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| AMLN > SEC Filings for AMLN > Form 10-K on 27-Feb-2009 | All Recent SEC Filings |
27-Feb-2009
Annual Report
Overview
We are a biopharmaceutical company committed to improving the lives of people with diabetes, obesity and other diseases through the discovery, development and commercialization of innovative medicines. We have developed and gained approval for two first-in-class medicines to treat diabetes, BYETTA® (exenatide) injection and SYMLIN® (pramlintide acetate) injection, both of which were commercially launched in the United States during the second quarter of 2005. BYETTA was approved in the European Union, or EU, in 2006 and our collaboration partner, Lilly has commercially launched BYETTA in 49 countries as of December 31, 2008. Our near-term business strategy is to create value for patients and our stockholders by capitalizing on market drivers, such as the ADA's recent inclusion of BYETTA as the only new addition to their treatment guidelines. Our focus remains on increasing BYETTA and SYMLIN revenue, submitting a New Drug Application, or NDA, for exenatide once weekly, significantly improving operating results and progressing toward positive operating cash flow by the end of 2010. Our long-term strategy is focused on making prudent investment decisions based on strong clinical data to advance our obesity program. We intend to finalize our obesity funding and development strategy by the end of 2009.
BYETTA is the first and only approved medicine in a new class of compounds called glucagon-like peptide-1, or GLP-1, receptor agonists. We began selling BYETTA in the United States in June 2005. BYETTA is approved in the United States for the treatment of patients with type 2 diabetes who have not achieved adequate glycemic control and are using metformin, a sulfonylurea and/or a TZD, three common oral therapies for type 2 diabetes. In October 2008, the ADA and the European Association for the Study of Diabetes, or EASD, updated their type 2 diabetes treatment guidelines, placing the GLP-1 receptor agonist class, of which BYETTA is the only approved product, as a secondary treatment option for type 2 diabetes patients. In August 2008, the FDA updated a prior alert for BYETTA referencing pancreatitis. Prescriptions declined in the second half of 2008. During that time period we committed our field resources to educating the medical community on the facts about BYETTA, pancreatitis, and the product's safety profile. We believe the decline in BYETTA prescriptions and demand for the products stabilized at the end of the fourth quarter of 2008. Net product sales of BYETTA were $678.5 million, $636.0 million, and $430.2 million for the years ended December 31, 2008, 2007, and 2006, respectively.
We have an agreement with Lilly for the global development and commercialization of exenatide. This agreement includes BYETTA and any sustained-release formulations of exenatide such as exenatide once weekly, our once weekly formulation of exenatide for the treatment of type 2 diabetes. Under the terms of the agreement, operating profits from products sold in the United States are shared equally between Lilly and us. The agreement provides for tiered royalties payable to us by Lilly based upon the annual gross margin for all exenatide product sales, including any long-acting release formulations, outside of the United States. Royalty payments for exenatide product sales outside of the United States will commence after a one-time cumulative gross margin threshold amount has been met. We expect royalty payments to commence in 2010. Lilly is responsible for 100% of the costs related to development of twice-daily BYETTA for sale outside of the United States. Development costs related to all other exenatide products for sale outside of the United States will continue to be allocated 80% to Lilly and 20% to us. Lilly will continue to be responsible for commercialization and all of the costs related to commercialization of all exenatide products for sale outside of the United States.
SYMLIN is the first and only approved medicine in a new class of compounds called amylinomimetics. We began selling SYMLIN in the United States in April 2005. Symlin is approved in the United States for the treatment of patients with either type 1 or type 2 diabetes who are treated with mealtime insulin but who have not achieved adequate glycemic control. In early 2008, we commercially launched the SymlinPen® 120 and SymlinPen® 60 pen injector devices in the United
States. These new pre-filled pen-injector devices feature simple, fixed dosing to improve mealtime glucose control. Net product sales of SYMLIN were $86.8 million, $65.5 million and $43.8 million for the years ended December 31, 2008, 2007 and 2006 respectively.
