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Executives

Michael York -

Dan Bradbury - Chief Executive Officer, President, Director and Member of Risk Management & Finance Committee

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

Analysts

Jim Birchenough - BMO Capital Markets U.S.

Thomas J. Russo - Robert W. Baird & Co. Incorporated, Research Division

M. Ian Somaiya - Piper Jaffray Companies, Research Division

Mark J. Schoenebaum - ISI Group Inc., Research Division

Robyn Karnauskas - Deutsche Bank AG, Research Division

Cory William Kasimov - JP Morgan Chase & Co, Research Division

Thomas Wei - Jefferies & Company, Inc., Research Division

Steve Byrne - BofA Merrill Lynch, Research Division

Yaron Werber - Citigroup Inc, Research Division

Philip Nadeau - Cowen and Company, LLC, Research Division

Amylin Pharmaceuticals (AMLN) Q4 2011 Earnings Call February 6, 2012 5:00 PM ET

Operator

Welcome to the Amylin Pharmaceuticals Q4 2011 Earnings Call. [Operator Instructions] This conference is being recorded. If you have any objections, please disconnect at this time. I would like to introduce your host, Mr. Michael York, Senior Director, Investor Relations. Sir, you may begin.

Michael York

Good afternoon, and welcome to Amylin Pharmaceuticals' quarterly update conference call. We've uploaded a presentation to accompany this conference call that provides additional background on the quarter.

Today's discussion will contain forward-looking statements that involve risks and uncertainties. These risks and uncertainties are outlined in today's press release, the website presentation 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 Amylin management team here today: Daniel Bradbury, President and Chief Executive Officer; and Mark Foletta, Senior Vice President of Finance and Chief Financial Officer.

I will now turn the call over to Dan Bradbury.

Dan Bradbury

Thanks, Michael, and welcome to our fourth quarter and year-end call for 2011. This afternoon, our comments will build on the press release issued earlier today. In a few moments, Mark will provide additional details on our financial results for 2011 and comment on our outlook for 2012.

Our recent announcement regarding the approval of BYDUREON in the United States was the culmination of diligent effort and successful execution. We achieved numerous goals and milestones during 2011 which I'll briefly review before commenting on our focus for 2012.

We achieved successes with both of our marketed products, BYETTA and SYMLIN. Regarding BYETTA, we stabilized revenue and expanded the label such that to date, it has the broadest label of any GLP-1 receptor agonist. We grew SYMLIN revenue as we discontinued the SYMLIN vial and converted patients to the SYMLIN pen.

In addition to the successes we achieved with our marketed products and perhaps most importantly for 2011, we successfully advanced BYDUREON by rapidly responding to the requests outlined in the second complete response letter we received from FDA. Outside the United States, BYDUREON was approved in the European Union and received a favorable recommendation from NICE in the United Kingdom, further supporting the value proposition of this revolutionary medicine.

Looking to ensure long-term shareholder value, we also advanced our metabolic pipeline. We obtained positive results from our proof-of-concept study for exenatide once-monthly suspension program and held a successful end-of-Phase-II meeting with the FDA. We also advanced our program for rare forms of lipodystrophy with a hormone analog, metreleptin.

From a financial perspective, 2011 was also a successful year. We continued to focus on managing expenses in line with revenues, and ended the year with non-GAAP operating income of $25.7 million.

Additionally, during the fourth quarter, we grew revenues for both of our marketed products with BYETTA growing by 3.5% to $132.6 million; and SYMLIN growing by 1.3% to $28.3 million. Our execution of the settlement deal to acquire the global rights to the exenatide franchise rounded out an eventful year for us, and we're now in the best position we've ever been in to successfully launch BYDUREON, the first weekly-dose diabetes therapy in the United States.

2011 truly set the stage for 2012. This year, we have an exceptional opportunity as a company. Following the U.S. approval of BYDUREON on the 27th of January, it is now approved in 31 countries. And with our pending launch in the U.S., we'll soon be launched in 11. We're on the verge of taking a truly remarkable step forward in advancing the treatment of type 2 diabetes and plan on having the product available to patients in the United States on February 17, just 3 weeks following approval.

Our plan to segment our commercial organization into 2 discrete units, 1 focused on exenatide and the other on specialty and orphan products has been implemented now that BYDUREON has been approved. We have completed the hiring of the 325 additional diabetes sales specialists for the exenatide commercial unit. And within the week, we expect to complete the hiring of 65 additional diabetes sales specialists into our specialty and orphan commercial unit. The training of these new specialists has already commenced and we plan to have these new resources fully deployed by the 1st of March. Our existing sales force of 325 diabetes sales specialists is already trained and priming the market for the availability of BYDUREON on the 17th of this month.

With prescriptions for GLP-1 receptor agonists having grown by nearly 50% since February of 2010, and the class now approaching $2 billion in global sales, we believe that awareness of the benefits of GLP-1 therapy is at an all-time high, and the timing of the pending BYDUREON launch could not be better. It is our goal to continue to grow the GLP-1 receptor agonist class with both the launch of BYDUREON and the new BYETTA indication, which is for use in people who have not achieved adequate glucose control with insulin glargine alone. With BYDUREON, we have the unique opportunity to grow and shape the long-acting GLP-1 market. And with BYETTA, the only GLP-1 receptor agonist indicated for use in combination with the world's best-selling basal insulin, we have the opportunity to establish a new market for short acting GLP-1 receptor agonists.

As we have reacquired the global rights to exenatide molecule, this opportunity extends beyond the United States. Our efforts to secure a new partner for countries outside the United States are ongoing with substantial interest from numerous large pharma companies with extensive global presence.

As we look to the future, we're also advancing several important lifecycle initiatives for both BYDUREON and the exenatide molecule. Development of the BYDUREON pen continues to remain on track and we expect to have this presentation available to patients in the United States in the fourth quarter of this year or in the first quarter of next year, depending on the length of the regulatory review. The Phase III program for the weekly suspension formulation of exenatide will commence in the middle of this year and the Phase III initiation for the monthly suspension formulation is targeted for 2013.

