Eli Lilly & Co. and Amylin Pharmaceuticals Inc. severed a nine-year-old partnership that was supposed to furnish a blockbuster treatment for diabetes but was instead plagued by disappointing sales, regulatory troubles and company disputes.

The collapse underscores the challenges for the many collaborations that big drug makers have been striking with smaller biotechs to spur innovation while reducing their risks.

Under the terms, Amylin agreed to pay $250 million to Lilly upfront and as much as $1.2 billion more from sales of a molecule called exenatide that lowers the blood sugar of diabetics. That molecule is in the drug Byetta. And it would be the basis for a longer-acting version, Bydureon, that was recently approved in Europe and is up for U.S. approval early next year.

Amylin gets the full U.S. rights Nov. 30, and the rights outside the U.S. sometime between late 2012 and the end of 2013. Until then, Lilly will continue sales outside the U.S. The agreement also settles outstanding litigation between the two companies.

With full control in hand, Amylin CEO Daniel Bradbury expects to realize more than $1 billion in sales from Bydureon. "We could have continued to work through" the differences with Lilly, he said. But "at the end of the day we believed the agreement we came to actually gives the molecule the greatest opportunity to realize its value."

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