Eli Lilly, the US drugs group, has established a $690m fund to settle the bulk of litigation over its biggest drug, Zyprexa for schizophrenia, as it moves to end a potential hindernce to sales from claims its causes diabetes.

The US drugmaker struck the agreement with attorneys representing about 8,000 claims, or 75 per cent of Lilly's estimated Zyprexa litigation. The settlement, announced late on Thursday, covers federal and state lawsuits, pending national class-action requests, and about 5,000 other claims.

Lilly has been fighting to stabilise weakening Zyprexa sales, which have been hurt by a combination of aggressive competition and scrutiny of the risk of diabetic side effects.

It is also trying to diversify from its reliance on Zyprexa, a $4bn-a-year drug making up at least 30 per cent of Lilly's earnings, by pushing new products from what many analysts see as one of the best drug pipelines in the industry.

Tony Butler, analyst at Lehman Brothers, said: "While we have yet to learn what may qualify someone to participate in the settlement, it appears Lilly is aiming to resolve much of the uncertainty around Zyprexa liability litigation and perhaps concentrate its efforts on the road ahead."

Reports of diabetic side effects and litigation gave ammunition to Lilly's competitors, including Bristol-Myers Squibb's Abilify, AstraZeneca's Seroquel, and Johnson & Johnson's Risperdal.

This came in spite of an apparent victory for Lilly in 2003 when US regulators required all these drugs in a class called atypical antipsychotics to carry warnings of potential increased diabetes risk.

Doctors have complained that plaintiffs' attorneys' advertisements linking Zyprexa to health risk have scared fragile patients into ceasing their medication.

Sidney Taurel, Lilly chief executive, said: "The litigation stirred concern for physicians and spread fear among patients and caregivers, which has interfered with the process of physicians making treatment decisions."

Lilly admitted no wrongdoing in the settlement and stressed "the claims are without merit", but added that it wanted to "reduce significant uncertainties".

Mr Taurel's efforts to clean up the disputes around Zyprexa also follow a court decision this year backing Lilly's patent rights to the drug.

Christopher Seeger, a plaintiffs' attorney, said: "We believe that this settlement is in the best interest of our clients, as well as patients, physicians and caregivers."

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