It amazes me how much investors can overreact to known side effects of a drug.

A few weeks ago, Elan (NYSE:ELN) and Biogen Idec (NASDAQ:BIIB) had to deal with new cases of a brain disorder in patients using the companies' multiple sclerosis drug, Tysabri. On Monday, it was Amylin Pharmaceuticals' (NASDAQ:AMLN) turn, as investors pummeled its stock.

This seems a bit excessive: a 13% drop after news that the number of pancreatitis cases from patients taking Amylin's diabetes drug Byetta increased to 36 from the 30 reported last October. Not being as dependent on sales of Byetta for its livelihood, marketing partner Eli Lilly (NYSE:LLY) didn't take it on the chin nearly as much.

It's not that pancreatitis isn't a serious issue -- the newly diagnosed patients had a more severe form of pancreatitis, and two of the six patients died -- it's that diabetics are already at increased risk of pancreatitis. At worst, patients with other risk factors for developing pancreatitis -- gallstones, severe hypertriglyceridemia, and alcohol use -- will stop using Byetta. But the rate of pancreatitis is so low that I doubt sales of Byetta will suffer more than they already have.

The biggest worry may be about how the new cases of pancreatitis will affect Amylin's once-weekly version of Byetta that it's developing in conjunction with Alkermes (NASDAQ:ALKS). Amylin depends on the extended-release drug for its future success, especially with Novo Nordisk (NYSE:NVO) hot on its tail. Diabetes drugs have come under increased scrutiny by the Food and Drug Administration, so new uncertainty about approval is likely a big reason the stock declined Monday.

Still, I think the market overreacted to a known issue. Just as Elan has recovered more than 30% since its jaw-breaking drop, I expect Amylin's stock will recover as well. It just might be a case of, if you've got the guts to buy, a panicking market can provide a treasure trove.

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Fool contributor Brian Orelli, Ph.D., doesn't own shares of any company mentioned in this article. Eli Lilly is an Income Investor pick. Biogen Idec is a Stock Advisor recommendation. Try any of our Foolish newsletters today, free for 30 days. The Fool has a disclosure policy.