We have a field force of approximately 650 people dedicated to marketing BYETTA and SYMLIN in the United States. Our field force includes our specialty and primary care sales forces, a managed care and government affairs organization, a medical science organization and diabetes care specialists. In addition, Lilly co-promotes BYETTA in the United States. In May 2008, we amended our United States co-promotion agreement with Lilly, resulting in a 40% increase in the total number of sales representatives promoting BYETTA beginning July 1, 2008. To achieve this increase, Lilly's existing third party sales force for Cialis® (tidalafil) co-promotes BYETTA in the United States and we increased the number of sales representatives in its existing primary care sales force by approximately 15%. In exchange for Lilly sharing in 50% of the costs related to our additional sales representatives and paying 100% of the costs of the third party sales force discussed above, our primary care sales force co-promotes Cialis in the United States. We are currently evaluating this element of the co-promotion arrangement with Lilly.
In addition to our marketed products, we are working with Lilly and Alkermes to develop exenatide once weekly. We are also working with Parsons on the construction of a manufacturing facility for exenatide once weekly in Ohio. We substantially completed the construction of this facility in 2008. We are now manufacturing exenatide once weekly at commercial scale in this facility and we began supplying clinical trials with this material in the third quarter of 2008. In October 2008 we entered into a commercial supply agreement with Lilly, pursuant to which we will supply exenatide once weekly for sale in the United States, if approved. In addition we will supply Lilly with commercial quantities of exenatide once weekly for sale by Lilly outside of the United States, if approved. Under the terms of this agreement, Lilly made a $125 million cash payment to us in October 2008 representing an amount to compensate us for our cost of carrying Lilly's share of the capital investment in our exenatide once weekly manufacturing facility in Ohio. In addition to the $125 million cash payment, we will recover Lilly's share of the over $500 million capital investment in the facility through an allocation of depreciation to cost of goods sold in accordance with our collaboration agreement with Lilly. The total amount that will ultimately be recovered from Lilly will be dependent upon the proportion of product supplied for sale in the United States, the cost of which is shared equally by the parties, and the proportion of the product supplied for sale outside the United States, the cost of which is paid for 100% by Lilly. We also entered into a loan agreement with Lilly under which we may borrow up to $165 million beginning on December 1, 2009 and ending on June 30, 2011, with maturity no later than June 30, 2014.
During the second quarter of 2008, we held our pre-NDA meeting with the FDA to discuss open items for our exenatide once weekly regulatory submission. Based on the pre-NDA meeting and our ongoing dialog with the FDA, we continue to believe that the pacing item for an NDA submission is to collect sufficient data to demonstrate the comparability between material manufactured by Alkermes in its facility and used in previous clinical studies and the commercial scale material produced in our Ohio facility. In December 2008, we announced that the FDA has indicated that data from an ongoing extension of our DURATION-1 study could be used to demonstrate comparability. Acceptance by the FDA of the comparability data is dependent upon the DURATION-1 study extension results that we expect to have in early 2009. Although we believe that our exenatide once weekly NDA submission is on track to be completed in the first half of 2009, if we are required to initiate a new clinical study to demonstrate comparability, the timing of the NDA submission would depend on the parameters of the new study, and our submission could be delayed.
In 2009, we will continue to focus on building a superior profile for exenatide once weekly by conducting three clinical trials that will compare exenatide once weekly against competing products.
The objective of these studies is to support the launch of exenatide once weekly and demonstrate superiority and the transformational nature of our exenatide once weekly therapy.
In November 2008, we announced a strategic restructuring and workforce reduction that reduced the size of our San Diego workforce by approximately 25%, or 330 employees. The goal of the restructuring was to better align our cost structure with anticipated revenues and is part of our business plan to achieve positive operating cash flow by the end of 2010. We believe we have the appropriate resources to market BYETTA and SYMLIN, bring exenatide once weekly to market as soon as possible, and continue to advance our obesity programs.
Our long-term growth strategy is focused on making prudent investment decisions based on strong clinical data to advance our obesity program and includes our INTO strategy. In November 2007, we announced that overweight or obese subjects in a 24-week proof-of-concept study treated with a combination of pramlintide, an analog of human amylin and the same active ingredient in SYMLIN, and metreleptin, an analog of human leptin, lost an average of 25 pounds from baseline, resulting in reduced body weight on average of 12.7%. In 2009 we plan to continue the development of a potential obesity medicine that is a combination of pramlintide and metreleptin and the development of a second generation amylinomimetic, now known as davalintide (formerly known as AC2307), which we have now moved into Phase 2 clinical trials. By the end of 2009, we intend to finalize our obesity funding and development strategy.
