Eli Lilly and Co. will pay Canadian drug developer Transition Therapeutics Inc. $7 million and take over the development of a potential diabetes treatment heading into mid-stage clinical testing.

Transition said Monday it also could receive up to $240 million in additional payments, plus royalties if the treatment is eventually approved and sold. It also will pay Lilly, which is based in Indianapolis, $14 million in three installments during the mid-stage study.

The treatment, labeled TT-401, is being developed to treat the most common form of diabetes, type 2, and accompanying obesity.

Diabetes is a chronic condition in which the body either does not make enough insulin to break down the sugar in foods or uses insulin inefficiently. It can cause early death or serious complications like blindness, a stroke, kidney disease or heart disease when blood sugar climbs too high and damages organs and blood vessels.

Demand for drugs that treat diabetes is climbing as rising instances of obesity are causing an explosion of diabetes cases globally.

Lilly representatives could not be immediately reached for comment.

Transition shares closed Friday at $3.51, near the upper end of their 52-week trading range of $1.78 to $3.84. Lilly shares closed at $52.05, and have traded between $41.41 and $58.40 in the past 52 weeks.