Amylin Shares Find Support, But Upside Still Limited

We have been cautious on Amylin Pharmaceuticals, Inc. (AMLN) since the beginning of 2008, and we are still unconvinced that LAR will be approved on its first cycle FDA review. However, with the shares trading at multi-year lows, and the stock down 70% over the past year, the worst may be over for Amylin. Eli Lilly’s (LLY) obvious commitment to Byetta and LAR will probably put a floor under further price declines.

News that Amylin will move forward with the LAR filing in mid-2009 is a positive, but we are still unconvinced the drug will be approved on first cycle review. In the meantime, an FDA decision on Byetta as a monotherapy could provide a boost to the shares in the near-term. Looking forward, we are optimistic on the mid-stage obesity pipeline. We see $14 as fair value.

Amylin currently trades at 10x our 2013 EPS estimate of $1.06. The 2013 multiple is a slight premium to the large-cap pharma / biotechnology peer-group average of 8x 2013 EPS. The peer-group consists of several large-cap bellwethers, including Lilly (7x), Merck (7x), Genentech (13x), Amgen (6x), Biogen Idec (10x), Gilead (10x), Celgene (12x) and Genzyme (9x). We feel the current valuation is reasonable.

Our biggest concern, besides what we expect to be disappointing Byetta sales over the next few quarters, is that the approval of LAR will be pushed back beyond early 2010. Renewed fears of pancreatitis lead us to believe the FDA will want to see more data than just the 295 patient DURATION-1 and top-line data from the 400 patient DURATION-2 trial before they grant approval.

There are 2 sides to the LAR pancreatitis issue. Firstly, because the pharmacologic exposure to exenatide may be lower over the week-long period from the LAR dose vs. twice daily injections, the risk may be lower. Management has reported better tolerability with the LAR version vs. regular Byetta. It is conceivable that the smoother release and concentration levels delivered by LAR will actually reduce the risk of pancreatitis.

However, given that physicians are urged to remove patients from Byetta upon the first signs of the disease, we are concerned that the FDA may take issue with the fact that a patient cannot simply discontinue LAR. It takes a week for the drug to leave the body, and symptoms could develop at any time. Therefore, we recommend investor stay away from the name until visibility improves.