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The surprising news released Tuesday night that the FDA has refused to approve the Bydureon diabetes drug - which involves a three-way partnership between Eli Lilly (NYSE:LLY), Alkermes (NASDAQ:ALKS) and Amylin Pharmaceutical (AMLN) - adds tremendous pressure to the big drugmaker to pursue some kind of deal to bolster its anemic pipeline. An acquistion would be the likeliest approach, but Lilly may be more vulnerable bait itself.

The initial reaction among some Wall Street wags is that Lilly may want to take a stake in, if not acquire, Amylin, given that so much has already been invested in Bydureon, which the FDA rejected over concerns of cardiac abnormalities. The med, which is a once-weekly version of Byetta, was already delayed due to cancer risks, but Lilly has a long-standing diabetes franchise, and a similar drug in its labs has not proven any better.

“It would not surprise us if the current partnership between Lilly and Amylin is restructured, possibly with Lilly obtaining a stake in Amylin, to help Amylin manage its way through its now increasingly cash-constrained period,” writes Credit Suisse analyst Catherine Arnold in an investor note, adding the anticipated delay in Bydureon approval will rob Lilly of about $450 million in revenue two years out.

Whether Amylin is the best target is unclear. But Lilly has big problems - this is third major recent flop when counting the very poor sales performance of the Effient bloodthinner launched a year ago and this summer’s setback with an Alzheimer’s med under development. There was also a patent loss on the Strattera ADHD pill. At the same time, Lilly has what Sanford Bernstein analyst Tim Anderson calls the “steepest patent cliff” of the big drugmakers facing patent expirations on big-selling meds over the next couple of years.

Consequently, “the pressure on Lilly to either do a deal and/or partner some of its pipeline products and reduce its cost structure likely will intensify,” writes Leerink Swann analyst Seamus Fernandez. And as Deutsche Bank analyst Barbara Ryan notes, Lilly’s pipeline “still carries considerable risk. In our opinion, management must reconsider its long term strategy and will need to take short term actions,” she wrote Wednesday morning to clients.

Lilly had about $5.1 billion in cash and equivalents as of this year’s second quarter (see page 4) that can be used for acquistions. Like its rivals, Lilly is cutting thousands of jobs and closing facilities, including the announcement this week that a drug discovery center in Singapore will be shuttered. But unlike its rivals, Lilly has not moved terribly fast into other areas; Pfizer (NYSE:PFE), for instance, this week struck deals to gain access to biologics with an Indian drugmaker and a Brazilian generics supplier.

When we last spoke with Lechleiter a year ago, he repeated a steadfast refusal to consider a merger with another big drugmaker. Would anyone want Lilly at this point? Given the setbacks of the past year, Lilly is less attractive than ever, not withstanding some pipeline magic that hasn’t been fully disclosed. But Lechleiter has literally done little to buy needed time. Perhaps he needs to rethink his mantra.

Disclosure: None

Source: One More Reason Lilly Must Do a Deal, Fast