We are continuing to add centers and enroll patients for our ongoing EXSCEL cardiovascular outcome study, which is investigating the potential for BYDUREON to reduce cardiovascular events relative to the standard of care in patients with type 2 diabetes.

In addition to the advances we are pursuing for our exenatide franchise, we're making excellent progress on 2 other development programs. Our metreleptin program in rare forms of lipodystrophy continues to advance, with completion of the rolling BLA submission on track for the end of the first half of this year.

Regarding AC165198, our peptide hybrid molecule, or phybrid, which we are developing with our program Biocon, we began enrolling patients in a Phase I study last month. While we invest in the launch of BYDUREON and other strategic priorities, we will continue to manage our expenses in line with our revenues.

As Mark will highlight momentarily, our strong fourth quarter and year-end financial results reflect the significant efforts we have made to drive efficiencies across our business.

I'll now turn things over to Mark to review our financial results released earlier today.

Mark G. Foletta

Thanks, Dan, and good afternoon. Today, we announced our financial results for the fourth quarter and the year ended December 31, 2011.

As Dan mentioned, we continue to manage the business with operational discipline and are focused on minimizing expenses while maintaining a strong cash position and fully supporting the launch of BYDUREON. And as we have discussed previously, we believe the key metric to track our financial progress is non-GAAP operating results which approximates our cash flow from operations before working capital changes.

Our non-GAAP operating results are defined as our GAAP operating results, excluding restructuring charges and non-cash items comprised of stock-based compensation, depreciation and amortization and the amortization of acquired intangible assets and fair value adjustments. This definition of our non-GAAP operating results has changed slightly from definition we've used historically. The changes have been implemented to account for several items related to the deal we executed to reacquire global rights to the exenatide franchise. I'll be describing these and other facets of the accounting treatment of the transaction in greater detail after reviewing our financial results.

Non-GAAP operating income in 2011 was $25.7 million compared to a loss of $4.4 million in 2010. Total revenues decreased 2.7% to $650.7 million in 2011 from $668.8 million in 2010. Our gross margins improved to 92% from 91% in 2011. Our operating expenses were $432.4 million in 2011, consisting of $271.2 million of selling, general and administrative expenses and $161.2 million of research and development expenses. This represents a 6% decrease from our operating expenses in 2010.

As I will discuss in a moment, we expect our operating expenses to increase in 2012 now that we have full operational control of exenatide. We ended 2011 with $214.6 million in cash and investments and are well-positioned to execute our plans in 2012.

I'd like to make a few additional comments regarding the fourth quarter versus the third quarter results. We reported non-GAAP operating income of $17.6 million for the fourth quarter compared to non-GAAP operating income of $13 million in the third quarter. The improvements in our quarter-over-quarter non-GAAP operating results reflect decreased research and development expenses and decreased collaborative profit sharing, partially offset by increased selling, general and administrative expense. This improvement largely reflects the impact of the new economics for exenatide and the favorable disposition of certain cost-sharing disputes with Eli Lilly and Company.

Before I move into a more detailed discussion of the accounting for the exenatide rights agreement, I'd like to comment on our sequential quarterly revenue and operating expense results.

BYETTA sales increased $4.5 million sequentially or 3.5%. The increase was driven by a fourth quarter price action, partially offset by a 3.1% decline in prescription volume during this period. Wholesaler inventories at December 31 were comparable to those at September 30, and we believe are consistent with patient demand. SYMLIN sales increased $1.3 million sequentially, driven primarily by pricing actions taken earlier in the year and flat prescription volume.

For further details regarding our financial results from the fourth quarter of 2011 compared to the fourth quarter of 2010, please refer to the presentation available on our company website.

Having discussed recurring operations, I'll now take a few moments to describe the accounting for the reacquisition of global exenatide economic interest from Lilly in the fourth quarter of 2011. Again, please refer to the slides in the accompanying presentation on our website as a supplement to this discussion.

We agreed to make the following payments to Lilly as consideration in the transactions. One, a $250 million upfront cash payment funded in November 2011. Two, a revenue-sharing obligation, or RSO, of 15% of global net sales of exenatide products providing up to $1.2 billion in value to Lilly, plus interest. The RSO accrues interest at a 9.5% annual rate with the interest being added to the note balance quarterly. And three, we also agreed to reimburse Lilly for up to $60 million of operating losses incurred outside of the United States prior to the transition to Amylin. An additional $150 million milestone payment is contingent upon the U.S. regulatory approval of a once-monthly formulation of exenatide.

For accounting purposes, the net consideration to acquire Lilly's global economic interest in exenatide was valued at $1.1 billion, and was allocated as follows. $736 million, or approximately 70% of the total, was allocated to U.S. economic interests. This amount is further allocated $275 million to BYETTA and $461 million to BYDUREON and exenatide suspension. The amount allocated to BYETTA was recorded as an intangible assets and will be amortized to our income statement as a non-cash expense over time.

In the fourth quarter of 2011, we recorded $4 million of amortization expense. The amount allocated to BYDUREON and exenatide suspension is included in the $432 million onetime expense reported in the fourth quarter of 2011 and is net of an accounting gain associated with foregone BYDUREON launch milestones.

$328 million, approximately 30% of the consideration, was associated with the acquisition of the OUS business. In accordance with business combination accounting rules, this asset will be treated as a prepaid acquisition cost until OUS operations are transitioned from Lilly. The RSO was valued at $977 million for accounting purposes as the 9.5% interest rate was deemed below market value. This obligation was recorded as debt on our balance sheet. The effective interest rate on the RSO is 14.4%. We recorded $11 million of interest expense associated with the RSO in the fourth quarter.

Lastly, the potential $150 million milestone payment payable on the U.S. approval of a monthly formulation of exenatide will be accounted for at a later date if the milestone is achieved.

