Last month, Amylin Pharmaceuticals made a splash by filing a lawsuit against Eli Lilly, its long-standing partner in marketing diabetes meds, notably the twice-a-day Byetta injectable. The move came not long after the big drugmaker unexpectedly signed a deal with Boehringer Ingelheim to develop and promote several other diabetes drugs, including one that would compete with both Byetta and the forthcoming Bydureon, a once-weekly injectable that is designed to supplant the older drug (back story here and here). Their heated clash brought to the fore a growing animosity between the companies and underscored the extent to which Lilly – which once dominated the market for serving diabetics – has had to scramble to in recent years. We spoke with David Kliff of Diabetic Investor about the events that led up to this unusually bitter turn of events and what may happen next.

Pharmalot: Why would such a dispute erupt when these two companies have worked so closely together for so long?
Kliff: The dispute really centers around the belief that Lilly’s DPP-4 (which was developed by Boehringer and recently approved by the FDA) would compete with Byetta or Bydureon. It’s really the central aspect that prompted Amylin to sue them. Basically, here you have Lilly devoting two-thirds of its sales force to promote this new drug, which is targeted at exactly the same patient who would use Byetta. It’s important to understand that, as it so often happens in the pharmaceutical world, when you’re a smaller company trying to become legitimate and need a partner, you look for someone who’s bigger and can provide marketing depth. So however many years ago, Amylin did a deal with Lilly, but more because they had to, not because they wanted to. But the two sides have never really gotten along well. There’s been a lot of animosity.

Pharmalot: Such as? And why? What caused that?
Kliff: There were several examples, but the best was when Byetta was launched however many years ago. That was about the same time that the Avandia controversy erupted and about the same time that Merck’s Januvia was coming to market. Everybody was excited about Byetta becoming available – it was the first GLP-1 coming to market with some compelling data and physician anticipation was extraordinarily high. Initially, I think their strategy was typical of the time, which was that you go out and sample it to death and get the patients on the drug and then get the scrips. Well, just when they were ramping up, they ran out of samples. That’s a big problem, of course, because you’ve got people clamoring for a replacement for Avandia, which was major news. That controversy made not just medical news but every mainstream media. So doctors, all of a sudden, were looking for alternatives. So you could have had the perfect storm. But they were caught basically flat footed.

If you ever have children and something breaks and one child points to the other, and then the first one points to the second, and then they both point to the dog. It was that kind of thing. Truth be told is that there were screw ups on all sides, which led to a lot of internal finger pointing. And this relationship was never really on what I call solid ground. But at the end of the day, it doesn’t really matter, they’re both responsible. And it really cost them big time. Januvia was coming to market. It’s an oral med and was a perfect replacement for Avandia, because the Merck reps could go into doctor offices and not only sample but say there’s no cardiovascular risk. Even though most physicians understood Byetta was a more powerful drug, they didn’t have access to it, so they couldn’t leave their patients without anything. Next thing you know, Januvia is a multi-billion dollar drug. And I think ever since then the relationship was strained.

Pharmalot: There were also issues about pancreatitis with Byetta.
Kliff: Yes, then came the announcement about pancreatitis and Byetta usage. There was no causal link, but Lilly’s response was the typical Jekyl and Hyde attitude toward Amlyin. When good data came out, Lilly said it was the best thing since sliced bread, but when there was controversy or bad news, Lilly didn’t reinforce its commitment. And as we were discussing, the third leg of this stool was when they did the deal with Boehringer with transition therapies for another GLP-1, which Amylin looked at and Novo looked and they passed, but Lilly did the deal. So if you’re Amylin, you’re saying ‘what the hell are they doing?’

Pharmalot: The picture you paint is that Lilly blundered.
Kliff: My read is that, from the beginning, Lilly was not enthusiastic but was willing to do a deal. They had the mistaken belief their insulin franchise would continue to be a revenue generator. The fact is that if Byetta would be as successful as everyone thought, it would eat into the sale of insulin, which is Lilly’s bread and butter. They didn’t wholeheartedly adopt this. It’s something nice to have in the pipeline and if it works, great. But we still have insulin.

