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UPDATE 1-Lilly results miss estimates as research gets priority

Oct 24 (Reuters) - Eli Lilly and Co reported quarterly results below Wall Street expectations on Wednesday, hurt by increased spending on research and a drop in sales as its Zyprexa schizophrenia drug faced competition from cheaper generics.

But the Indianapolis drugmaker affirmed its full-year profit forecast, which would represent a 23 percent decline from 2011 results, due mostly to Zyprexa's freefall.

The company said it had earned $1.33 billion, or $1.18 per share, in the third quarter. That compared with $1.24 billion, or $1.11 per share, a year earlier.

Excluding special items, Lilly earned 79 cents per share. Analysts on average expected 83 cents, according to Thomson Reuters I/B/E/S.

Revenue fell 11 percent to $5.44 billion, below Wall Street estimates of $5.62 billion.

Lilly declined to cite reasons for the earnings and sales shortfalls. But the company said it was making good progress developing its array of experimental drugs needed to offset plunging sales of Zyprexa and looming generic competition for its Cymbalta depression medicine and Evista osteoporosis drug.

``We're executing well according to our own metrics,'' company spokesman Mark Taylor said.

Lilly, unlike other large drugmakers, has refused to merge with other companies as a way to soften the pain of generics and get earnings back on track. Nor has it cut back on research to prop up earnings.

Instead, Lilly boosted research spending by 5 percent to $1.34 billion in the quarter.

Zyprexa sales fell 68 percent to $375 million. Sales of Cymbalta, which is the company's biggest product and which goes generic in mid-2013, jumped 16 percent to $1.24 billion. Sales of Evista, which faces generics in 2014, fell 9 percent to $247 million.