By Rachel Barron

Pharmaceutical giant Eli Lilly said Monday it had agreed to acquire startup Hypnion, a developer of drugs for sleep-related disorders.

Of special interest to Eli Lilly is Hypnion’s experimental insomnia drug designed to help people fall asleep and stay asleep. Hypnion, which was selected as a Red Herring most innovative company in 2006, was in mid-clinical trials with the drug when its stockholders agreed to the merger.

Financial terms of the deal were not made public. But the acquisition of the Lexington, Massachusetts-based company is expected to close during the first quarter of 2007.

Wall Street reacted modestly to the news and pushed Eli Lilly’s stock down $0.14 to $51.63.

Elli Lilly also has its own sleep aid in development. Should the company’s drug, as well as the one it will inherit from Hypnion, win U.S. Food and Drug Administration approval, it could help Elli Lilly grab market share from Sanofi-Aventis's Ambien and Sepracor’s Lunesta.

Before Hypnion stuck its buyout deal, it had raised $80 million in two rounds of venture funding. Investors were MPM Capital, Advanced Technology Ventures, Forward Ventures, Flagship Ventures, Oxford Bioscience Partners, GIMV, S.R. One, JAFCO, Alexandria Real Estate Equities and Mintz Levin Investments.