Pharmalot: And how is Lilly doing in that market at this point?
Kliff: For a company that wants a dominant role, they’re not a third tier player, but there’s no long-acting insulin. Their short-acting insulin is in second place, but only because the Sanofi product hasn’t yet built any significant share. Things have become so bad at Lilly, especially for the insulin franchise that they’ve turned to very aggressive rebating to retain share. Realizing they can’t grow share, they’re holding on by selling for less. So they maybe they gain a few managed care plans, but they’re eroding margins they were trying to protect. So at the end of day where are they?

Pharmalot: What about Bydureon?
Kliff: Like everyone else, Lilly anticipated Bydureon getting on the market already, but it was delayed at FDA, and Lilly was caught without anything new coming for a Type 2 (diabetes) patient, so they had to do something as an interim step to generate revenue. And that’s why they did this deal with BI. It buys time to do something while waiting for Bydureon. But it got caught in the FDA meat grinder, like a lot of diabetes drugs. The FDA has become ultraconservative and looking for ways not to approve drugs….I think the FDA has lost perspective on risk-reward profiles. And that is the reality that Lilly and Amlyn are faced with. But Lilly is a big company with a lot products, and is conservatively run. And they want to protect their dividend and do whatever they can while hoping the FDA will approve Bydureon and reach the potential a lot of people think it has. But the drug will not sell itself and if they don’t execute, they’ll take a potential major blockbuster and run it into the ground.

Pharmalot: So Lilly gambled on the BI deal, but now it would appear the gamble may make it harder to execute, creating the risk you just mentioned.
Kliff: If it’s a gamble, it’s the dumbest gamble I’ve ever seen. Januvia is a blockbuster. Onglyza (which is marketed by Bristol-Myers Squibb and AstraZeneca) can’t get established. How can Lilly think that a third drug in an already crowded market can steal share? Whatever they’re smoking, I want some of it. There’s no upside on the deal with BI. Its gives them a third drug in a market dominated by a major player.

Pharmalot: So what might happen from here?
Kliff: I ‘m not a conspiracy guy, but I’ve always believed at some point Lilly would buy Amlyin. They don’t want to over pay, so rather than pump them up, they’ll dump on them - knock the share price down and make amends and then buy them for less than they could have years ago. Whether it’s true, I have no idea, but it’s the only explanation that makes sense for Lilly’s behavior. But what Lilly didn’t count on is that, after negotiating for four months to try to solve this issue is that Amlyin would go to divorce court. I’m not an attorney, but some people are speculating that Amylin wants a ruling that there was a material breach in the contract with Lilly, which means their contact goes away. The way it’s written today is that if somebody made an offer to buy Amylin, there’s a formula for buying out Lilly, which makes an acquisition more expensive. Remove that obstacle, Amlyin immediately becomes more valuable and I guarantee there are several companies that would be delighted to come in and buy them.

Lilly’s many miscalcations are becoming habit forming. Some of it I take as the arrogance of a large pharma. We’re Lilly. We’re big. Whereas David did slay Goliath. I believe lily lost all focus on their diabetes franchise and by the time they woke up and saw the damage it was too late. Now it’s a classic situation where something goes wrong.

Pharmalot: And what’s your best guess on the outcome?
Kliff: There are several possibilities. They sSee a marriage counselor and work things out. Others say it’s irreconcilable and time to part ways and how does that get done financially. Third school of thought says somebody comes along and says we believe in Bydureon and wants to be player in diabetes and wants to buy Amylin, and will help fight Lilly. There’s nothing in the agreement that says Amylin can’t listen to offers. It’s a little problematic, though. You have to assume there are no major scuffles. And Byrdureon may be ready to go at end of year. So it’s tough for another company to integrate Amylin so quickly. The best possible solution for Lilly is to just buy Amylin.