anticipate a regulatory decision by the end of the year.

When approved healthcare professionals will have the freedom to expand BYETTA usage along with treatment continuum as either standalone or combination therapy. A monotherapy indication will also allow even better pay of coverage in some plants thereby increasing patient access to BYETTA.

We also continue to investigate in epidemiologic studies regarding adverse events associated with diabetes medicines. These studies provide insight into the safety profile for these medications within large sub sects of the population wherein base line characteristics are known.

Now moving along I will share with you the latest developments regarding exenatide once weekly the next planned medicine in our pipeline. This product candidate is poised to become the first once weekly therapy to treat Type 2 diabetes with unprecedented dual efficacy defined as powerful glucose control and sustained weight loss. This is durable control that is offered in just one dose per week and provides improved tolerability with breakthrough convenience.

As a reminder in the second quarter we had our pre-NDA meeting with the FDA to discuss the open items for our regulatory submission. Following these and subsequent discussions we continue to believe that the DURATION 1 study we reported last year provides the necessary safety and efficacy data for a submission and continue to plan on submitting an NDA before the end of the first half of 2009.

During our pre-NDA meeting, we received more clarity on our strategy for showing comparability between the material manufactured at our facility in Ohio and the intermediate scale material used in the clinical studies to-date. We continue to execute this strategy, and we have now shared data from our in vitro-in vivo correlation or IVIVC studies with the FDA. This data is currently under review. As we've said in the past, this is a data driven process and until the FDA determines that this data is sufficient to show comparability we are reiterating our previous guidance on timing of a submission.

We also have made great progress by finalizing the commercial scale manufacturing process at our Ohio facility. Indeed, we have already produced and shipped commercial scale material which has been used in ongoing clinical trial since the third quarter. This includes use of commercial scale material in our second path to demonstrate comparability to cross over patients from the extension of DURATION-1.

The third path, we previously discussed to demonstrate comparability is a new bleaching study which would likely include both pharmacokinetic and clinical endpoints, if needed the design of the study will be finalized following input and guidance from the agency.

Now, as you understand there are specifics of our interactions with the FDA that we are not able to share with you at this time. This is consistent ensuring that we meet the requirements of the agency. We will not speculate on potential FDA action regarding the data dependent nature of our regulatory path going forward.

Moving on now to clinical data, DURATION-1 findings were presented at the American Diabetes Association and the European Association for the study of diabetes 2008 scientific meeting as well as published in the September 2008 issue of the Lansic [ph].

The data showed that continuous study state levels of exenatide provide durable glycemic control with weight loss. Additionally, improved glucose control was seen in patients switching after 30 weeks to exenatide once weekly, from exenatide taken twice a day. After 52 weeks, patients in both treatment groups experienced an average A1C decline of 2%. This level of A1C decline is unprecedented in a study of this type in patients with a mean baseline of A1C of 8.3% at entry. 74% of all patients achieved an endpoint A1C of 7% or less.

Furthermore, patients in both treatment groups reported a sustained average weight loss of 9.5%. Based on our confidence from these data, we put in place an aggressive clinically relevant program that compares exenatide once weekly against competing products that demonstrates superiority. The objective of these studies is to support the launch and demonstrate the transformational nature of exenatide once weekly therapy. These trials are on track.

In the third quarter, we completed enrollment of DURATION-2 which compares exenatide once weekly against the TZD and a DPP-4 inhibitor on a background of metformin therapy. We expect results from this study in the first half of 2009.

We are currently enrolling DURATION-3 comparing exenatide once weekly against insulin glargine on a background of oral agent therapy and look forward to reporting results in mid-2009.

DURATION-4, looking at exenatide as standalone therapy against either metformin, TZD or DPP-4 inhibitor we'll begin later this year.

Additionally, given the positive effects on cardiovascular surrogate outcomes seen with exenatide, the encouraging data seen in the ACCORD trial and the current regulatory interest in cardiovascular outcomes, we have engaged a steering committee composed of outside experts to assist us in designing a robust cardiovascular outcomes trial. This design will be reviewed with the agency with plans to initiate patient enrollment in 2009.

Clearly, we're actively positioning the exenatide franchise for near and long-term success and addressing the possible entrants of competitors in our classes. The powerful durable results from the exenatide trials, the three years of BYETTA's experience on the market and the stellar results from the DURATION-1 trial are compelling proof that exenatide is the best molecule in the class as a twice a day product now and as a once a week product in the future.