Although our efforts will remain primarily focused on our near-term opportunities including BYETTA, SYMLIN and exenatide once weekly and select investments in our obesity programs, we also maintain an active discovery research program focused on novel peptide and protein therapeutics and are actively seeking to in-license additional drug candidates. We have also made a number of strategic investments and collaborations for the potential development of additional drug candidates.
Since our inception in September 1987, we have devoted substantially all of our resources to our research and development programs and, more recently, to the commercialization of our products. All of our revenues prior to May 2005 were derived from fees and expense reimbursements under our BYETTA collaboration agreement with Lilly, previous SYMLIN collaborative agreements, and previous co-promotion agreements. During the second quarter of 2005, we began to derive revenues from product sales of BYETTA and SYMLIN. At December 31, 2008, our accumulated deficit was approximately $1.7 billion.
At December 31, 2008, we had $816.8 million in cash, cash equivalents and short-term investments. Additionally we have future availability of $165 million beginning December 1, 2009 pursuant to the loan agreement with Lilly. Although we may not generate positive operating cash flows for the next few of years, we intend to improve our operating results and reduce our use of cash for operating activities from current levels to achieve our goal to be operating cash flow positive by the end of 2010. Additionally, we expect that our use of cash for capital expenditures will decrease significantly from 2008 levels following the substantial completion of our manufacturing facility in Ohio in 2008. Refer to the discussions under the headings "Liquidity and Capital Resources" below and "Cautionary Factors That May Affect Future Results" in Part I, Item 1A for further discussion regarding our anticipated future capital requirements.
Recent Developments
Diabetes
BYETTA
º •
º Communicated the addition of GLP-1 receptor agonist class, of which
BYETTA is the only approved product, to the ADA and EASD treatment
guidelines as a secondary treatment option for type 2 diabetes
patients.
º •
º Initiated co-promotion of BYETTA with third party Lilly primary care
sales force, increasing the sales force promoting BYETTA by 40%
effective July 1, 2008.
Exenatide Once Weekly
º •
º Announced that the ongoing extension of the DURATION-1 study is
appropriate to use as the basis for demonstrating comparability
between intermediate-scale clinical trial material made in Alkermes'
manufacturing facility, and commercial-scale drug product made at
Amylin's manufacturing facility based on feedback from the U.S. Food
and Drug Administration (FDA) and reaffirmed plans for exenatide once
weekly NDA submission to the FDA by the end of the first half of 2009.
º •
º Completed enrollment of DURATION-2 and DURATION-3, the second and
third studies in a planned program of superiority clinical studies of
exenatide once weekly. Results for DURATION-2, comparing exenatide
once-weekly against a TZD and a dipeptidyl peptidase-4 (DPP-4)
inhibitor on a background of metformin therapy, are expected in the
second quarter of 2009. Results for DURATION-3, comparing exenatide
once weekly to insulin glargine in patients using oral diabetes
medications are expected in the third quarter of 2009.
º •
º Initiated DURATION-4, the fourth study in a planned program of
superiority clinical studies of exenatide once weekly. Results for
DURATION-4, comparing exenatide once weekly as a monotherapy treatment
to either metformin, a TZD or a DPP-4 inhibitor are expected in 2010.
º •
º Executed an exenatide once weekly supply agreement with Lilly, under
which Lilly made an initial payment of $125 million to Amylin in the
fourth quarter of 2008. In addition, Lilly extended a $165 million
line of credit to Amylin. These agreements underscore Amylin's and
Lilly's commitment to the successful commercialization of exenatide
once weekly, strengthen Amylin's balance sheet and provide additional
financial flexibility.
º •
º Announced results from a 52-week open-label clinical study that showed
the durable efficacy of exenatide once weekly. Patients taking
exenatide once weekly experienced an average A1C decline of
2.0 percent with 9.5 pound weight loss, and over the course of one
year, sustained a similar improvement in glucose control compared to
those receiving treatment for 30 weeks.