Having described the accounting treatment of the major complements of the exenatide rights transaction, I'd like now to highlight some information regarding key trends and assumptions for 2012.

In early 2011, we indicated that our quarterly GAAP operating expenses would be $110 million to $115 million. For the full year of 2011, we operated at the low end of this range as a result of our focus on operating efficiencies.

In November 2011, following the reacquisition of exenatide, we indicated that we would be assuming incremental annual cash operating expenses of $150 million to $170 million in 2012 to fully support exenatide commercial and R&D activities. The improved exenatide gross profit economics we gained through the transaction will fund the majority of these incremental cash expenses. Consequently, we expect our operating expenses in 2012 consisting of selling, general and administrative and research and development expenses to be between $600 million and $625 million.

As has been the case over the past 3 years, our non-GAAP operating results will be the key metric we use to measure our performance in 2012. Historically, our non-GAAP operating results were defined as our GAAP operating results, excluding the restructuring charges and non-cash items, comprised of stock-based compensation and depreciation and amortization.

As I mentioned previously, following the reacquisition of exenatide, we are making the following changes to the definition of our non-GAAP operating results. We will exclude acquisition-related charges in the amortization of acquired intangibles and we will include the 15% RSO payment on exenatide global sales.

In 2012, we are expecting a non-GAAP operating loss of between $20 million and $40 million. I will now provide some further quantitative and qualitative guidance to assist you in understanding our expectations for 2012.

Collaborative revenues, consisting of the amortization of the upfront payment we received from Takeda as part of our 2010 obesity collaboration, will be $7.5 million. We expect royalties on exenatide gross margin outside of the United States to be less than $5 million. We expect combined gross margins for BYETTA, BYDUREON and SYMLIN of approximately 80%. We expect net interest expense to be $165 million to $175 million, approximately $140 million of interest expense associated with the RSO. As I discussed earlier, the RSO has an accounting value of $977 million and an effective interest rate of 14.4% per year.

Non-cash adjustments, including depreciation, amortization and stock-based compensation, are expected to be between $105 million and $115 million. The increase from approximately $84 million in 2011 primarily reflects increased depreciation expense for our Ohio manufacturing facility. As we described earlier in the call, an tangible asset, which represents the allocated accounting value of U.S. BYETTA economic interest, will be amortized to the income statement over time and excluded from our non-GAAP operating results. We expected this amount to be approximately $30 million in 2012.

With respect to our cash flows, we offer the following additional comments. We intend to continue to focus on tightly managing our cash in 2012 while investing in the working capital to support the launch of BYDUREON. Additionally, our first 2012 RSO payment will not be made until the fourth quarter. We do not expect our capital expenditures to change significantly from $26.8 million in 2011.

To summarize, we are pleased with our solid financial performance in 2011 which reflects our focused discipline to manage expenses, closely in line with expected revenues. This discipline will continue in 2012 while we fully invest to support the BYDUREON launch in the United States.

Now I will turn the call back over to Dan for a few additional comments.

Dan Bradbury

Thanks, Mark. Before the close of our prepared remarks, I'll just add a few more comments. I would again like to take a moment to acknowledge and thank the employees at Amylin whose hard work and the diligent efforts enabled several key achievements in 2011 that led to the eventual approval of BYDUREON. Having just returned from an extraordinarily enthusiastic launch meeting for BYDUREON last week, I can say that the Amylin team is ready to launch BYDUREON, and is truly looking forward to bringing this revolutionary medicine to physicians and patients across the country.

Additionally, I'd like to note that this will be the last earnings call for Michael York who has moved on to accept a new role here at Amylin as the Vice President in charge of our specialty and orphan commercial unit. Michael brings over 20 years of commercial strategy leadership and operations experience in both biotech and pharma. The role of Senior Director of Investor Relations and the new point of contact for the investment community will be held by Christine Everett-Zedelmayer. Please join me in welcoming Christine to this new role.

In closing, I'd like to reiterate that I, along with the Amylin leadership team, remain committed to creating value for our shareholders, our employees, and most importantly, the millions of diabetes patients we're focused on serving.

I'll now ask the operator to open the lines for questions.

Question-and-Answer Session

Operator

[Operator Instructions] The first question is from Jim Birchenough of BMO Capital.

Jim Birchenough - BMO Capital Markets U.S.

Congratulations to Michael, and I've got a couple of questions. Just first on the accounting for the RSO and that 15% of exenatide sales. Can you confirm again how that 15% is hitting the P&L, if at all? It was hard to follow all the numbers there, but I just want to confirm that you're offloading the partnership expense. And I want to know where you're accounting for the 15% RSO as a cash payment to Lilly. And then just a second question, as you think about the BYDUREON launch, could you maybe talk to what proportion of patients you think might be warehoused right now? We've seen some launches where we've had the initial bolus. Maybe if you could comment on that dynamic, if you think it's going to play out or if it's going to be a slow build.

Dan Bradbury

Hi, Jim. Firstly, thanks for congratulating Michael. We're excited about him taking on that new role. I'll pass your RSO question over to Mark in a second. Maybe just to answer your second question about potential patients being warehoused for the BYDUREON launch, we actually don't have a specific number that I can give you there, but what I can tell you is that without doubt and in my experience and I think in Vince's experience, we've never actually been involved in a launch where awareness of a new product was as high as it was for BYDUREON. Now clearly, that's a consequence of a number of factors. The products' features and benefits, of course, are key to that but also, of course, the time that it has been -- it was in the regulatory review also contributed to that. So I think you're right, there are patients who are waiting to come on BYDUREON. I just can't give you a number at this point. Mark, perhaps you could comment on the RSO?

Mark G. Foletta

Sure, Jim. We did record the revenue sharing obligation for GAAP purposes to our balance sheet as debt. However -- and we will be amortizing that at 15% of exenatide sales. We did say, on our non-GAAP guidance, though, that we will include that 15% RSO payment against our non-GAAP results. That was contemplated in the guidance that we gave of $20 million to $40 million non-GAAP loss -- operating loss in 2012.