Also I would note that given exenatide's potency we are continuing to study with our partners the potential for less frequent dosing regimen as well as non-invasive dosing form.

Now, I will move on to describe our significant opportunities in obesity. We previously announced our commitment to pursue a medicine for obesity that is a combination of pramlintide, an analog of human amylin and metreleptin, an analog of human leptin. This commitment is based on impressive study results, 12.7% reduction in body weight over 24 weeks when pramlintide and metreleptin were used together.

In the third quarter we completed enrollment of the Phase 2B study to evaluate different dosing combinations of pramlintide and metreleptin. This six months multi-arm study with approximately 600 patients enrolled will be completed in mid-2009. We believe this product candidate has the promise to meet the unmet medical need for a highly effective and safe weight loss therapy.

Another exciting opportunity we have in our pipeline is our second generation Amylin mimetic AC2307 which we have now moved into Phase 2. We expect results from this study in the second half of 2009. AC2307 is an Amylin analog optimized for obesity with increased potency that offers the potential to enhance the efficacy and less frequent dosing. Lastly at the Obesity Society's annual scientific meeting in the beginning of October, we presented scientific data through 11 oral and poster presentation showcasing progress in our obesity pipeline.

In addition to pramlintide metreleptin, and Ac2307, new findings were also presented on various pre-clinical program including a new white family mimetic and Amylin's peptide hybrid, or hybrid platform.

And as Mark mentioned earlier, we are actively managing our R&D expenses. This includes pursuing options to offset the R&D expense associated with our obesity and early stage programs through potential partnerships and/or project financing.

I'll add just a few more comments before we close. At Amylin, our goal is to be a sustainable, profitable company. In the coming months, we will further evolve our business model to be more flexible enabling us to maximize market opportunities and anticipate changes in our environment.

To that end we will continue to increase our operational efficiency by looking at spending across our business to further focus spending on driving value and improving operating results. This will allow us to extend available cash and enable investments in growth program.

At this time, we remain well positioned with a strong balance sheet and future financial flexibility which will enable us to execute our plans. In the near-term, I want to make it clear that this year we are focused on one; driving BYETTA and SYMLIN growth and two; completing the NDA submission for exenatide once weekly as soon as possible.

Finally, to end; I would like to make some comments about the environment in which we operate. Today, we are experiencing the most challenging environment the biopharmaceutical industry has seen in decades, many would say ever. However, we believe that by bringing innovated medicines to patients, inventors and investors will be rewarded. Although the path to getting there maybe more challenging than in the past. We acknowledge this and we are making the necessary changes in our business to ensure shareholder value is maximized.

With that, I will conclude the formal portion of today's call. And turn things back over to the operator for your questions.

Question And Answer

Operator

[Operator Instructions]. Your first question comes from the line of Thomas Wei from Piper Jaffray.

Thomas Wei - Piper Jaffray

Just a housekeeping question about the sales for the quarter were actually about better than what the IMS data would have suggested any one time factors there? And then question on pancreatitis I guess I am curious like you are hearing from the seal when you break it down by end dose versus GPs any difference in the reaction there or the challenges that you see going forward and when do you think a reasonable timeframe is to judge the performance of the sales force to better the next quarter are you looking now into a timeframe into 2009? Thank you.

Daniel M. Bradbury - President and Chief Executive Officer

Hi, Thomas, thanks very much for your question. Maybe Mark you could take the first part of Thomas's question and then I'll answer the second part.

Mark G. Foletta - Senior Vice President, Finance and Chief Financial Officer

Certainly Thomas I think your question was how do we look at the revenue growth of 1% compared to a small decline in scripts quarter-over-quarter. And I think the way you should be thinking about that really is the third quarter did include a couple extra shipping days. So that's really the predominant reason we view it as huge channel inventories as consistent with where they were at the end of the second quarter.

Daniel M. Bradbury - President and Chief Executive Officer

And Thomas just to answer the second part of your question, you are asking about the perception differences between primary care physician and endocrinologist with regards to the FDA alert on pancreatitis. I think at this point what we would say is that with regards to our target audience we're seeing pretty consistent responses with regards to their understanding of the data and impact as I mentioned on my pre-prepared remarks the number of questions relating to this has dropped off considerably and these days actually is a rare occurrence and in core with endocrinologist or a primary care physician.

