Eli Lilly and Co. agreed to pay up to $1.2 billion for 50 percent rights to two diabetes drugs developed by Germany-based Boehringer Ingelheim, including one on the cusp of market approval.

In exchange, Boehringer Ingelheim agreed to pay up to $650 million for 50 percent rights to two experimental insulins in Lilly’s pipeline, and it could buy rights to a third diabetes drug for another $525 million.

The five-drug deal, announced Tuesday morning, is a way for Lilly to have a shot at new sales quickly. In November it entered a three-year period in which U.S. and European patents will expire on five of its bestselling drugs, sapping roughly half Lilly's total revenue.

"Working together, we will comprise one of the most robust diabetes pipelines in the pharmaceutical industry,” John Lechleieter, CEO of Indianapolis-based Lilly, said in a statement. “For Lilly, this alliance expands our range of offerings for people with diabetes, strengthens our diabetes care capabilities and offers the prospect of near-term revenue opportunities as we address the upcoming loss of patent exclusivity for several of our products."

The leading diabetes drug developed by Boehringer Ingelheim, which has a research and development facility outside Columbus, Ohio, is called linagliptin. It’s an oral pill for Type 2 diabetics and is currently being reviewed by regulators in the United States, Europe and Japan.

The sales potential of linagliptin isn’t clear, as Boehringer is a closely held company. If approved, linagliptin would join a growing class of drugs, known as dipeptidyl peptidase-4 inhibitors, which analysts project could grow to $7 billion in global sales by 2015.

However, there are already two similar drugs on the market—Januvia, made by New Jersey-based Merck & Co. Inc., and Onglyza, made by U.K.-based AstraZeneca plc and New York-based Bristol-Myers Squibb Co.

Linagliptin is one of four other drugs being developed by drug companies in the same class.

"The big challenge will be that by the time linagliptin comes to the market, prescribers will have four to five years of experience with Januvia," Klaus Dugi, Boehringer’s head of medical affairs, told Bloomberg News in October 2009. "It will be an uphill battle to convince them of the benefits of linagliptin."

On the upside, linagliptin does not require a kidney test to determine the proper dose for a patient—a convenience factor that could give it an advantage over its competitors.

Boehringer’s other drug in the deal is also an oral diabetes pill, BI10773, which is in Phase 3 clinical trials.

Lilly contributed two experimental insulins: LY2605541 and LY2963016, which are expected to begin Phase 3 trials this year. Boehringer also could buy partial rights to a biotech drug in Phase 2 testing.

Lilly and Boehringer have worked together in the past on drugs, most notably the European rights to Cymbalta, an antidepressant that is Lilly’s No. 2 selling drug now. In August, Lilly paid $400 million to buy back those rights from Boehringer.

Because of the deal, Lilly will record a $300 million charge, or 27 cents per share. The company said it would factor the charge into its 2011 profit forecast, which it will issue on Jan. 27.