Operator

Next question is from Tom Russo of Baird.

Thomas J. Russo - Robert W. Baird & Co. Incorporated, Research Division

Your competitor earnings call recently provided a macro outlook for the segment about doubling to a 10% share by dollars and contemplating kind of their market share expectations. Just wondering if you would be willing to provide your outlook for the segment growth and any market share expectations that you have from your end, long-term expectations.

Dan Bradbury

Yes, hi, Tom, thanks for the question. We have not given and do not intend to give specific guidance with regards to our expectation. I think that what we can say, however, is consistent with that competitive comment is that we do expect to see the GLP-1 market grow substantially. And certainly, I thought it was interesting to comment with regards to market share because when one does the math, that would be a very substantial position for Amylin relative to our current position in the market globally. So -- but that all having been said, at this point, I think we can see the market now is already over $2 billion and growing at a very substantial rate.

Thomas J. Russo - Robert W. Baird & Co. Incorporated, Research Division

Okay. And then last but real quick, what's left to complete between now and filing the pen early enough such that it could be potentially be improved -- approved by the fourth quarter? What's left between now and filing?

Dan Bradbury

Just a few things, really. We're completing some stability work. We have to have a certain amount of stability work completed, and then, of course, there's the compilation of the application itself. Those are the 2 kind of major factors. And we don't see any challenges with completing those in time to have the pen available by the end of this year or early next year.

Operator

The quest the next question is from Ian Somaiya of Piper Jaffray.

M. Ian Somaiya - Piper Jaffray Companies, Research Division

I was hoping to touch base or have you revisit the idea of awareness. Can you give us some qualitative feedback you're getting from physicians or at or even on the patient side regarding BYDUREON? And I just have a question for Mark on the financials.

Dan Bradbury

Sure, hi, Ian. Well, I think from a qualitative point of view, certainly, I think maybe I can maybe talk to some of the comments from some of our salespeople last week at the launch meeting. I mean, they spontaneously receive phone calls from physicians asking when they would be able to prescribe, when the products would be available. The interesting thing as well is when we've done market research, our physicians actually call out the BYDUREON brand by name. So it's not just talking to a generic name or some theoretical product. They're already aware of the brand, and that's been very consistent over the last 6 to 9 months. So we're feeling very pleased about that and that certainly does give us a very strong situation. From a patient perspective, I mean, certainly, I guess anecdotally, I've had number of patients asking me directly. We've seen postings on blogs across social media networks as well as across the infamous investor blogs as well, with regarding when they would be available. And I think as I said earlier, you've also had patients who have gone into physicians which have then resulted in calls to us saying when can physicians ask for the product and when will it be available. And as I said on the -- in my prepared remarks, we believe, product -- we believe, we know, product will be available in pharmacies by the 17th of February.

M. Ian Somaiya - Piper Jaffray Companies, Research Division

Okay. And what type of -- what level of inventory do you anticipate being held by your [indiscernible]

Mark G. Foletta

Ian, could you be more specific, what do you mean being held?

M. Ian Somaiya - Piper Jaffray Companies, Research Division

Well, I mean, just given the launch, given the awareness, I mean, what type of inventory should we assume?

Mark G. Foletta

Yes, so we have been making inventory, as you know, certainly for the OUS market. And be -- and have certainly begun to put inventory together for the U.S. market. As Dan said, we expect it in the market by the end of next week. We have said that typically, you have a bolus of product that gets launched. And yes, it's usually around somewhere around 4 weeks that -- at the outset. So we would expect to see the shipments of that relatively soon here, and then, future orders will come based upon demand. Given the timing of this, we'll certainly provide more -- further outlook on this when we get to our Q1 call in April, because we'll have a good sense of what the channel is looking like then.

M. Ian Somaiya - Piper Jaffray Companies, Research Division

And I guess, the question was more related to also how much inventory do you have on hand to supply the market?

Dan Bradbury

Well, maybe -- I mean, we have plenty of inventory available to put 4 weeks worth of product into distributors, which is what we would aim to do before the -- in the next week or so.

Mark G. Foletta

Yes, so we were building inventory in the fourth quarter. And I may remind you that we actually had some inventory that was available actually 1 year ago that can be used in the marketplace, a little over 1 year ago, following our second complete response, so -- which isn't actually even on the books. So anyway, we have plenty of inventory to support the market.

Operator

The next question is from Mark Schoenebaum with ISI.

Mark J. Schoenebaum - ISI Group Inc., Research Division

Hey, Mark, we're going to miss you on calls. There'll be nobody to confuse all the biotech analysts with accounting jargon.

Michael York

No, you're still going to have me.

Mark J. Schoenebaum - ISI Group Inc., Research Division

Hey, I was -- number one -- I just had like -- I had 4 questions, but they're really short. Number one, why the decision to not get any explicit sales guidance? And number two, this is always dangerous because I'm really bad at math, but when I take your guidance and try to back out what you guys imply for revenue for the company, I get to something like $660 million to $680 million, which is like low single-digit growth for total company revenue over 2011. So wondering if my math is right and why such low growth? Do you expect a lot of cannibalization at first? And then any help on the CapEx line for this year? And then finally, one for Dan. The pen that's you're -- that's going to be approved in the next, call it, 12 months, how exactly is that different from the weekly suspension? Like what exactly is this pen? Can you literally describe it for us to help us understand what kind of impact it would have in the marketplace versus the weekly suspension?

Dan Bradbury

Yes, sure. So just to give Mark some time to do some back-of-the-envelope calculations there, Mark, to come up with your numbers, I'll answer the last question first. So with the pen is actually going to be one which is made up of a single jeweled chamber cartridge. In those, the 2 chambers of the cartridge, 1 chamber will have the microspheres and then the other chamber will have the diluent. When a patient uses the pen, it will be a simple case of essentially actuating the cartridge so that the diluent goes into the microsphere chamber. The patient then would then suspend the microspheres by shaking the pen and then they'd be able to inject. So it's all in a single device. Now the big difference with the suspension is that the suspension already has microspheres suspended in a different diluent, which is possible to do because of the uniqueness of that formulation. So it actually takes out of the step the reconstitution of the microspheres. Okay, is that clear?