To a point relating to the expanded field force and adjusted marketing strategy that we started in the third quarter certainly the FDA alert was very much a speed bump with regard to our efforts to grow the BYETTA franchise. My expectation is that we will continue through the end of this quarter to see impact from the FDA alert but thereafter we'll be able to grow the product going forward.

Thomas Wei - Piper Jaffray

Thank you.

Operator

Your next question comes from the line of Tom Russo from Baird.

Thomas J Russo - Robert W. Baird & Co.

Hi, Dan thanks, for taking the question. Just wondering it's with the noble sweet 6 extension trials seems as if they are setting up to ask not only for new patients but also for patients which is... and I was just wondering if assuming they do make it on to the market next year, what you'll able to do prepared to counter that?

Daniel M. Bradbury - President and Chief Executive Officer

Hi, Tom, thanks for the question. Well, it's difficult for us to judge the likelihood of Lira-glutide making it's the market given that we haven't seen their entire data set. However, I would comment that I think that it's clear that there is significant opportunity in the GLP-1 class in general to grow the market going forward.

And so, while so I understand the data that they have presented in lead-6. I do believe that the opportunity really lies in expanding the market both in the GLP-1 area. I would, sort of comment that the lead-6 data is inconsistent with other peer reviewed and published data for exenatide.

In previous open label clinical trials abided the range of absolute A1C reduction was greater than was reported in the lead-6 study in being between 1% and 1.5%. And so, as seen stand at the moment, I think we have the opportunity to present a cluster of data, which is significantly greater in volume and also in review, than it's currently available with regards to the lead-6.

To the point you made at this time BYETTA is the first and the only FDA approved GLP-1 receptor agonist and another key point is that of course it's been available now for over three years and has a very, very significant safety database having been exposed to approximately a million patients. So these points I think will be important in physicians consideration of prescribing going forward.

Thomas J Russo - Robert W. Baird & Co.

Okay. And just real quick I don't know if you will be able to provide this or not but, do you have any sense at this point with regard to the pancreatitis warning language whether it's more likely to be an update within the current section label or more likely to move up towards the top?

Daniel M. Bradbury - President and Chief Executive Officer

Tom, I really can not comment on our ongoing interactions with the FDA. What I would say is that of the leaf is that the posting that the agency made on the -- in the local came out in mid-August language consistent with that is likely to included in our label.

Thomas J Russo - Robert W. Baird & Co.

Okay thanks very much.

Daniel M. Bradbury - President and Chief Executive Officer

Thank you.

Operator

Your next question comes from the line of Meg Malloy from Goldman Sachs.

Margaret (Meg) Malloy - Goldman Sachs Research

Thanks. I guess first quick question Dan you have kind of characterized the FDA alert as a speed bump and indicated that in recent weeks, the questions on pancreatitis has dropped off yet, I don't like you are not expecting BYETTA growth in the fourth quarter am I right in that assumption if I am why?

Daniel M. Bradbury - President and Chief Executive Officer

Hi, Meg. So certainly I mean I was trying to ensure that there was appropriate characterization in terms of the understanding of what the agencies posting was in terms of our overall understanding of the benefit risk profile of BYETTA. In terms of the fourth quarter revenue, I think that it's fair to say that if you look at our guidance that Mark gave out earlier, what we're looking at is fairly consistent revenue quarter-on-quarter from third to fourth quarter.

Margaret (Meg) Malloy - Goldman Sachs Research

I guess the question is what is it going to take to grow the product?

Daniel M. Bradbury - President and Chief Executive Officer

I think there is a number of things that are trying to be important in growing a product I mentioned a number in my pre-prepared marks I would step back from just a overall the most important thing I think that's going to enable us to try the product going forward is really greater recognition of the benefit that BYETTA brings to the patients.

The unmet medical need is continuing to grow in Type 2 diabetes. And the potential of the plant is increasingly recognized. I do think that going forward that this will be recognized in the way the guidelines have been put together in particular practice guidelines consistent with conversations that occurred at the American Diabetes Associations meeting and also at the European Association for the study of diabetics meeting as well.

