Bristol-Myers Squibb (BMY) is laying down $7 billion to be a bigger player in the market for diabetes treatments with its planned takeover of Amylin Pharmaceuticals (AMLN). But it will share the economic risk with a partner.

In a deal announced late Friday, Bristol-Myers will acquire Amylin and subsequently bulk up an existing collaboration with UK drug maker AstraZeneca (AZN), which will pay $3.4 billion toward the partnership.

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"This is a very strategic transaction for Bristol-Myers Squibb," CEO Lamberto Andreotti told investors on a conference call Monday morning. Emphasizing the market potential, he said one in every 11 adults in the U.S. has diabetes and cited figures estimating 350 million people worldwide have the disease.
                                                        
Both Bristol-Myers and AstraZeneca need new products as older drugs at the end of their patent lives lose sales to generic competitors. Last month, AstraZeneca acquired gout drug maker Ardea Biosciences for more than $1 billion. Bristol-Myers bought hepatitis drug developer Inhibitex in February for $2.5 billion.

Bristol-Myers paid a big premium for Inhibitex and is paying a hefty price for Amylin, too. The company, which makes the Byetta and Bydureon diabetes treatments, was trading at a little more than $15 a share in late March before a report that Amylin turned down a $3.5 billion takeover bid from Bristol-Myers. (See Amylin, Ardea Biosciences Show Brisk Pace for Biotech Drug Deals.) The report was followed by lawsuits from investor Carl Icahn, who wanted Amylin to open its books regarding the offer and sought to nominate new directors.

Bristol-Myers is paying $31 a share in cash for Amylin, which amounts to about $5.3 billion. The other $1.7 billion price of the deal relates to debt and a payment obligation to Eli Lilly (LLY), Amylin's former development partner. AstraZeneca will have an option to pay Bristol-Myers an additional $135 million "to establish equal governance rights over key strategic and financial decisions regarding the collaboration," the companies say in a statement.

Shares of Bristol-Myers dropped almost 1% to $35.75 in premarket trading. AstraZeneca's U.S. shares dropped less than 1% to $44.75. Amylin rose 9% to just shy of the purchase price.

Amylin and Alkermes (ALKS) won U.S. approval for Bydureon in January after severing ties with Lilly late last year. (See Amylin Shares Rise on Diabetes Drug Approval, Challenges Loom.) Bydureon is a once-weekly version of Amylin's Byetta, a twice-daily injectable drug to help adults with type 2 diabetes control blood-sugar levels. Bydureon uses Alkermes' drug-release technology. The drug was previously rejected by the Food and Drug Administration and some investors have qualms about the drug’s ability to compete with Novo Nordisk's (NVO) Victoza. A head-to-head study between Bydureon and Victoza backfired on Amylin last year as the Novo Nordisk product trumped. (See Amylin's Bydureon Bombs.)

Byetta and Bydureon are part of a class of drugs known as GLP-1 agonists and Bristol-Myers says the Amylin treatments will complement its own portfolio of diabetes therapies. Amylin is working on other diabetes treatments as well.

In a weekend survey of more than 100 investors by ISI Group analyst Mark Schoenebaum, more than half said they thought Bristol-Myers is overpaying for Amylin.   

Bristol-Myers estimated the diabetes transactions will add to earnings by 2014 through a combination of cost cuts and market expansion.