Feb. 2 (Bloomberg) -- Hedge fund Eastbourne Capital Management LLC nominated five directors to the board of Amylin Pharmaceuticals Inc. and is supporting a slate put forward by investor Carl Icahn, after it “lost confidence” in leadership of the maker of the Byetta diabetes drug.

Eastbourne, which owns 12.5 percent of San Diego-based Amylin, said in a letter to management yesterday that the company’s board needs to be “significantly strengthened” after the stock fell almost 80 percent since Oct. 5, 2007. In November, Eastbourne said it was talking with Amylin about options including “a possible acquisition by a third party.”

“While we have not lost faith in the potential of Amylin’s products and pipeline, we have lost confidence in Amylin’s leadership to take this rich product portfolio and execute an operational strategy that is in the best interest of the shareholders,” Eastbourne founder Richard J. Barry said in the letter sent to management and obtained by Bloomberg.

Amylin rose 24 cents, or 2.1 percent, to $11.80 at 4 p.m. New York time in Nasdaq Stock Market composite trading. Shares tumbled 63 percent in the past 12 months amid reports linking Byetta to inflamed pancreas. Amylin markets the drug with Indianapolis-based Eli Lilly & Co.

Amylin, with a market value of about $1.6 billion, said in November that data it submitted with Lilly on a long-acting version of Byetta didn’t meet U.S. Food and Drug Administration requirements. The biotechnology company has cut 340 employees, or 16 percent of the workforce, to preserve cash.

Board Nominees

Alice Izzo, a spokeswoman for Amylin, didn’t respond to telephone calls or e-mails.

Eastbourne, a $3 billion hedge fund that has been a shareholder in Amylin for almost four years, selected M. Kathleen Behrens, Marina Bozilenko, Charles Fleischman, William Nuerge, and Jay Sherwood for the board. Icahn Capital LP, the fifth- largest shareholder, nominated five directors on Jan. 30, including former ImClone Systems Inc. chairman Alex Denner, who manages investments for Icahn’s funds.

“We urge the board to use this opportunity to assemble a slate of directors that includes a significant number of Eastbourne and Icahn nominees,” Eastbourne said. “If the board fails to take advantage of this opportunity, we are determined to take our case directly to Amylin shareholders and pursue the election of our five highly qualified director nominees.”

Replacement of a majority of directors on the 12-member board would allow bondholders to seek repayment of $775 million in convertible notes at par, said Steven Harr, an analyst with Morgan Stanley in New York, in a note to clients today.

‘Significant Risk’

Selection of Icahn and Eastbourne directors “has the potential to create significant risk and transfer full ownership of the company to bondholders,” Harr said in the note.

Under Amylin’s agreements with its bondholders, “only the board can change a majority of directors without adverse consequences to the company,” Eastbourne said in its letter today.

The bondholder put provision is “very unlikely to be triggered,” said Thomas Wei, an analyst with Piper Jaffray in New York, in a note to clients today.

“It would be highly unlikely that each dissident shareholder would push forward with their full slate to a shareholder vote knowing that election of more than five outside candidates would result in bonds being put to the company,” Wei said in the note.

Eastbourne, based in San Rafael, California, holds 17.2 million of Amylin’s shares outstanding and Icahn held 8.81 percent as of Jan. 29. Icahn’s move is similar to actions he took to force sales of other companies, including ImClone.

Lilly Relationship

“The most logical candidate” for buying Amylin “would be Eli Lilly because they already partnered with Amylin” on Byetta, said Adam Cutler, an analyst with Canaccord Adams in New York, in an interview on Jan. 29. “The Lilly relationship complicates the purchase for anybody other than Lilly.”

Amylin has only one marketed product besides Byetta, a diabetes drug called Symlin aimed at people with Type I diabetes. Byetta accounted for 89 percent of Amylin’s net product sales in 2008. The injection’s momentum has been slowed by the deaths of six patients who developed inflamed pancreas while taking the drug.

The company is developing a series of compounds for diabetes and obesity, including a combination of pramlintide, a diabetes drug, with a version of leptin, a hormone tied to hunger. Amylin also is working with Lilly on a once-weekly form of Byetta, and Lilly has said it plans to seek regulatory approval of the product by the first half of 2009. Byetta safety concerns may put the once-weekly version of the shot in question, said Cutler.

Reason for Change

“I would assume the major initiative for both Icahn and Eastbourne is to push harder to sell the company, but the other part of it is they’re frustrated with how the current management team has interacted with Wall Street,” Cutler said. “To the extent they’re looking to change the perception of the company, that’s another reason to change the board.”

Eastbourne and Icahn’s move to change leadership of Amylin comes as deals in the pharmaceuticals industry gather pace. Pfizer Inc. is offering to buy competitor Wyeth for about $64.2 billion in cash and stock. Japanese drugmaker Astellas Pharma Inc. last week revived a $1 billion offer for CV Therapeutics Inc., the U.S. maker the Ranexa chest-pain treatment.

Eastbourne nominee Behrens, 56, is an adviser to PHYSIC Ventures LLC and has held board seats with Abgenix Inc., Protein Design Labs Inc., and Cell Genesys Inc. Bozilenko, 43, is a principal at private equity firm Kidd & Company LLC. Fleischman, 50, was previously president and director of Digene Corp. Nuerge, 56, is a managing partner of Fortress Pharms Advisors LLC, and Sherwood, 39, is an Eastbourne managing director.

Worldwide Sales

Worldwide sales of the Byetta diabetes treatment increased 1 percent to $187 million in the fourth quarter, Lilly said on Jan. 29. Since Amylin announced Byetta’s approval on April 29, 2005, the shares have dropped 32 percent, compared with a 25 percent gain in the Amex Biotechnology Index, Eastbourne said.

“Despite this dramatic decline in share price and the company’s history of disappointing results, we have continued to invest in Amylin because we believe the company’s products have unmatched potential to deliver significant shareholder value if managed properly.”

Eastbourne said on Nov. 3 that Amylin was “substantially undervalued” and that it was exploring a sale and other options with management, shareholders and third parties.

The firm is “sorely disappointed with the Board’s response to our concerns” Eastbourne said in the letter to management yesterday, adding it “aims to ensure that the proper steps are taken to realize the full commercial value of Amylin’s assets.”

To contact the reporters on this story: Jonathan Keehner in New York at jkeehner@bloomberg.net; Lisa Rapaport in New York at lrapaport1@bloomberg.net

Last Updated: February 2, 2009 16:26 EST