SYMLIN
º •
º Published data showing that the use of mealtime SYMLIN with basal
insulin therapy for 24 weeks resulted in more patients with type 2
diabetes achieving improved glucose control, without weight gain or
hypoglycemia compared to the use of rapid-acting insulin with basal
insulin.
º •
º Commercially launched the SymlinPen 120 and the SymlinPen 60
pen-injector devices for administering SYMLIN in the United States in
January 2008. These new pre-filled pen-injector devices feature
simple, fixed dosing to improve mealtime glucose control.
Obesity programs
º •
º Presented novel data on Amylin's promising obesity pipeline at The
Obesity Society's Scientific Conference that supported the therapeutic
potential of the integrated neurohormonal approach to obesity
pharmacotherapy.
º •
º Completed enrollment of a phase 2B study to evaluate different dosing
combinations of pramlintide and metreleptin. The objective of this
dose-ranging study is to support dose selection for phase 3, and to
guide the development of a delivery system for this combination
regimen. Results from this study are expected in the second half of
2009.
º •
º Completed enrollment of a phase 2 clinical study of davalintide, our
second generation amylinomimetic. Results from this study are expected
in the second half of 2009
Financial and Operational
º •
º Implemented a strategic restructuring that reduced our San Diego
workforce by approximately 25% and announced our business plan to
achieve positive operating cash flow by the end of 2010.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to revenue recognition, stock-based compensation, inventory costs, research and development expenses and income taxes. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
We believe the following critical accounting policies affect the significant judgments and estimates used in the preparation of our consolidated financial statements (see Note 1 to our consolidated financial statements on page F-6).
We recognize revenue from the sale of our products, license fees and milestones earned and for reimbursement of development costs based on contractual arrangements.
Net Product Sales
We sell our products primarily to wholesale distributors, who in turn, sell to retail pharmacies, pharmacy benefit managers and government entities. Decisions made by these wholesalers and their customers regarding the level of inventories they hold, and thus the amount of product they purchase, can materially affect the level of our product sales in any particular period.
We recognize revenue from the sale of our products when delivery has occurred, title has transferred to the customer, the selling price is fixed or determinable, collectability is reasonably assured and the Company has no further obligations. The Company records allowances for product returns, rebates and wholesaler chargebacks, wholesaler discounts and prescription vouchers. We are required to make significant judgments and estimates in determining some of these allowances. If actual results differ from our estimates, we will be required to make adjustments to these allowances in the future.
We do not offer our wholesale customers a general right of return. However, we will accept returns of products that are damaged or defective when received by the wholesale customer or for any unopened product during the period beginning six months prior to and up to 12 months subsequent to its expiration date. We estimate product returns based on our historical returns experience. Additionally, we consider several other factors in our estimation process including our internal sales
forecasts, the expiration dates of product shipped and third party data to assist us in monitoring estimated channel inventory levels and prescription trends. Actual returns could exceed our historical experience and our estimates of expected future returns due to factors such as wholesaler and retailer stocking patterns and inventory levels and/or competitive changes. To date actual returns have not differed materially from our estimates.
Allowances for rebates include mandated discounts under the Medicaid Drug Rebate Program and contracted discounts with commercial payors. Rebates are amounts owed after the final dispensing of the product by a pharmacy to a benefit plan participant and are based upon contractual agreements or legal requirements with private sector and public sector (e.g. Medicaid) benefit providers. The allowance for rebates is based on contractual discount rates, expected utilization under each contract and our estimate of the amount of inventory in the distribution channel that will become subject to such rebates. Our estimates for expected utilization for rebates are based on historical rebate claims and to a lesser extent third party market research data. Rebates are generally invoiced and paid quarterly in arrears so that our accrual consists of an estimate of the amount expected to be incurred for the current quarter's activity, plus an accrual for prior quarters' unpaid rebates and an accrual for inventory in the distribution channel.
