Market Overview

Amylin Pharmaceuticals Continues to Soar in Wake of Bydureon Approval

Last Friday, the FDA finally approved Bydureon, a once-weekly diabetes shot developed by Amylin Pharmaceuticals (NASDAQ: AMLN) and Alkermes PLC (NASDAQ: ALKS). Bydureon is a long-acting form of Byetta, a twice-daily injection developed by Amylin and Eli Lilly & Co. (NYSE: LLY) in a partnership which was dissolved last year. The drug had been rejected twice before, which caused AMLN to lose nearly half of its market value in October 2010.

Bydureon is expected to be available in U.S. pharmacies this month. In the wake of the FDA's decision, AMLN shares have seen persistent bullish activity this week and are up a little more than 41% over the last five trading days. The stock gapped higher on Monday morning and traded in the mid to low $14 range throughout Monday and Tuesday's trading session.

On Wednesday, AMLN broke out of this range and has been moving aggressively higher once again, with the stock surging more than 9% on Wednesday and adding better than 8% by mid-day on Thursday. At last check, AMLN shares were trading in the $16.80 range. The activity in the share price this week has been accompanied by very heavy volume as investors place bets on Amylin's future prospects in the wake of Bydureon's long awaited FDA approval.

Despite the good news, there is a wide range of opinions on Wall Street regarding the stock, which suggests that the name will remain volatile going forward. Of particular concern is Amylin's ability to successfully market Bydureon, which could generate as much as $2 billion in annual sales by the end of the decade, according to some analysts.

Originally, the partnership between Eli Lilly (LLY) and Amylin (AMLN), which can be traced back to 1999, called for the two companies to market the drug jointly in the United States, with the much larger Lilly handling international marketing. The partnership, however, fell apart amid the Bydureon approval delays and ended in a lawsuit which was resolved in November.

The lawsuit was initiated by Amylin after Lilly entered into a new diabetes-drug partnership with Boehringer Ingelhiem GMbH. The settlement between the two companies gives Amylin global development and commercialization rights for Byetta and Bydureon, but the company will have to pay Lilly royalties on sales up to a cap.

The question that investors and analysts are asking now is how will Amylin successfully market Bydureon with Lilly out of the picture? The concerns are exacerbated by Amylin's weak financial outlook. In a note from January 24, Deutsche Bank (NYSE: DB) analyst Robyn Karnauskas told investors that the bank remains positive on Bydureon's prospects, but noted that "significant execution risk remains." Karnauskas added that "We view Amylin's capital structure as poor, with $2 billion of debt and $210 million in cash," but said that the company's options for financing should improve post-approval.

Michael King, an analyst at Rodman & Renshaw, took a similar view with regard to the company's financial position. He was quoted by Bloomberg saying, "Bydureon's approval in the U.S. will not solve Amylin's current issues," and also argued that the company took on a "tremendous financial burden" when it severed ties with Eli Lilly.

Another factor that investors must weigh now that Bydureon has been approved is how it will stack up against the existing competition. In particular, Novo Nordisk has a once-daily diabetes shot that is in the same class as Bydureon. The drug, known as Victoza, was approved in 2010. While Bydureon's once-weekly shot will likely be more convenient for patients, data suggests that it doesn't work as well as daily shots of Victoza.

In a note from January 29, Goldman Sachs (NYSE: GS) analysts, who have a "Sell" rating on the stock, summed up the challenges facing Amylin. They wrote, "We continue to expect Bydureon to face numerous challenges upon launch including gaining traction with primary care physicians (given lack of commercial support from former partner, LLY), competition from Novo's Victoza (dosed once-daily with a pre-filled syringe pen that is easier to use than Bydureon's, and favorable head-to-head data), and potential competition from other once-weekly GLP-1's in development."

While quite a few analysts are bearish on AMLN shares and are taking a cautious view on the future of Bydureon, there are plenty of bulls as well. Jefferies (NYSE: JEF), for example, has an "Overweight" rating on the stock and a $25.00 price target. In a note, the firm's analysts wrote that "We continue to believe that the Street has underestimated the potential of the Byetta/Bydureon franchise."

The other factor that could drive significant upside in AMLN shares going forward is the perception that the company is now a takeover target. Furthermore, if a deal were to materialize, it would likely come at a hefty premium. Piper Jaffray analysts, who have an "Overweight" rating on the stock wrote in a report on January 30 that the FDA approval for Bydureon paves the way for a potential acquisition of the company. In particular, they argue that "Based on our analysis of recent biotech acquisition's, AMLN could be acquired for $33 per share."

Despite the prominent detractors, it is this type of speculation that is likely contributing to the persistent strength in the stock after the initial announcement of Bydureon's approval. Going forward, traders should expect more volatility in AMLN shares as the market evaluates the company's future prospects in light of new developments. In particular, future catalysts could include buyout rumors, an international partnership agreement with a larger pharmaceutical company, and updates about the trajectory of Bydureon's U.S. launch.

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