Eli Lilly & Co. (LLY) has agreed to pay nearly $700 million to settle a majority of legal claims that labels on its anti-psychosis drug Zyprexa had failed to provide adequate warning that the drug could put patients more at risk for developing diabetes.

Lilly said late Thursday it had agreed in principle with plaintiffs' attorneys involved in the Zyprexa (search) claims. The settlement, when finalized, will resolve about 75 percent of the Zyprexa claims pending in the United States, according to a Lilly news release.

"While we believe the claims are without merit, we took this difficult step because we believe it is in the best interest of the company, the patients who depend on this medication, and their doctors," Lilly Chairman and CEO Sidney Taurel said in the statement.

Most of the lawsuits claimed that before September 2003, the information on Zyprexa labels regarding the risk of hyperglycemia and diabetes was not adequately displayed. Hyperglycemia (search) is a condition in which the blood has elevated sugar levels, typical in diabetics.

In September 2003, the Food and Drug Administration (search) required label changes for all atypical anti-psychotic drugs to warn against the risk.

The Indianapolis-based company plans to establish the settlement fund, which will affect its second-quarter earnings. The company said it plans to take a pretax charge of at least $700 million for the fund and to cover other claims not in the agreement.

The agreement only involves people who filed claims arguing that they developed diabetes-related conditions from using Zyprexa, which is used to treat schizophrenia and bipolar disorder. Lilly said it is prepared to continue its "vigorous defense" of the drug in the remaining cases.

Christopher Seeger, a member of the plaintiffs' steering committee, said the group was pleased with the agreement.

"The patient population to which this drug is given has difficult medical histories," Seeger said. "Protracted litigation was in no one's interest."

In April, Lilly said worldwide sales of Zyprexa fell 5 percent to $1.04 billion. Sales in the United States fell 17 percent to $517.4 million because competing drugs are reducing demand for Zyprexa, the company said. U.S. sales of the treatment for schizophrenia and other disorders brought in $2.4 billion for Lilly last year. The drug had worldwide sales of $4.4 billion in 2004.

However, Lilly prevented further erosion of the still lucrative U.S. franchise for the drug when a federal judge in April upheld its patent giving its exclusive U.S. rights until 2011. The case could still face appeals.