Wholesaler chargebacks are discounts that occur when contracted customers purchase directly from an intermediary wholesale purchaser. Contracted customers, which currently consist primarily of Federal government entities purchasing off the Federal Supply Schedule, generally purchase the product at its contracted price, plus a mark-up from the wholesaler. The wholesaler, in-turn, charges back to the Company the difference between the price initially paid by the wholesaler and the contracted price paid to the wholesaler by the customer. The allowance for wholesaler chargebacks is based on expected utilization of these programs and reported wholesaler inventory levels. Actual rebates and wholesaler chargebacks could exceed historical experience and our estimates of future participation in these programs. To date, actual rebate claims and wholesaler chargebacks have not differed materially from our estimates.
Wholesaler discounts consist of prompt payment discounts and distribution service fees. We offer all of our wholesale customers a 2% prompt-pay discount within the first 30 days after the date of the invoice. Distribution service fees arise from contractual agreements with certain of our wholesale customers for distribution services they provide to us and are generally a fixed percentage of their purchases of our products in a given period. Prompt payment discounts and distribution service fees are recorded as a reduction to gross sales in the period the sales occur. The allowance for wholesaler discounts is based upon actual data of product sales to wholesale customers and not on estimates.
Prescription vouchers result in amounts owed to pharmacies that have redeemed vouchers for a free prescription. We provide prescription vouchers to physicians, who in turn distribute them to patients. Patients may redeem a voucher at a pharmacy for a free prescription. We reimburse the pharmacy for the price it paid the wholesaler for the medicine and record this reimbursement as a reduction to gross sales. The allowance for prescription vouchers is based on the number of unredeemed vouchers in circulation, and the estimated utilization rate. The estimated utilization rate is based on our historical utilization rates experience with prescription vouchers. The allowance for prescription vouchers could exceed historical experience and our estimates of future utilization rates. To date, actual prescription voucher utilization has not differed materially from our estimates.
Revenues under collaborative agreements
Amounts received for upfront product and technology license fees under multiple-element arrangements are deferred and recognized over the period of such services or performance if such arrangements require on-going services or performance. Non-refundable amounts received for substantive milestones are recognized upon achievement of the milestone and the expiration of stock conversion rights, if any, associated with such payments. Amounts received for equalization of development expenses are recognized in the period in which the related expenses are incurred. Any amounts received prior to satisfying our revenue recognition criteria are recorded as deferred revenue in the accompanying consolidated balance sheets.
Valuation of Stock-Based Compensation
We account for stock-based compensation to employees in accordance with SFAS No. 123R, "Share-Based Payment." SFAS No. 123R requires us to expense the estimated fair value of non-cash, stock-based payments to employees.
We estimate the fair value of stock-based payments to employees using the Black-Scholes model. This estimate is affected by our stock price as well as assumptions regarding a number of inputs that require us to make significant estimates and judgments. These inputs include the expected volatility of our stock price, the expected term of employee stock options, the risk-free interest rate and expected dividends.
We estimate volatility based upon the historical volatility of our common stock for a period corresponding to the expected term of our employee stock options and the implied volatility of market-traded options on our common stock with various maturities between six months and two years, consistent with the guidance in SFAS No. 123R and the SEC's Staff Accounting Bulletin, or SAB, No. 107. Prior to the adoption of SFAS No. 123R, we estimated volatility based on the historical volatility of our common stock for a period corresponding to the expected term of our employee stock options. The determination to use implied volatility in addition to historical volatility was based upon the availability of data related to actively traded options on our common stock and our assessment that the addition of implied volatility is more representative of future stock price trends than historical volatility alone.
The expected life of our employee stock options represents the weighted-average period of time that options granted are expected to be outstanding in consideration of historical exercise patterns and the assumption that all outstanding options will be exercised at the mid-point of the then current date and their maximum contractual term.
The risk-free interest rates are based on the yield curve of United States Treasury strip securities in effect at the time of grant for periods corresponding with the expected life of our employee stock options. We have never paid dividends and do not anticipate doing so for the foreseeable future. Accordingly, we have assumed no dividend yield for purposes of estimating the fair value of our stock-based payments to employees.
If factors underlying the above assumptions change in future periods, the associated estimated non-cash, stock-based compensation expense that we record may differ significantly from what we have recorded in the current period.
Inventories and Related Reserves
Inventories consist of raw materials, work-in-process and finished goods for SYMLIN and BYETTA. We maintain inventory reserves primarily for production failures and potential product expiration. The manufacturing processes for our . . .
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