Eli Lilly & Co.'s (LLY) fourth-quarter earnings rose 28%, as higher sales of an antidepressant and a cancer drug helped lift overall revenue.

The Indianapolis-based drug maker continued its string of relatively good financial reports, but Lilly's outlook is shaky because it faces a wave of patent expirations that will expose its best-selling drugs to generic competition in coming years, including the blockbuster antipsychotic Zyprexa beginning in October.

Compounding its challenges, Lilly has suffered a series of research and regulatory setbacks that have hampered efforts to bring new products to market to replace the lost revenue. Lilly is relying on delivering new products from its research labs and modest-sized license deals and acquisitions, and has vowed to avoid a large-scale merger.

Lilly and other drug makers are also facing external challenges, including new costs associated with the implementation of the U.S. health-care overhaul, price cuts imposed by European national health programs, and tough regulatory hurdles for new products. Earlier this week executives from Johnson & Johnson (JNJ) and Abbott Laboratories (ABT) said the environment for health-care companies was getting more difficult.

"We do see opportunities but we're looking at the external environment with some caution," Lilly Chief Executive John Lechleiter said in an interview Thursday. He said Lilly has had strong sales growth in Japan and emerging markets, and in its animal-health unit, which is partly mitigating the challenges.

The new health-care overhaul requires drug makers to pay higher rebates to government health programs, new fees, and funding for the Medicare prescription drug benefit. Lechleiter said these new requirements are expected to cut Lilly's 2011 sales by $400 million to $500 million, and to increase operating expenses by about $150 million to $200 million.

For the fourth quarter, Lilly reported a profit of $1.17 billion, or $1.05 a share, up from $915.4 million, or 83 cents a share, a year earlier. Excluding items such as asset impairments and restructuring charges, earnings rose to $1.11 from 91 cents, beating the mean estimate of analysts surveyed by Thomson Reuters by a penny.

Revenue rose 4% to $6.19 billion, also exceeding the Thomson estimate, helped by a 3% increase in volume as well as higher prices, the company said.

Zyprexa sales fell 2% to $1.3 billion. Sales should drop sharply later in the year when generic versions become available. "We're planning on a very significant and rapid erosion," Lechleiter said.

Sales of antidepressant Cymbalta rose 19% to $985 million, while cancer drug Alimta was up 9% at $569 million. Sales of cancer drug Gemzar dropped 22% due to generic competition.

Lilly predicted its earnings for 2011 would be $3.92 to $4.07 a share, or $4.15 to $4.30 per share excluding items. Analysts surveyed by Thomson Reuters most recently expected $4.29.

Lilly's 2010 earnings were $4.58 a share, or $4.74 excluding items, near the top if its previous forecast range.

Credit Suisse analyst Catherine Arnold said in a research note the 2011 forecast may come as a relief to investors, given that the Zyprexa patent expiration is expected to hurt results later this year.

Lilly's pipeline setbacks have included the discontinuation of studies of an experimental Alzheimer's disease drug, and a delay in regulatory approval for diabetes drug Bydureon, which Lilly has co-developed with Amylin Pharmaceuticals Inc. (AMLN) and Alkermes Inc. (ALKS).

Lilly also disclosed Thursday it was discontinuing development of an experimental insomnia drug, which it called a "business decision," and not related to any safety findings.

On the positive side, Lilly said it has decided to begin late-stage studies later this year on an experimental schizophrenia drug. Also, Amylin on Thursday disclosed the design for a study related to Bydureon to address FDA concerns, and said FDA has approved the protocol.

-Peter Loftus, Dow Jones Newswires; +1-215-656-8289; peter.loftus@dowjones.com

-Nathan Becker contributed to this article

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