Clearly we were dealing within the third quarter an unexpected event and that has not enabled us to fully realize the benefits of the sales and marketing changes that we did make at the beginning of the third quarter. Of course various benefits will be I think will stop to have a greater impact inventory... follow at the beginning of the year once we get passed also getting agreement with the agency on the change in the BYETTA label as we.

Margaret (Meg) Malloy - Goldman Sachs Research

And thanks that was helpful. If I can just have two quick follow-ups one if what is the expectations about... what are the expectations about guidelines and potential changes and timelines for guidelines? And then separately do you have a sense of the timeline for when we may have more data on the incidents of pancreatitis from a broader database?

Daniel M. Bradbury - President and Chief Executive Officer

So with regards to the first question, unfortunately I don't control the timing of the issuance of guidelines, what I can tell you is that, I know that a substantial numbers of discussions have occurred with regard to guidelines and I would expect to see that some guidelines will be issued in the near future. With regards to the epidemiologic studies that we have undertaken, we are moving as fast as we can to complete all the analyses on those and I expect that during 2009, that we will be publishing data from those epidemiologic studies.

Margaret (Meg) Malloy - Goldman Sachs Research

Okay, thanks a lot.

Operator

Your next question comes from the line of Matt Osborne from Lazard.

Matthew Osborne - Lazard Capital Markets

Hi and thank you for taking the question, just a quick one. Could you get a chance to look at the earliest database reporting that was updated this afternoon from the FDA?

Daniel M. Bradbury - President and Chief Executive Officer

We did have a chance to see that Matt. We constantly review those databases and just to say that the database is consistent with what we've previously reported on our conference call last quarter.

Matthew Osborne - Lazard Capital Markets

Okay. And then just here a quick take, did you see any death facility to pancreatitis due to BYETTA?

Daniel M. Bradbury - President and Chief Executive Officer

Well in FDA update... database there were some new reports that when previously in the database those are consistent with what we previously had reported on the conference call we had last quarter.

Matthew Osborne - Lazard Capital Markets

Okay, great. And can you remind us in the DURATION trials 1 and through 4, what are the pre-specified cardiovascular data that you are looking at in these trials?

Daniel M. Bradbury - President and Chief Executive Officer

Certainly not yet in the DURATION-1 through 4 studies we are measuring the ends point of blood pressure triglycerides, HDL, LDL and we're also looking at some other additional surrogate cardiovascular endpoints in varying degrees, in different sub sects of populations.

Matthew Osborne - Lazard Capital Markets

Great. Thank you.

Daniel M. Bradbury - President and Chief Executive Officer

Thank you.

Operator

Your next question comes from the line of Salveen Kochnover from Collins Stewart.

Unidentified Analyst

Hi, this is Brian [ph] in place of Salveen. The first is can you break up the stock option expenses for the quarter? And second is, can you tell us exactly what the IVIVC data was, that you turned into the FDA and, when do you expect to hear back from the FDA, and the path forward there? And the last one is, what is the latest point you can begin? A bridging study which is sounds like the worst case scenario and still at the filing timeline?

Daniel M. Bradbury - President and Chief Executive Officer

Okay, Hi Brian [ph] yes, Mark, do you want to answer that stock option?

Mark G. Foletta - Senior Vice President, Finance and Chief Financial Officer

Yes, Brian [ph], I'll take the first one. In the third quarter, we recorded $18 million of stock compensation. Importantly that includes both the stock options and ESOP of plan $11 million in SG&A and $7 million in R&D expenses. And if you want to breakdown of the $18 million, $14 million of that is associated with options and $4 million is associated with the ESOP.

Unidentified Analyst

Thanks.

Daniel M. Bradbury - President and Chief Executive Officer

Okay, and Brian with regards to your question about the IVIVC study it's pretty complicated things going to details on a call but just to say that this was a study that we have designed to look at in-vitro test versus a in-vivo finding, the in-vivo finding being looking at PK levels, drug levels that is in man compared with an in-vitro test that we conducted.

And what we were able to demonstrate in that study was strong correlation between what we've seen in-vitro versus in-vivo. That data has been submitted, the timing of review of that data was it's really dependant upon the agency we have no control, there is no control over the timing of that study being reviewed.

