OSI Pharmaceuticals Inc. is getting $25 million up front in a licensing deal with Eli Lilly & Co. for a glucokinase activator program developed by OSI's diabetes and obesity subsidiary, Prosidion Ltd.

Overall, OSI could rake in as much as $385 million under the terms of the agreement, including the up-front payment and potential development and sales milestones of $360 million.

The Melville, N.Y.-based firm also stands to receive "a competitive royalty" rate on any products that successfully reach the market, said OSI's CEO Colin Goddard.

"It's a nice financial package for us," he added, and "allows us to continue to focus on our primary goal this year of achieving profitability."

The company, which has not yet reported full-year or fourth-quarter earnings, had a net loss of $13.4 million, or 23 cents per share, for the third quarter of 2006. As of Sept. 30, it had cash totaling about $210 million.

Under the terms of the licensing deal, further costs of developing the GKA program will be assumed by Lilly, which already has an established diabetes franchise, including marketed drugs Actos, an insulin sensitizer, and Byetta, an incretin mimetic partnered with San Diego-based Amylin Inc. Lilly is expected to start by continuing work on the lead GKA compound, PSN010, which started Phase I testing healthy volunteers in early 2006.

Developed in-house by Oxford, UK-based Prosidion, GKAs are aimed at reducing the occurrence of hyperglycemia by rapidly lowering glucose levels by boosting both glucose uptake in the liver and insulin secretion in the pancreas.

There has been significant interest in the target, Goddard said, especially in light of the "mushrooming epidemic of Type II diabetes," and OSI is the lead competitor in the GKA space, after Basel, Switzerland-based F. Hoffmann-La Roche Ltd., which is in Phase I development with its R1440.

Results from animal studies with PSN010 have been promising, and the drug's mechanism of action suggests that it has "the potential to replace SFU (sulfonylureas) or metformin," provided that "no weight gain or hypoglycemia is observed in clinical trials," analyst Joel Sendek of Lazard Capital Markets wrote in a research note.

Sendek maintained a "buy" rating on OSI's stock, with a $44 price target.

The company's shares (NASDAQ:OSIP) closed at $33.85 Friday, down 6 cents.

With a primary concentration in oncology - OSI is best known for Tarceva, an EGFR inhibitor partnered with South San Francisco-based Genentech Inc. and approved in lung and pancreatic cancers - the company opted to seek a partner for the diabetes program rather than taking it forward alone.

"We've never had the view that we could effectively commercialize in the primary care area," Goddard said, adding that the company might consider licensing opportunities for other candidates in Prosidion's pipeline.

The subsidiary has two other clinical programs: PSN9301, a Phase II-stage dipeptidyl peptidase-IV inhibitor, and PSN357, a glycogen phosphorylase inhibitor in Phase I.

OSI, however, has a different strategy for its ophthalmic subsidiary, Eyetech Inc. In its third quarter earnings, OSI told investors it planned to seek strategic alternatives, such as a licensing or divestiture.

When OSI acquired New York-based Eyetech for $935 million in November 2005, the company hoped Eyetech's Macugen would provide a positive cash-flow.

At that time, Macugen was leading the pack in wet age-related macular degeneration, though it was displaced several months later by the superior AMD drug, Lucentis (Genentech).

"We think there's value to be derived from" the ophthalmic division, Goddard said. "We'll be looking for a partner who will take the asset and invest in it," with hopes that it will provide revenue share for OSI in the future.

Besides AMD, the ophthalmic division has investigated programs for diabetic macular edema and retinal vein occlusion.

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