Eli Lilly struck a drug-development alliance with Germany's Boehringer Ingelheim as the U.S drugmaker tries to revive its diabetes business after setbacks and help it maneuver past generic competition.

Lilly, whose shares edged up 0.3%, will initially pay €300 million ($388.5 million) plus potentially up to 625 million euros depending on future development progress for the right to co-develop two of Boehringer's experimental diabetes pills, linagliptin and BI10773, the two companies said on Tuesday.

Unlisted Boehringer, in turn, has agreed to pay as much as $650 million depending on development milestones for the right to co-develop Lilly's two injectable basal insulin analogues.

For the fifth drug covered by the pact, Lilly's anti-TGF-beta monoclonal antibody, the U.S. company is eligible to receive up to $525 million, comprising an opt-in fee and success-based payments.

"This alliance ... offers the prospect of near-term revenue opportunities as we address the upcoming loss of patent exclusivity for several of our products," Lilly Chief Executive John Lechleiter said in a statement.

Indianapolis-based Lilly faces the expected patent expiration this year of its big-selling Zyprexa schizophrenia drug, and the expiration of its anti-depressant Cymbalta in a few years. Investors are skeptical the drugmaker can make up for the revenue losses and Lilly trades at a lowly 7.9 times forward earnings projections, making it one of the cheapest drug stocks.

"Lilly's strong presence in diabetes makes this major collaboration a solid strategy," said BMO Capital Markets analyst Robert Hazlett, who rates the stock "outperform."

The drugs covered by the Lilly alliance have the potential to reach combined annual peak sales of 10 billion euros beyond 2020, according to Boehringer's head of marketing for human pharmaceuticals, Engelbert Tjeenk Willink.

Lilly expects its 2011 earnings per share to take a hit of $0.45-0.50 as part of the agreement, including $0.27 as a result of the one-off payment. The deal could slightly top up EPS as early as 2014, Lilly said, adding that it expects a more significant gain in EPS in 2015 and thereafter.

The move follows regulatory and development setbacks in Lilly's diabetes drugs business. U.S. health regulators in October declined to approve diabetes drug Bydureon, co-developed by Amylin Pharmaceuticals, citing the need for further studies. Bydureon, a long-acting form of Lilly's Byetta treatment for Type II diabetes, could have annual sales of over $1 billion if brought to market, analysts have said. Also in October, another of Lilly's drugs failed to improve Type I diabetes in a late-stage trial.