We hope to have response from the agency in the near future. However, I think it's fair to say that we're dependent upon the agencies review cycle for that. With regards to your second... your final question regarding the third path forward as I mentioned on the call that the design of the study would be finalized following input from the agency.

So at this time it's not possible to give you a specific time with regards to when and if you would have to start that study. As I mentioned we are pursuing two other strategies and we're confident in those strategies going forward.

Unidentified Analyst

Thank you.

Daniel M. Bradbury - President and Chief Executive Officer

Thank you.

Operator

Your next question comes from the line of Ian Somaiya from Thomas Weisel.

Ian Somaiya - Thomas Weisel Partners LLC

I will hop in your last comment Dan. Can you talk about the back-up strategies in the event that the IVIVC studies are accepted by the FDA? And now your backup strategy is consistent with any feedback that you might have gotten from the FDA in the second quarter?

Daniel M. Bradbury - President and Chief Executive Officer

So Ian I have to be careful here. Because as I mentioned on the call, we need to be careful about our interactions, that we have with the agency. At this time, what I would say to you is that the IVIVC strategy is consistent with the feedback that we've received... the submission is consistent with expectations relative to feedback that we received from the agency.

Additionally, the DURATION-1 crossover study is ongoing and we already have considerable amount of data that is being generated from crossover of patients through previously owned intermediate scaling material and known commercial scaling material. With respect to the need to undertake a new bleaching study at this time, we have decided that is not to be undertaken based on, we are waiting for feedback on the agency are the other key strategies.

Ian Somaiya - Thomas Weisel Partners LLC

And how long, would abridging study take start to finish?

Daniel M. Bradbury - President and Chief Executive Officer

Ian, as I mentioned earlier and in response to Brian's questions is dependent upon... only dependent upon input and further guidance from the agency.

Ian Somaiya - Thomas Weisel Partners LLC

Okay, thank you.

Daniel M. Bradbury - President and Chief Executive Officer

Thank you.

Operator

Your next question comes from line of Cory Kasimov from JPMorgan.

Cory Kasimov - JPMorgan

Hi, good afternoon guys, thanks for taking the question. First question, I guess is for Mark modeling questions regarding today's supply agreement with Lilly and with that first of all how should we account or how do you plan on accounting for the upfront fees they are going to be amortized over the life of the agreement or is it something that hits the P&L at once?

And then secondly with regards to the reimbursement of the significant capital investments you've made and going against COGS is that going to not begin until exenatide once weekly is on the market or that begin going against current manufacturing of commercial material that I assume being rationalized in R&D?

Mark G. Foletta - Senior Vice President, Finance and Chief Financial Officer

Okay, Cory you had good question. Let me kind of set this up for you. Thanks for the question. I think that it's the highest level I want to make sure you understand this agreement today which is really important for us and Lilly we believe. It essentially compensates at both for the Lilly share of capital that as I said will be reimbursed in cost to goods sold over time.

And also compensates us for the cost of that carry that capital over a period of time. And essentially we think getting the payment of approximately $500 million plus overtime is an efficient way to recover that cost because this will be a global facility which we'll provide material for both the United States market and the OUS market as you know there is a differential economics there.

So to your second question really we will record that, as we commence product sales as we're recording cost of goods sold. With respect to the upfront and, which is really done mostly to compensate us for the cost of carrying that capital for the $125 million. I think the most important answer to your question is the debit goes to cash and the credit will be deferred on our balance sheet and we believe it'll be recognized over a period of time estimated to be the useful life of -- the estimated life of exenatide once weekly, probably 10 to 15 years through our income statement.

Cory Kasimov - JPMorgan

Okay, all right, that's very helpful. And then my next question is for Dan. Going back to this idea of comparability in the timing of the filing and everyone is very focused on getting this done as quickly as possible, but even in the case of the FDA indeed, deems of the IVIVC data is, does sufficiently demonstrate comparability. Are you absolutely going to proceed immediately with your following is there any chance that you would consider holding often till the second quarter anyway to learn from the panel and also be able to submit a more robust 120 days safety update considering that DURATION-3 and 4 at least to that point would be more complete?

Daniel M. Bradbury - President and Chief Executive Officer

Cory I guess sorry Phil, I guess answer to your question would be that it will be dependent of course on the feedback that we get from the agency. I wouldn't speculate on this at this time. Our expectations at this time is that once we do with the feedback from the agency and assuming that would be positive then we would proceed with the filing as quickly as possible.

