Lilly, Amylin Expand Byetta Deal: Vote Of Confidence Or Down Payment?

Lilly pays $125 million upfront as part of supply agreement for long-acting Byetta formulation.

A commercial supply agreement between Eli Lilly and Amylin Pharmaceuticals for the long-acting version of exenatide ( Byetta ) gives Amylin $125 million in cash upfront - and a much needed signal of confidence from its Big Pharma partner.

On Oct. 20, the companies signed a supply agreement for exenatide once-weekly, calling for an upfront payment of $125 million and setting terms for future supply payments on any sales of Byetta LAR . The companies also signed a separate $165 million loan agreement.

Investors across the board read the agreement as a sign of confidence by Lilly in the future of its partnership with Amylin and of the prospects for LAR in particular.

The Diabetic Investor's David Kliff - probably the most bullish analyst about the prospects for Byetta LAR and hence Amylin - sees the deal as Lilly "betting nearly $300 million more that Byetta LAR will reach the market and achieve ... mega-blockbuster status."

But even Amylin's skeptics see the deal as a vote of confidence from Lilly. The supply agreement signals Lilly's "obvious commitment to Byetta and LAR" and "will probably put a floor under further price declines" in Amylin shares, Zacks Investment Research's Jason Napodano said. Zacks had a "SELL" rating on Amylin, which it changed to a "HOLD" after the deal.

Tough times for Amylin

San Diego-based Amylin has been battered on Wall Street, first by slowing growth in Byetta, then by an FDA safety alert citing fatal cases of pancreatitis associated with the drug. Those safety issues in turn raised questions about the prospects for Byetta LAR (¹ (Also see "Byetta Safety Concerns Could Set Roadblocks Ahead For New GLP-1s" - Pink Sheet, 21 Aug, 2008.)).

Lilly's disclosure of its own GLP-1 research progress in the midst of those issues then raised questions about its commitment to the Byetta franchise long-term - though both Lilly and Amylin declared their ongoing commitment to exenatide (² (Also see "Amylin, Lilly Partnership Tested By Lilly GLP-1 Project" - Pink Sheet, 12 Sep, 2008.)).

Amylin and Indianapolis-based Lilly announced the new agreement shortly before Amylin reported its third quarter results. As expected, Byetta sales reflected the impact of the safety alert. Overall, the brand grew 14 percent in the quarter to just shy of $180 million, but sequential growth from the second to third quarters was just 1 percent. Moreover, since the safety alert came almost exactly in the middle of the quarter, the product ended the quarter on a downward trend.

Amylin says it is confident Byetta will return to growth in the fourth quarter, but the company lowered its revenue guidance for the year from a range of $900 million to $950 million to a new range of $850 million to $875 million. And that follows an early reduction from the company's initial forecast of $950 million to $1 billion for the year.

Against that backdrop, Amylin cited the new Lilly agreement as an important good news event for the quarter.

"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," CEO Dan Bradbury said.

Lilly covers some - but not all -Amylin costs

Lilly described the agreement in somewhat more measured terms on its quarterly call two days later; though given Lilly's pending acquisition of ImClone, the agreement with Amylin was decidedly not the most important business development activity it had to discuss.

The agreement "was a continuation of the ongoing discussion we have been having with Amylin," Chief Financial Officer Derica Rice said. "As we would be preparing for the potential launch of Byetta LAR obviously through the construction of the Ohio facility, we were working through how to work out the arrangements there. What you're really seeing here is a recent announcement as of this conclusion of those discussions that's been ongoing for some time."

And the terms of the agreement may suggest less of a vote of confidence by Lilly than it may at first appear.

The $125 million upfront payment in the agreement "represents a negotiated estimate of Amylin's cost of carrying Lilly's share of the capital investment made in Amylin's manufacturing facility in Ohio," Amylin says in a Securities and Exchange Commission filing.

In addition, "Lilly will reimburse Amylin for its share of the more than $500 million capital investment in the facility through the cost of goods sold for exenatide once weekly."

In other words, if Lilly's share is presumed to be $250 million of the total $500 million capital costs, it is paying half upfront and will pay the rest from product sales. In effect, Lilly has about 25 percent of the risk of building the plan for an as-yet unapproved drug, while Amylin still has 75 percent.

The $165 million loan agreement in the deal can be accessed by Amylin any time from Dec. 1, 2009, until June 30, 2011. The timing of those terms is interesting, since Lilly and Amylin hope to be in a position to file LAR for approval by the middle of next year at the latest.

That means Lilly's line of credit will be available only after an important milestone has been achieved - or after an unexpected setback that would make Amylin's prospects much cloudier. And the loan terms themselves are not overly generous: interest is set at LIBOR plus 5.25 percent.

A different sort of confidence?

Still, in the current financial climate, Amylin's ability to put $125 million in cash in the bank and also demonstrate access to capital over the medium to long term is an important asset.

The commercial slowdown in Byetta sales means that Amylin still is not on a track toward profitability. Though the company has significant cash reserves, it also has about $900 million in long-term debt. It also felt a more direct impact from the turmoil in the financial markets, taking a $14.9 million impairment loss in the quarter partially due to a debt security in the company's short-term investment portfolio.

In that sense, Lilly's agreement represents an important vote of confidence of a very different kind - the company is standing behind the credit worthiness of its partner in a manner perhaps analogous to the federal government standing behind the securities offered by Fannie Mae or Freddie Mac.

Lilly's underlying agreement with Amylin includes a "standstill" provision that prohibits it from making an unsolicited offer for its partner.

However, with a commitment to provide capital through 2011, some investors may start to read that as an implicit guarantee to support the company - one way or the other - no matter what becomes of Byetta LAR.

- Michael McCaughan ([email protected])