Investors in Amylin Pharmaceuticals (NASDAQ:AMLN) have gotten a harsh lesson in the old Wall Street saying that it's wise to buy on the rumor and sell on the news. The stock spent most of the first half of the year in decline, despite approval from the Food and Drug Administration of two drugs in the spring. Now, with positive news having come out Monday evening, it's time to see whether Wall Street will show some enduring affection for this promising biotech company.

After the market closed on Monday, Amylin announced mid-stage results from a small phase 2 clinical study of exenatide LAR, a longer-acting formulation of the already approved Byetta GLP-1 drug, which treats type 2, or adult-onset, diabetes. While it is very important to emphasize that this is an interim analysis of a small study, the results looked quite promising. Amylin shares were bid up considerably on the news.

Patients receiving the high-dose formulation showed compelling improvement in glucose control by both commonly used metrics -- hemoglobin A1c (HbA1c) and blood glucose concentration. In the study, 12 of the 14 high-dose patients who started with HbA1c levels above 7% were able to achieve sub-7% levels -- the levels most doctors seek for their patients -- within 15 weeks. None of the patients receiving a placebo reached those levels.

What's more, high-dose patients lost an average of 9 pounds during the study, and the most relevant side effect was just mild nausea. About 20% of the high-dose group experienced the nausea, but that is a common side effect with this class of drugs.

Although this is only a mid-stage look at a very small study, it's still an encouraging sign. Unlike the company's currently approved version of Byetta, which needs to be injected twice a day, this new, long-acting formula needs to be injected only once per week. That's clearly more convenient for patients, and such a long-acting formula is important to Amylin's glucagon-like peptide 1 (GLP-1) drug franchise, though it isn't likely to be approved until 2008 or 2009.

There is plenty of competition in the diabetes drug market. Novo Nordisk (NYSE:NVO), Sanofi-Aventis (NYSE:SNY), and Roche all have GLP-1 compounds in development as well, but Amylin, along with partners Eli Lilly (NYSE:LLY) and Alkermes (NASDAQ:ALKS), appears to have a one- to two-year lead on all of them.

Investors should also note that many media sources misleadingly report that Amylin will see competition from compounds under development at companies such as Novartis (NYSE:NVS), Merck (NYSE:MRK), and OSI Pharmaceuticals. By and large, the drugs referred to in these cases are known as DPP-IV inhibitors -- an entirely different class of experimental diabetes drug. Although DPP-IV inhibitors are indeed promising -- and their oral administration makes them appealing to patients -- they are not necessarily competition for GLP-1 drugs. In fact, some experimental data suggest that the two can work well in combination. Many diabetics routinely take multiple drugs.

Although Amylin shares did rise in pre-market trading, only time will tell whether those gains prove durable. This biotech has many things going for it, including approved first-in-class products and a respectable balance sheet, but biotechs in general can be volatile. These shares aren't for the faint of heart, but aggressive investors may want to explore Amylin as an opportunity to play on the growing epidemic of metabolic diseases such as diabetes and obesity.

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Fool contributor Stephen Simpson owns shares of Amylin Pharmaceuticals and Sanofi-Aventis. The Motley Fool has a disclosure policy.