Cory Kasimov - JPMorgan

Okay. And then with the ongoing marketing of BYETTA and you are talking about the questions on pancreatitis have come down, are there any other common genes that are out there anything potential that's new as far as push back principally from the primary care marketplace whether it's the BID dosing or the GI or something that is that's new that's come up that may is another hurdle you have to clear?

Daniel M. Bradbury - President and Chief Executive Officer

Not at this time, no.

Cory Kasimov - JPMorgan

Okay. And then lastly I just want to clarify something from the first question that Thomas asked. Mark you said there has been no inventory stocking ahead of the recent price increase if you took?

Mark G. Foletta - Senior Vice President, Finance and Chief Financial Officer

We really said, was we believe the channel inventory appropriately supports patient demand and it's comparable to the demand that we saw at the end of the second quarter at the levels of days if you will in the channels that what we're talking in the second quarter.

Cory Kasimov - JPMorgan

Okay.

Mark G. Foletta - Senior Vice President, Finance and Chief Financial Officer

We can't try it Cory, if you we do here we characterize that the third quarter did have a couple of extra shipping days.

Daniel M. Bradbury - President and Chief Executive Officer

Thanks Cory.

Cory Kasimov - JPMorgan

Okay, all right. Thanks, for taking the questions.

Operator

Your next question comes from the line of Phil Nadeau with Cowen & Company.

Philip Nadeau - Cowen & Company

Good afternoon. Thanks for taking my questions. The first is actually just a follow-up to the last two, just still I am unclear. If you don't need to do a new bridging study, would you have to change your guidance for when LAR would be filed? Or is the need for new bridging study assumed in your Q2 '09 timelines?

Mark G. Foletta - Senior Vice President, Finance and Chief Financial Officer

So Phil, I think, so to say that we've assumed in our Q2 timeline the need for bridging study, however the clarity around that cannot be... is not absolute, as we haven't had direct feedback from the agency, with regards to design of that study. And we would need feedback from the agency on the design of the study before proceeding with it.

Philip Nadeau - Cowen & Company

Okay, great, that's very clear. And then, my second question is on the timing of the label updates that you mentioned earlier. I believe, what is going to happen at the same time, meaning those, the BYETTA monotherapy label require you and the FDA coming to some agreement on pancreatitis language or is it possible, that you could get the BYETTA monotherapy label and some other updates following that?

Daniel M. Bradbury - President and Chief Executive Officer

Yes, great question. Thanks very much Phil, I think I expect to say that at the moment, our expectation is that the label update would come into single label update. However, it is always possible that the agency might take a different tact and to approach these things independently. However, our conservations have been with respect to the totality of the label.

Philip Nadeau - Cowen & Company

Okay. And one last question technical question on pancreatitis and event rates. When you decided the event rate in the past of about one instance per 3,000 patients, what adjustment did you make for under reporting in any of the epidemiological databases that you've used to you know how the adjustments compare to what the FDA itself is doing?

Daniel M. Bradbury - President and Chief Executive Officer

Phil we've just in the past reported the epidemiologic data as we have received it. As it has been reported, we haven't made any adjustments in that regard and we have always been very deliberate and stating the facts of what we absolutely know as opposed to making any predictions.

Philip Nadeau - Cowen & Company

Okay. That's very helpful thank you.

Daniel M. Bradbury - President and Chief Executive Officer

Thank you.

Operator

Your next question comes from the line of Tom McGahren from Merrill Lynch.

Thomas McGahren - Merrill Lynch

Hi, question for Mark, just on the noticable improvement there on the operational efficiencies. So that do you expect to use of cash to go down I guess going forward but that you talk about enhanced marketing sales opportunities I am just curious as to how you achieved better efficiencies this quarter and specifically what you are going to be doing going forward?

Mark G. Foletta - Senior Vice President, Finance and Chief Financial Officer

Yes, Tom thanks for the question. I think the way to really answer to that is the way we are looking at the business hard and really driving for efficiency across our business focused on the near-term value drivers which we see is certainly revenue growth and BYETTA and SYMLIN once weekly getting at to market and getting in the market prepared for it.

