Updated from 7:29 a.m. EST

Eli Lilly's ( LLY) sales for the fourth quarter rose 9%, but earnings dropped sharply year over year because of significant charges the drugmaker had to record.

Worldwide revenue was $4.25 billion for the quarter, up from $3.88 billion in the year-earlier period. Earnings sank to $132.3 million, or 12 cents a share, from $700.6 million, or 64 cents a share, in the 2005 fourth quarter.

Lilly took a charge of $495 million, or 42 cents a share, to settle legal claims involving the schizophrenia drug Zyprexa. It also took a charge of $450 million, or 31 cents a share, for asset impairments that included closing several facilities and halting work on an insulin-manufacturing plant.

However, excluding items, Lilly's adjusted profits for the fourth quarter rose 7% to $929.6 million. Lilly would have earned 85 cents a share before items, 3 cents ahead of estimates. Analysts had expected sales of $4.08 billion.

For the full year, Lilly's earnings per share of $3.18, excluding items, beat the Wall Street consensus by 3 cents.

Last year's results provide "a solid footing for 2007," said John Lechleiter, Lilly's chief operating officer, during a telephone conference with analysts. By midmorning, Lilly's stock was up 52 cents, or 1%, to $53.28.

Looking forward, Lilly projects adjusted earnings of 77 cents to 79 cents a share for the first quarter. For 2007, Lilly forecasts a profit of $3.25 to $3.35 a share before items.

The full-year EPS forecast includes an estimated reduction of 10 cents because of the Icos acquisition, and the company said a disproportionate amount of the overall impact will be felt in the first half of the year. Analysts surveyed by Thomson Financial want to see 80 cents for the first quarter and $3.34 for the year.

Sales should grow in the high-single or low-double digits this year, Lilly said.

The Icos purchase, which was completed a few days ago, will begin adding to earnings per share in 2008, Lilly said. The Icos deal gives the Indianapolis-based drugmaker full control over the impotence drug Cialis. Previously, Lilly was Icos' marketing partner.

The Product Line

The biggest news in the fourth quarter -- for sales and litigation -- was Zyprexa. Lilly's biggest drug produced a 12% gain in worldwide sales to $1.16 billion vs. the same period last year as U.S. prescriptions continued to stabilize. For the full year, Zyprexa gained 4% to $4.36 billion and represented nearly 28% of corporate revenue.

The company in early January said it settled more than 18,000 legal claims vs. Zyprexa, but it took a charge in the fourth quarter of 2006. This was the second settlement with plaintiffs who alleged that Lilly didn't adequately disclose Zyprexa's side effects, especially weight gain.

Side effects have played a role in competing drugs' gaining sales at Zyprexa's expense, especially in the U.S. Lechleiter said Wednesday that 2007's sales of the once-a-day pill should be stable. By midyear, he said, Lilly plans to ask the Food and Drug Administration to approve a once-a-month injectable version of Zyprexa.

A big highlight of the fourth quarter was the continued growth of the antidepressant Cymbalta, gaining 85% to $424.1 million vs. the same period in 2005. For the year, sales climbed 94% to $1.36 billion.

Lechleiter said the sales reflected greater acceptance by managed care organizations, more direct-to-consumer advertising and a reorganization of Lilly's sales force. Cymbalta also is approved for treating nerve pain associated with diabetes.

Lechleiter said he expects to hear from the FDA during the first quarter on an application for Cymbalta as a treatment for generalized anxiety disorder. Lilly also is working on the drug as a treatment for fibromyalgia and chronic pain.

Among other products, sales of the cancer drug Gemzar gained 5% to $371.3 million vs. the same period in 2005, and sales of the cancer drug Alimta jumped 26% to $171.4 million, thanks primarily to a 56% gain in foreign markets. Gemzar is prescribed for cancers of the lung, breast, pancreas and ovaries; Alimta is a lung-cancer drug.

Lilly expects to hear from the FDA later this year on whether the osteoporosis drug Evista can be used to reduce the risk of invasive breast cancer in postmenopausal women. Evista's fourth-quarter sales were $270.3 million, up 2% from the year-ago quarter. Sales of another osteoporosis drug, Forteo, jumped 46% to $172.1 million.

Sales of the attention deficit hyperactivity disorder drug Strattera dropped 7% to $156.3 million for the fourth quarter due to declining demand in the U.S. However, full-year sales rose 5% to $579 million.

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