If anyone needs to make a good impression at the American Diabetes Association's scientific meeting that begins Friday, it's Bristol-Myers Squibb (BMY) - Get Report and AstraZeneca (AZN) - Get Report.

Each company has had recent

high-cost failures for diabetes drugs. They have joined forces to develop and market a pair of experimental drugs

that they hope will help offset many setbacks.

Bristol is trying to

snap out of a slump marred by

government investigations, patent challenges, management shake-ups and generic competition to top products. AstraZeneca is trying to overcome

a series of research failures both in its own labs and with partners.

One of the experimental drugs Bristol discovered is saxagliptin, which belongs to the class of DPP-4 inhibitors. AstraZeneca signed a deal in January to help develop and market it, and analysts believe an application will be sent to the Food and Drug Administration by mid-2008.

The DPP-4 inhibitor class holds promise, because it controls blood sugar in two ways. It tells the pancreas to produce more insulin -- the protein hormone that converts sugar into energy -- and it tells the liver to produce less sugar. DPP-4 inhibitors can work for the 90% to 95% of patients who have Type 2 diabetes (who don't produce enough insulin or whose bodies don't adequately process insulin).

Merck

(MRK) - Get Report

has the only commercial DPP-4 inhibitor, whose full name is dipeptidyl peptidase-4 inhibitor. Merck

has been selling Januvia since October. It also recently began selling Janumet, which combines Januvia and a generic drug that controls blood sugar called metformin.

As long as Merck's DPP-4 inhibitors don't show any surprise side effects, the company's first-to-market status will make it tough to beat.

Interviews with several diabetes experts indicate Januvia will "garner broad primary-care use," says S.G. Cowen analyst Ian Sanderson in a June 18 report to clients. Januvia will do well thanks to "aggressive marketing support, a clean side-effect profile" and concerns about a different drug class that includes

GlaxoSmithKline's

(GSK) - Get Report

Avandia, Sanderson says. Merck is scheduled to present safety data on Januvia at the ADA meeting.

Merck's competitors won't be reaching the market soon.

Novartis

(NVS) - Get Report

has run into

regulatory roadblocks for Galvus, which has stalled at the FDA due to tests showing it caused skin lesions in monkeys.

Novartis is scheduled to make some presentations at the ADA meeting in Chicago, but the key event will be its response later this year to the FDA request for additional testing.

The FDA was supposed to act on Galvus in November, but delayed its decision by three months to review more data and told Novartis in February to conduct another clinical trial and provide more data. Lehman Brothers analyst C. Anthony Butler recently told clients that a U.S. launch could be pushed back to 2009.

The Bristol/AstraZeneca DPP-4 inhibitor is in late-stage clinical testing. In Chicago, the companies will present clinical studies of saxagliptin plus metformin. "Investors' attention will likely be turned towards the skin toxicity issue that has also been reported with saxagliptin," says Butler in a June 12 research report.

Investors also should keep track of how well saxagliptin affects patients with kidney problems -- one of the FDA's concerns with Novartis' drug, says Butler, who doesn't own shares in companies he covers. His firm says it does business or seeks to do business with companies mentioned in research reports.

Butler adds that

Takeda

is expected to announce clinical trial results for its DPP-4 inhibitor called SYR-322. Investors should be looking at this drug's side-effects to gauge whether skin toxicity affects the whole class, he says.

So far, Merck's drug hasn't caused skin problems. But analyst Sanderson says doctors would be more comfortable with two years' of real-world safety data, which covers a broader group of patients than those in clinical trials.

While Bristol and AstraZeneca trail in the DPP-4 inhibitor race, they appear to be leading the search for a new class of drugs, whose commercialization is still many years away even under the most ideal research circumstances.

In Chicago, Bristol is expected to present results of a mid-stage clinical trial for dapagliflozin, part of a new class called sodium glucose cotransporter-2 inhibitors. The SGLT2 transporter protein is in the kidney, and it reabsorbs sugar from urine while other waste products are filtered out. By blocking reabsorption of sugar, Bristol says this drug will help improve their blood-sugar control.

Doctors interviewed by S.G. Cowen say "there is limited clinical data ... but that the mechanism appears promising," says Sanderson, who doesn't own shares in companies he covers.

Lehman Brothers' Butler says Bristol is "well positioned" in the SGLT2-inhibitor race, whose contestants include

Sanofi-Aventis

(SNY) - Get Report

and GlaxoSmithKline. The British drug giant will present early-stage clinical trial data on its drug, sergliflozin.

Glaxo is testing another SGLT2-inhibitor as a weight-loss drug.