(Updates stock activity.)

By Val Brickates Kennedy

U.S. drug stocks fled with the broader market into negative territory Monday as investors reacted negatively to a warning by Bank of America Corp. (BAC) that credit markets were continuing to deteriorate.

The Amex Pharmaceutical Index retracted 2% to 237.03 while the Amex Biotechnology Index retrenched 3% to 619.44.

The Dow Jones Industrial Average tumbled about 240 points, or 3%, to 7,892.

Leading decliners among the large caps included Allergan Inc. (AGN), Amgen Inc. (AMGN) and Pfizer Inc. (PFE), all down at least 3%.

One bright spot was Amylin Pharmaceuticals Inc. (AMLN), up 2% at $10.39.

Early Monday, an Amylin director, James Wilson, accused Amylin activist investor Carl Icahn of pushing for a sale of the company to Eli Lilly & Co. (LLY), which co-markets Amylin's top-selling product, Byetta.

Last year, Icahn was able to navigate a takeover deal between another investment, ImClone Systems, and Lilly for $6.5 billion. Icahn is currently engaged in a proxy battle with Amylin's board. Wilson, who serves as Amylin's lead independent director, says a deal with Lilly at this time would seriously undermine Amylin's value.

Wilson made his comments in a proxy addendum filed Monday.

Meanwhile, Lilly shares were down 2% at $33.17, after the drugmaker unveiled a better-than-expected first-quarter earnings report.

Despite the solid performance, Lilly didn't raise its 2009 financial forecast, citing a strengthening U.S. dollar and increasing generic competition.

Lilly reported first-quarter net income rose 23% on 5% higher revenue, due largely to strong U.S. sales and improved gross margins.

Lilly added that the change in foreign-exchange rates boosted gross margins by almost 7 points to about 84%. U.S. revenue jumped 13% to $2.87 billion, while foreign revenue slid 4% to $2.18 billion due to a higher U.S. dollar.

Dendreon Corp. (DNDN) was the standout on the biotech side. Shares of the cancer-vaccine developer shot up 7% to $19.25 after the stock was upgraded to buy from hold by Lazard Capital.

On Sunday, Dendreon released additional positive data for its prostate-cancer therapy, Provenge, which has had difficulty winning U.S. regulatory clearance. Dendreon presented the data at the annual meeting of the American Association for Cancer Research.

-By Val Brickates Kennedy, 415-439-6400; AskNewswires@dowjones.com