You've got the drugs.
We've got the drugs.
Let's make lots of money.
-- Pharma remix of "Opportunities," Pet Shop Boys

Eli Lilly (NYSE: LLY) and German Boehringer Ingelheim are the latest drugmakers to hook up with a diabetes joint venture.

Both companies will contribute two drugs to the partnership, and Boehringer has the option to add Lilly's anti-TGF-beta antibody at a later date. The deal calls for payments in both directions when drugs reach certain regulatory milestones. Boehringer could get up to about $810 million for its compounds. Lilly is potentially due $650 million for its two drugs, with as much as an additional $525 million if Boehringer opts to bring in Lilly's anti-TGF-beta antibody and it makes it to market.

Boehringer is contributing more to the partnership, given the late stage its products are in, so Lilly will initially pay around $390 million to join the party. Lilly could use some late-stage assets given its coming patent cliff, so making the additional upfront payment is a necessary evil.

I really like the structure of the deal, as it lowers the risk for both companies, but the milestone payments allow them to retain some upside. By owning half of four drugs instead of all of two drugs, they're splitting the development risk into a bigger pie.

Pfizer (NYSE: PFE) and GlaxoSmithKline (NYSE: GSK) did a similar deal in early 2009 when they set up a joint venture to develop HIV drugs. Those drugmakers went so far as to throw the drugs they already had on the market into the mix, as well. That allows some cost savings since the companies can share sales reps marketing drugs to the same doctors.

That kind of structure might not have worked well for Lilly, though, since it jointly markets Byetta with Amylin Pharmaceuticals (Nasdaq: AMLN) and sells Takeda's Actos in some countries. For now, Lilly will just have to focus on raising earnings by launching new diabetes drugs rather than lowering costs of selling those drugs.

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