And, focused investments on our obesity pipeline. Comments today regarding future quarters obviously there is only one more quarter in 2008 and I think we're saying as we're increasingly focused on that. As we did throughout 2008 we are adjusting our spending based upon expected revenues and that is our further priority for us as we move through this quarter and into 2009.

And certainly, we'll provide you more guidance as to future quarters at our January year end call. I think the message we want to give you with is that we will be reducing the cash use from operations and with the completion of the plant in Ohio. We will also be reducing our capital expenditures in 2009.

Thomas McGahren - Merrill Lynch

Just a quick follow-up. In terms of timing for potentially partnering obesity program what are you thinking there?

Mark G. Foletta - Senior Vice President, Finance and Chief Financial Officer

Yes, Tom maybe I can answer that question. Tom, we continue to have to conversations with a number of potential partners, both financial and commercial partners with regards to the obesity program. We at this time we haven't provided any statistic guidance with regards to comments. However, I would comment that I believe that is important to when we enter into latest stage of development, where do we partner the obesity programs given the significant expenses involved in those programs.

Thomas McGahren - Merrill Lynch

Okay, thanks a lot.

Operator

Your next question comes from the line of William Ho of Bank of America.

William Ho - Bank of America

I guess just with respect to the agreement with Lilly in the line of credit given your cash position, I guess my question is why now and ultimately how do you manage your business towards breaking even? What's required in terms of sales and cost savings on the operations line, especially since we are seeing growth in BYETTA slowing down as well as having competition coming through where advertised potentially next year?

Daniel M. Bradbury - President and Chief Executive Officer

Hi, William. Yes, so the first part of your question was why now, I believe with regards to the agreement with Lilly and I mean the simple answer to that question is that, we undertook to build this facility. We have an ongoing collaboration agreement with Lilly and this agreement is consistent with that agreement. We undertook to commence the building of that facility earlier and this is really just truing up in consistent with our agreement with Lilly. With regards to--

Mark G. Foletta - Senior Vice President, Finance and Chief Financial Officer

I other thing I will add because you specifically asked about the credit agreement and I actually missed that I am glad that you did come back to that in my earlier comments about compensating as for the cost of carrying this capital over time. The upfront payment obviously $125 million we received in day and having the availability of the $165 million on an unsecured basis enables us to have additional access to cash and really it was compensation through for the staff that we will not recover the entire cost of the facility for a number of years. And so really in our discussions with Lilly they stepped up and brought up to the table to help make it a fair result for both companies. I'll let Dan answer the second part of your question.

Daniel M. Bradbury - President and Chief Executive Officer

Yes, so William I mean believe the second part of your question is really asking about guidance for the future and at this point we have only guided for this year. We don't provide long-term guidance of the type that you are asking about. What I would say is that we recognize that our environment is going to be increasingly challenging going forward.

And as I mentioned in my prepared remarks Amylin our goal is clearly to be a sustainable and profitable company. And that I did mention that we would further evolve our business model to be more flexible enabling us to maximize the market opportunities that we have and clearly a market opportunities to grow BYETTA and to grow SYMLIN as well as to accelerate the submission of exenatide once weekly so that, we can start generating revenue from exenatide once weekly going forward.

We will need to be flexible in our approach to our business model, dependent on a wide range of different factors, that will affect our business going forward, including the timings and the nature of potential competition, which you indicated. So I would just say at this point, we continue to be very focused on this, we have made operational efficiency moves in this last quarter and we will continue to do that going forward to give ourselves the maximum numbers of options to become a profitable company in the future.

William Ho - Bank of America

Okay, thank you.

Daniel M. Bradbury - President and Chief Executive Officer

Thank you.

Operator

Thank you. We have reached our allowed time for questions. I would now like to turn the call over to Mr. Dan Bradbury.

Daniel M. Bradbury - President and Chief Executive Officer

Well just a few final remarks to say thank you to everybody for being on the call today. We appreciate your time and interest in the company. If there any additional questions, please contact Michael York in our Investor Relations department. I would finally finish by commenting at Amylin, we remained focused on driving BYETTA and SYMLIN growth and accelerating the NDA submission for exenatide once weekly. Thank you again for your interest today.

Operator

This does concludes today's conference call. You may now disconnect. .

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Source: Amylin Pharmaceuticals Inc. Q3 2008 Earnings Conference Call Transcript
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