Mark J. Schoenebaum - ISI Group Inc., Research Division

That's great. That helps a lot.

Dan Bradbury

Okay. Now, Mark, over to you for the questions...

Mark G. Foletta

I'll take -- first, I'll take the lack...

Mark J. Schoenebaum - ISI Group Inc., Research Division

My goal is to stump you as a going-away present, so proceed.

Mark G. Foletta

I'm not going anywhere.

Mark J. Schoenebaum - ISI Group Inc., Research Division

Just kidding.

Mark G. Foletta

That's Michael York. You still get to deal with me Mark. So anyway, with respect to the CapEx, that's the easy one. We did have in our prepared remarks, we expect CapEx to be comparable to 2011, and that's a number, $26 million approximately, that we had in 2011, and my -- primarily focused around our facility in Ohio. With respect to your back calculation of revenue, I think there is a few things that are at play here. One is obviously, the mix of revenue. We did guide margins, blended margins of 80%, but depending upon the mix of the revenue across our products, BYDUREON, BYETTA and SYMLIN, the revenue number that we have for each product, is -- we have range of forecast for each of those products. And with respect to your back calculation, I don't think you're thinking about it inaccurately. We certainly would expect early on to have some switching of BYETTA patients to, and potentially Victoza patients to -- into BYDUREON. And as we look to grow the market in -- earlier in the continuum of care, and then we will be promoting BYETTA in the -- with our new indication on top of basal, as we said in the prepared remarks. But we don't want to provide specific guidance and I think it really comes down to the mix of the products. But we're very bullish on the opportunity, as Dan said earlier, of this market growing and us continuing to secure revenue growth as we move through the year.

Mark J. Schoenebaum - ISI Group Inc., Research Division

Okay. Sorry I confused you with Michael. Sorry, Michael.

Mark G. Foletta

No problem. It's okay.

Operator

The next question is from Robyn Karnauskas of Deutsche Bank.

Robyn Karnauskas - Deutsche Bank AG, Research Division

So I guess -- so quick question, I guess, accounting questions. So are you re-recording the interest payment associated with the RSO and when do you expect to make those payments? And then second question I had, for the sales force that you're bring on from Lilly, are you now going to have permanent contracts for those sales individuals or are they still temporary sales contracts?

Dan Bradbury

So maybe I'll take the second question first. I mean, just to clarify, first and foremost, we're not taking on any sales people from Lilly. We actually have hired our own contract sales organization. We have the contracts that will, each person will have in place is a 2-year contract, it will be -- but with a 1-year renewal. So it's actually a pretty long-term contract that we'll have in place. Although, of course, we always have the opportunity to adjust that if we need to at any time, but there will always are consequences associated with canceling a contract or changing a contract outside of the cycle. Perhaps that you're asking the -- your first question regarding interest, Mark, do you want to comment on that?

Mark G. Foletta

Yes, Robyn, it's Mark here. We will be recording interest expense through our income statement on the RSO and the way you should think about it that is it'll be -- below the line will be interest cost. We guided that, it was $140 million in 2012 of approximately $160 million to -- $160 million of the total interest expense. So the majority of interest expense we'd expect this year will be associated with the RSO. And then of course, payments on the RSO, you asked when we would make them. The way the agreement was struck is the first RSO payment for 2012 will not be made until the fourth quarter, the 1-year anniversary of the deal. But we'll be accruing that to quarter -- throughout the year, but the first payment will not be made until the fourth quarter. And then we will be making them quarterly thereafter, starting in 2013. And I think I said this, but the interest does get added to the principal, so you'll see the RSO obligation that's on the books at the end of the year at $977 million grow throughout the year.

Operator

Next question is from Cory Kasimov of JPMC.

Cory William Kasimov - JP Morgan Chase & Co, Research Division

I realized it's only been 1 week, but can you describe the initial reaction from payers regarding the price of BYDUREON?

Dan Bradbury

So with the caveat, yes, it has only been 1 week. I would just say that I think we've had positive reactions so far. We've had a number of calls from payers keen to meet with our managed care organization team. And I would say, Cory, that the pricing strategy that we are adopting -- we've adopted for BYDUREON, I think, has been well received to-date. But I would then say -- I go back, say, it is early. And certainly, we're at the stage now where people are wanting proposals and they also want the dossier, of course, that we prepared to enable them to get to review as soon as possible.

Cory William Kasimov - JP Morgan Chase & Co, Research Division

Okay. And then for Mark, on OpEx, can you talk a little bit about the dynamics behind the drop in R&D from the third quarter to fourth quarter of 2011? And then, if the relative breakdown between R&D and SG&A is going to be similar in 2012 as it was in Q4.

Mark G. Foletta

Yes. So let me first take the first question first, Cory. With respect to the drop of R&D costs in the fourth quarter, that was somewhat related to, we mentioned in the prepared remarks, settlement of some ongoing cost-sharing disputes with Lilly that we resolved during the quarter. So I wouldn't look at that as a sustainable level. And obviously, we're -- we've guided that we'll be adding expenses as a result of the full support of activities on the R&D side and the commercial side in 2012. So please refer to that guidance of $600 million to $625 million of GAAP expenses. With respect to the proportion of those expenses being SG&A versus R&D, I think the way to think about that is it would be comparable to the proportion that we had in 2011 with the caveat that it is a launch year, so they might be slightly weighted towards the sales and marketing side.

Cory William Kasimov - JP Morgan Chase & Co, Research Division

Okay. And then lastly, you're responsible for up to, I believe, $60 million in the European operating loss. Are you able to quantify for us in any way kind of where that stands right now in terms of the profitability or lack thereof of the European operations for Lilly?

