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In my recent manifesto about diabetes, I briefly touched upon Amylin Pharmaceuticals (AMLN). As most readers are aware, Amylin focuses the majority of its R&D on drugs for type 2 diabetes and obesity.

We believe that Amylin's pipeline could fit in with well with that of several large pharmaceuticals. Many drug companies have been cutting back on R&D and intend to make further cuts in the upcoming years. It all boils down to a risk-reward dynamic. Big pharma may determine that it is more cost effective to look elsewhere for future products rather than to try to keep developing them on their own. Amylin’s current drugs are Symlin, used to treat both type 1 and type 2 diabetes, and Byetta, which treats just type 2 diabetes.

Byetta is Amylin's flagship drug, and comprises more than 80% of its revenues. The only problem is that Byetta is expected to come off patent in 2013. Amylin is currently developing other versions of Byetta. These phase II and phase III trials are determining if the efficacy of the drug can be used in alternative delivery and dosing methods, respectively. The revamped Byetta line in the later trial stages should most likely win approval based on the fact that they are reformulated versions of existing drugs.

There are several large pharmas that may have an interest in Amylin. We believe that Eli Lilly (LLY), a current partner, is the most likely winner. Of the other companies interested, including Merck (MRK) and Pfizer (PFE), Pfizer is perhaps the more likely candidate, having recently been losing market share to two of the largest diabetes drug manufacturers, Sanofi-Aventis (SNY) and Novo Nordisk (NVO). Amylin's pipeline could give Pfizer much need market share in the diabetes sector of the industry. Pfizer has only one type 2 diabetes drug in phase II trials; the other nine are all in phase I.

Amylin’s market cap is around $2 billion and the stock trades for around $13 dollars a share. Revenues have declined 12% year over year, as other diabetes drugs have eaten into Amylin’s market share. Any type deal that involves a small biotech-pharma is always risky, and trials may have to progress further before another company is comfortable enough to pull the trigger. Carl Icahn's 10% stake in Amylin is another question mark that merits consideration. As an activist shareholder, his letter to the board was not unexpected to say the least. If Mr. Icahn has his way, he will either get the new management that he is seeking or will convince the powers that be to sell some or all of the company, thus unlocking Amylin's value.

There is little clarity on how this will ultimately shake out. Either way, Amylin will undergo a changing environment. We feel that between its precision execution on cost-cutting and the likelihood of approval on its new delivery methods for Byetta, Amylin could see $20 - $22 representing full value for the stock - a far cry from its all time high of $53.25 in August of 2007, but still a nice return from here.

Source: The Diabetes Trade: Why We Like Amylin