Two of Amylin Pharmaceuticals' (AMLN) prominent shareholders, Carl Icahn and Eastbourne Capital, want the company to consider selling itself.

Many assume the logical buyer would be Eli Lilly & Co. (LLY), Amylin's marketing partner for diabetes drug Byetta. But Lilly should stay away.

The back-and-forth between the activist investors and Amylin has focused on poison puts, standstill agreements and determining when separate investment funds legally constitute a single "group."

The reasons for Lilly to steer clear don't involve governance or questions of law, however. They are strategic.

Lilly's deal with Amylin gives it half of the profits from Byetta's sales, which in turn account for the lion's share of Amylin's total revenue. The question is how much Lilly should be willing to pay for the rest of the business. The answer depends on at least three unresolved issues with Byetta.

First, does the drug's long-acting version get approved? The new version, which Amylin plans to submit this quarter to the U.S. Food and Drug Administration, is administered once weekly, versus twice daily for the current version. Approval could significantly expand the drug's commercial potential.

Second, are questions about Byetta's safety profile resolved? A few cases of pancreatitis, a sometimes deadly condition, have been reported in Byetta patients. Since disclosure of these cases, Byetta sales have slowed significantly. But the jury remains out on whether Byetta causes pancreatitis, or if the condition simply occurs more frequently in diabetics.

Finally, how heavy will Byetta's competition be? There are next-generation diabetes treatments in late-stage development or now entering the market from Novo Nordisk A/S (NVO), GlaxoSmithKline PLC (GSK), Bristol-Myers Squibb Co. (BMY), Merck & Co. Inc. (MRK) and Novartis AG (NVS).

Icahn has said he wouldn't recommend selling Amylin for less than $30 a share. At $30, Amylin would have an enterprise value of more than $4 billion. The Big Pharma companies trade at an average enterprise value/revenue multiple of around 2 (Amylin currently trades at 1.9). So, roughly speaking, Icahn's suggested price reflects the expectation of a mature revenue stream from Amylin of about $2 billion (vs. $800 million now). But the value of Amylin's revenue should be adjusted for Lilly's 50% interest in Byetta, so the expected revenue figure must be pushed significantly higher to justify a $30 price.

Amylin sales may or may not grow into the multi-billions. Yet the strategic choice Lilly faces is simple. Given that it already has a 50% share in Byetta, Lilly will participate in the drug's success. Should it spend billions of dollars to go further, and gain full ownership?

The answer must be no. With Byetta, Lilly has placed a bet on a horse in the race to sell the dominant next-generation diabetes treatment. Given the high risks (and high returns) inherent to all drug markets, and the risk specific to this particular product, Lilly should hold its money to place bets in other races, rather than doubling down on that same horse. Product diversification is the only insurance against the uncertainties of drug development.

Lilly CEO John Lechleiter recently said in an interview that Lilly does not intend to acquire Amylin. Executives often talk down acquisitions they fully intend to pursue. In this case, he may be telling the whole truth.

(Robert Armstrong is a senior columnist with Dow Jones Newswires. He can be reached at 201-938-2319 or by email at robert.armstrong@dowjones.com. Dow Jones Newswires is enhancing its news, commentary and analysis for the investment banking community, and is providing it on this service temporarily. Stay tuned for information on continued access to the best of Dow Jones news and opinion on companies, sectors and deals for bankers and research analysts.)

(TALK BACK: We invite readers to send us comments on this or other financial news topics. Please email us at TalkbackAmericas@dowjones.com. Readers should include their full names, work or home addresses and telephone numbers for verification purposes. We reserve the right to edit and publish your comments along with your name; we reserve the right not to publish reader comments.)