Dan Bradbury

So Cory, you're absolutely right. We are responsible up to a maximum of $60 million over 2 years to the end of 2013. Obviously, if-- there are multiple factors that affect that. So once we are able to establish a new OUS partnership, that would change the dynamic with respect to the exposure to that. I think the other thing there is as well, we are working very closely with Lilly to control those expenses and agree on what those expenses associated with the launches of BYDUREON outside the United States, and the ongoing expenses associated with the promotion of BYDUREON and BYETTA outside of the United States are. So I would say that, that is a maximum number and we do not have full expectation that, that will be what we will finally book. That having been said, at this point, given the variables that are affecting it, it's not possible to guide to a precise number.

Mark G. Foletta

Cory, the only thing I'll add there is that we did mention in the prepared remarks that in the context of our accounting for this transaction, that we actually estimated, we were conservative and actually built that into the accounting so it's -- of approximately $45 million really using kind of a present value and a probable concept, if you will. And so you will not see material amounts flowing to our P&L on this. And to the extent this gets revalued, it actually will be done kind of outside of the operations of the company going forward.

Operator

Next question is from Thomas Wei of Jefferies.

Thomas Wei - Jefferies & Company, Inc., Research Division

I wanted to ask a couple of questions. The first just on the guidance and some of the math that we're all trying to do on the fly here. Actually, I got 2 slightly different numbers than Mark did. And basically, it looks to me like you would need combined BYETTA, BYDUREON sales to grow roughly 15% to 20%-ish. So maybe something like $600 million in combined franchise sales, is that the right way of thinking about things? And given the fact that, that seems much higher than maybe what street expectations were for and certainly relative to the current rate of BYETTA prescription decline, I guess, I'm interested to understand a little bit better what the thought process was behind that.

Dan Bradbury

So Thomas, maybe I can comment on that. Well, I just reiterate that we don't provide specific revenue guidance. And obviously, you guys have to do your own work with respect to what your expectations with regards to revenue. However, I would reiterate that we continue to have high level of confidence in the launch of BYDUREON. We do expect that it will grow share of the GLP-1 market. And we also expect that BYETTA will -- although we expect there will be some cannibalization with BYDUREON and BYETTA, we do expect that BYETTA will establish its own market, the short-acting GLP-1 market, which will contribute to our 2012 results. So I think that you've done some pretty elegant math there, and it's up to yourself, really, to finalize what you think what your numbers will be. But I would say that we do continue to be confident in the launch of BYDUREON. I'll let Mark...

Mark G. Foletta

Yes, the only thing I'll add is I suspect the differences that you guys are calculating possibly is in how you're -- the level of sales you're assuming, and we have said the 15% of exenatide sales will be -- flow through our non-GAAP results, that's the RSO payment. And so maybe, that's a factor that's in the mix as well. And of course, we also have SYMLIN, which did slightly over $100 million in 2012 -- or '11, I'm sorry.

Thomas Wei - Jefferies & Company, Inc., Research Division

I think I've accounted for the 15% correctly. But maybe just on the kind of on the bigger picture here, is part of -- when you set out to give us this guidance, you obviously have your own expectations built in, otherwise you couldn't have given us non-GAAP operating loss guidance. Did you base that on how -- do you only have one market worth of data for BYDUREON launch, that would be in Germany. Is that kind of what you used as the proxy for uptick or do you model BYETTA, BYDUREON dynamics in the U.S. very differently from the way that it's gone in Germany so far?

Dan Bradbury

So we certainly haven't used Germany as the proxy for the United States. We built our own model for the United States. I think you have to look at those markets and remember that they're very different in terms of patient access from day 1. In Germany, once a product is approved, that product is freely available. I shouldn't say, freely available, but is available widely across the entire healthcare system to all physicians to prescribe. That is not the case here in the United States, as you know. And there is a period of time where there's a lag in availability of the product directly to patients through their various different -- depending on the structure of their healthcare plans. So we built our own model, which is very -- I can tell you, very complicated and sophisticated based on individual plan access and the timing of individual plan access, as well as modeling other product launches recently and how those products have been taken up. So it's a little bit more complicated than that, Thomas, I guess, is probably the bottom line.

Thomas Wei - Jefferies & Company, Inc., Research Division

And maybe if I'm...

Mark G. Foletta

Tom, I have one more comment to maybe help. We did give a range of $25 million for GAAP operating expenses as well. So probably the way to think about where we'll be in that range is somewhat how we'll be at the top line. So you probably would think they would be higher in that range than the expense range if we were at the higher range of our forecast and vice versa. And we did also guide the non-GAAP number to pull out of the GAAP operating expenses. And that's going up to $105 million to $115 million. So I know there's a lot of math that you're having to do and you haven't had a lot of time to do it, but those are additional factors to consider.

Thomas Wei - Jefferies & Company, Inc., Research Division

That's helpful. And then maybe, Dan, maybe just to follow-up on what you just -- we're talking about, does that -- the way that you described it, it sounds like you have modeled for less aggressive BYDUREON uptake in the U.S. than maybe what we've seen so far in Germany. That would be my takeaway from what you've said. Is that fair?

Dan Bradbury

Well, I think, yes. I think that's true. Because in Germany, you can expect to see access very quickly. That having been said, of course, one, you have to take into account, Tom, I mean, the U.S. market, significantly greater than the German market in terms of size. And so even for -- even in the United States, the size of the early access group, if you like, is extremely large. And so we don't see access per se being a major challenge early on. It's something that we would -- because many plans, by the way, have a period of time where they make -- enable product to be available until they've established their rules. That having been said, there are plans where that's not the case. So you can't just do a straight proportional sort of, "This is what it's like in Germany and this is what's it's going to be like in the United States." It's a bit more complicated.

Operator

Next question is from Steve Byrne from Bank of America.

Steve Byrne - BofA Merrill Lynch, Research Division

I just wanted to confirm that until you establish a new marketing partner, ex-U.S., that the revenues that you'll recognize in the foreseeable future here are the legacy royalty rate that you had with the Lilly for sales of BYETTA and BYDUREON. Is that correct?

Dan Bradbury

Yes, Steve. Yes, that is correct.

Mark G. Foletta

Yes, that's correct, Steve, and we guided that as -- in the absence of the transition to a new partner in 2012, we guided that at less than $5 million.

Steve Byrne - BofA Merrill Lynch, Research Division

Okay. And Mark, I recall that one time, you talked about the Ohio plant. This is, well, pre-approval. But in the -- and it has fixed cost that were somewhere in the $100 million a year range, is that correct? And how are you -- how has the accounting on that changed post-approval and the termination of the Lilly agreement?

Mark G. Foletta

Well, that is correct, that we have fixed cost of approximately $100 million. We did say that approximately half of those were non-cash depreciation. In the fourth quarter, we did begin to capitalize some of those costs to the extent that they previously were going to flow into our P&L and we're sharing them with Lilly. And then as we got -- as we began to make some inventory towards the end of the year, we've began to capitalize some of those. And clearly and as we move into 2012, we will be recording those costs on the balance sheet, understanding that, that will then impact the BYDUREON cost of goods sold because those -- some of those could -- we have a capacity, obviously, to build a lot of units. And as the manufacturing ramps up, the cost per unit will be higher, so we'll have some cogs impact, the higher that we've talked about earlier, higher cogs, lower gross margins. But there's really -- I guess, to summarize the changes, it is now going into inventory. It's no longer, obviously, being shared with Lilly. But a significant amount of that -- of those fixed costs are non-cash depreciation. So our cash margins will be higher than what we've guided.

Steve Byrne - BofA Merrill Lynch, Research Division

And that roughly 80% gross margin that you talked about, that was kind of an all-in with all the products, does that include these fixed costs for the Ohio plant?

Mark G. Foletta

Yes, it does. So it's a blended margin for the products and it does include an element of non-cash depreciation. So that's why I said that our cash margins will be higher.

Steve Byrne - BofA Merrill Lynch, Research Division

And was some of the R&D stepdown due to a shift out of those depreciation expenses after the approval?

Mark G. Foletta

No.

Steve Byrne - BofA Merrill Lynch, Research Division

It was in R&D and moving forward, it would move out of there?

Mark G. Foletta

Yes. So that is -- to an earlier question about R&D I mean, that is one reason why R&D will decline, because we'll no longer be recording those costs through R&D. I had mentioned in a response to an earlier question that the biggest reason for the decline sequentially was to resolution of a cost-sharing dispute. But a smaller reason was the fact was that some of those costs that used to flow through R&D are now flowing into the balance sheet. You should think about that as you think about R&D levels in 2012.

Operator

The next question is from Yaron Werber from Citigroup.

Yaron Werber - Citigroup Inc, Research Division

Congrats for approval, and Michael, congrats on moving on. I can see your smile all the way from here that you're not going to deal with us anymore.

Dan Bradbury

He's going to miss you. Don't worry.

Yaron Werber - Citigroup Inc, Research Division

Michael, give me your number, I'll call you. So just -- I have a quick question on -- actually, 2 quick questions. So one, just to follow on Steve's question, has to do with -- just so we understand, did you have a chance to pre-expense inventory in the past? And so essentially, the 80% gross margin, is that going to be essentially, including some pre-expense inventory which you're not going to be essentially paying for now, and so should we think of it as a good steady-state into next year? Or I'm just trying to sense how much of that has been pre-expense? And then, I have a follow-up, too.

Dan Bradbury

I'll say, Mark, over to you.

Mark G. Foletta

Okay. Yaron, we did say, in fact, it was-- respond to an earlier question that there is some inventory that was pre-expense associated with the second complete response letter in late 2010. And that will work its way into our supply chain, into our product. But that's contemplated in the 80% margins that we guided.

Yaron Werber - Citigroup Inc, Research Division

So does that mean that as we think of next year, we should assume that some of that pre-expensed inventory is not going to be there anymore, and so we should think of -- is that going up? Essentially, that's what I'm trying to figure out.

Mark G. Foletta

Yes, I think it's too soon, Yaron, to guide for margins into -- for the following year. I think we need to kind of get through 2012 and we can certainly provide more guidance there. There is a few things going on. Obviously, you've got some expense inventory that you benefit from but you also have manufacturing inefficiencies that will improve over time as we -- as the production in the plant increases. So let us move through 2012 and watch how this settles out. And the other thing, we're giving blended margin. We've got BYETTA at 90%-plus margins. We also need to see how that plays out as we move forward in terms of the mix of BYETTA to our revenues. So it's premature to guide really beyond 2012 at this point.

Yaron Werber - Citigroup Inc, Research Division

Right, right. And there's going to be the pen in '13, which is another level of complexity, obviously. So then just a question on BYETTA. Help us understand a little bit. I mean, the price -- the blended price increase in October wasn't all that much. It was 5% on the 5 micrograms. So it was in the minority of the pens. And the TRx actually declined, as you noted, quarter-over-quarter, yet BYETTA was actually up. Inventory you said was flat. So help us understand a little bit, what was the -- so what is actually going on? I mean, is IMS just not capturing the meds correctly this quarter or...

Mark G. Foletta

So you know that there is always an error factor, if you will, in the IMS data. So -- and there's also -- we said its inventory levels were comparable. They always adjust a day up, day down. I mean it's -- we don't get too granular there. And the other thing that you have is you have your gross to nets that we just report net sales. But those tend to move around slightly. So I think it's fair to say that this is within the range that we would expect of fluctuation and I think it's -- BYETTA had a strong quarter, benefited somewhat from the price, the prescription decline was less than what we experienced sequentially from Q3 to Q2. So the stabilization continued there. And there's enough product out there we believe to meet patient demand.

Yaron Werber - Citigroup Inc, Research Division

Okay. If you don't mind, just final question. Just to kind of highlight what Mark and Tom were asking about, just so we understand, the net interest expense, the $165 million to $175 million. You said, of that, the $140 million is going to be below the line, right? So I mean, is that the delta? Because whether you -- it sounds like you're excluding that from the non-GAAP operating results. Because that's going to have an -- as we back into what the top line number is, that delta is pretty important. I'm just trying to get a sense of that $20 million...

Mark G. Foletta

Okay. Well, let me make -- Yaron, let me make sure I'm clear. All of the interest expense will be below the line, and we're -- and the other aspects of interest we have besides the RSO, we were just suggesting the RSO would be the majority of the interest expense. The other aspects, clearly, we have a convertible debenture out there and we have the loan from Lilly that's out there. So those will be the other elements of interest that were really with us in 2011. So we're trying to help you think of the incremental interest expense that will hit our financial statements in 2012, and that's the RSO, and we wanted to quantify that magnitude. But this will all fall below the non-GAAP line. You will notice, if you look at our press release that we put out today, we have included an additional reconciliation table for net non-GAAP results. Because of this, primarily -- for a few reasons, but primarily because the deal accounting that had a significant expense in the fourth quarter and to help, because we're starting to get that non-cash interest flowing through our books as well. So -- but it'll all be below the non-GAAP line that we've guided.

Yaron Werber - Citigroup Inc, Research Division

But the interest in 2011 was negative $52 million. The interest expense of $52 million. So it sounds like that's going to $165 million to $175 million, and that's going to hit your net income line and then we got to adjust for that in non-GAAP. Is this -- because, I think, it's a little confusing.

Mark G. Foletta

Yes. So the increase in the interest is because of the RSO. We had 1 month of the RSO in the -- in 2011, we'll have 12 months in 2012. But yes, it's all below the non-GAAP line. So I want to make sure we're clear, though. We will record actual payments on the RSO to an earlier question and it's contemplated in our guidance through the non-GAAP results. But the interest expense will be below the line. So yes, maybe we can have a follow-up if that's still not clear, Yaron, after the call is done.

Operator

The next question is from Phil Nadeau with Cowen.

Philip Nadeau - Cowen and Company, LLC, Research Division

So just a follow-up to Yaron's. So when you make a payment on the RSO, the 15% royalty on BYETTA and BYDUREON, that does -- that is included in non-GAAP, but the other kind of more amorphous GAAP interest expense associated with the RSO, that's in fact what's below the line. Do I have that correct?

Mark G. Foletta

Yes.

Philip Nadeau - Cowen and Company, LLC, Research Division

Okay, perfect. And then on BYETTA, just kind of question on patient dynamics there. Could you give us some sense of what your most recent data suggest about patients who are new to BYETTA in any year? So of the $500 million or so of BYETTA sales this year, how many of those -- what proportion of that is patients who had been adherent to BYETTA in prior years versus how much churn was there? How many patients new to BYETTA would be -- would make up that number?

Dan Bradbury

So it's a great question, Phil. It's actually very difficult to actually line up your sales numbers, your script numbers and then also looking at patients. Compliance is a challenge in all chronic diseases, and we know that over a 12-month period in the diabetes space and certainly, we've seen this with BYETTA, is that approximately half the patients who start a product at the beginning of the year will be on the product at the end of the year. And of course, given that BYETTA has been in the market now for multiple years, you've got several -- you've got a lot of dynamics going on there. But one of the things that's most pleasing to me, and I was just commenting on it earlier today to our Chief Commercial Officer, was when you look at the NRxs for BYETTA, they're actually very consistent. We're seeing now very consistent NRxs over time. And that will change with the launch of BYDUREON, I'd expect. But certainly, over the last 6 months, you've seen a very consistent NRx. So I think you've hit probably a fairly steady state with regards to new patients coming on, patients coming off.

Philip Nadeau - Cowen and Company, LLC, Research Division

Okay. I guess, what I'm -- well, you can guess I'm trying to back into, is every new patient will now buy BYDUREON instead of BYETTA, kind of what sales [indiscernible].

Dan Bradbury

Yes, so again, one of the -- I think, one of the things there is the -- it's really to talk about potentially maybe the opportunity that we have with BYDUREON. I think one of the things that we saw in the clinical studies was incredible adherence and also continuation of patients following the discontinuation of the studies into the extension phases of the studies. One of the things that is interesting is that injectable products in general in the diabetes space have had lower compliance, including, quite surprisingly, given that they're life-saving in many patients, including insulins compared with orals. I think one of the major opportunities we have with BYDUREON is the opportunity to see an increase in adherence and compliance. And that's something certainly that we will be looking for going forward. There's a couple of reasons for that. Firstly, of course, the very attractive feature of it being only dosed once a week. But secondly, also because there's no dose adjustment and also there's dosing timing flexibility. And of course, you don't have to increase the amount of blood glucose monitoring that you're doing as a result of going on BYDUREON. So all of those things, we believe, will contribute to enabling patients to actually adhere more effectively to the dosing regimen of BYDUREON. I think a further factor that is important as well is tolerability. We've seen extremely good tolerability to BYDUREON in the studies and in -- and also in feedback from patients who have been on the studies in terms of how they felt about being on BYDUREON. So those factors combined should lead us to an improvement in terms of adherence and persistence to the product.

Operator

Unfortunately, we are out of time for questions today. I will now turn the conference back over to Mr. Dan Bradbury for final comments.

Dan Bradbury

Well, again, thank you very much indeed to everybody for your interest and for your questions today. We have a huge opportunity to continue to advance our mission of discovering, developing and commercializing medicines to improve the lives of patients. Additionally, our leadership team and the many dedicated employees of Amylin remain focused both on building the business today and laying the necessary foundation for success tomorrow. If you have any additional questions, please call Christine or Jeff, the members of our IR team. Thank you.

Operator

Thank you for participating in today's conference call. You may now disconnect.

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