(Reuters) - Eli Lilly and Co (LLY.N) may boost research spending through 2014, even as company sales and earnings tumble due to expected generic competition for its biggest-selling medicines.

The U.S. drugmaker, which detailed its strategy at a meeting on Thursday for Wall Street, pointed to promising new and experimental medicines in diabetes -- where it aims to be the global market leader by the end of the decade -- as well as for rheumatoid arthritis, lupus and Alzheimer's disease.

It also vowed to maintain its dividend, while avoiding any large-scale mergers. Lilly shares were up 10 cents at $37.37 in early trading.

Lilly's research spending would stand in stark contrast to rival drugmakers, most notably Pfizer Inc (PFE.N), that are slashing their research budgets in hard times.

Lilly affirmed it expects annual revenue of at least $20 billion between 2011 and 2014, down from more than $23 billion last year. It expects full-year net income of at least $3 billion during the period, meaning a possible 40 percent decline from the $5.1 billion generated in 2010.

Even so, Lilly plans to earmark as much as 25 percent of annual sales for research and development. That would mean perhaps $5 billion or more during the three-year period, when top medicines will lose patent protection. That compares with R&D spending last year of $4.88 billion, which represented 21 percent of sales.

"Lilly is showing it is very committed to the innovative R&D model," JP Morgan analyst Chris Schott said, as hundreds of industry analysts and fund managers gathered for a half-day meeting with company officials in New York.

"We will have an answer to this investment in the next two years," Schott said, referring to data that will be coming out over that period for Lilly's experimental drugs.

In 2009, Lilly said it would eliminate 5,500 jobs and cut costs by $1 billion by the end of 2011, to bolster its finances ahead of its patent cliff. But its R&D operation was largely unscathed and savings from the restructuring are slated to be plowed into research, as well as to protect Lilly's hefty dividend.

By contrast, Pfizer, whose Lipitor cholesterol fighter loses U.S. marketing exclusivity in November, vowed earlier this year to chop its research budget by up to $2 billion and lay off thousands of researchers in the process.

The global drug industry cut research spending for the first time ever in 2010 after decades of relentless increases, according to Thomson Reuters data released earlier this week.

While declining to comment about specific rivals, Lilly Chief Executive Officer John Lechleiter told Reuters in an interview earlier this week that large earnings-driven spending cuts can throw research organizations out of kilter.

"It's crazy; first of all, by definition this is a research and development-based industry," he said.

Lilly has 70 medicines in clinical development and said it was on track to meet or exceed its goal of 10 new drugs in late-stage clinical studies by the end of the year.

In the diabetes field, Lilly recently launched Tradjenta, a once-daily tablet. Jan Lundberg, Lilly's research chief, said the drug could be simpler to prescribe for patients with liver or kidney problems than another widely used drug in the same class, Merck's (MRK.N) Januvia.

Lilly has four experimental diabetes medicines it said could hit the market in the next five years. It said it was on track to respond later this year to U.S. regulatory concerns about Bydureon, a long-delayed once-weekly version of its Byetta treatment, co-marketed with Amylin Pharmaceuticals (AMLN.O).

It said it could seek approval in 2013 for dulaglutide, another long-acting drug in the same class as Byetta and Bydureon. An oral drug called empagliflozin, gained through an agreement with Germany's Boehringer Ingelheim, could launch in 2014, Lilly said.

"Diabetes is one of the great opportunities for Lilly moving forward," Lundberg said in an interview, adding that it was Lilly's ambition to be the market leader in the area by the end of the decade.

For other conditions, Lilly has seen encouraging mid-stage data for an experimental rheumatoid arthritis drug, known as an IL-17 antibody. It is also in late-stage trials for a lupus medicine that Lundberg said could be better than Benlysta, the newly approved treatment from Human Genome Sciences (HGSI.O) and GlaxoSmithKline Plc (GSK.L).

Two late-stage studies for Lilly's closely watched Alzheimer's treatment solanezumab are expected to be completed in the first half of next year.

"Solanezumab is a risky bet, but if the data are positive it's a huge opportunity," Chief Financial Officer Derica Rice said in an interview. "If it doesn't hit, that's not the end of Lilly."

Lilly's $5 billion-a-year Zyprexa schizophrenia treatment will face generics in October, while anti-depressant Cymbalta -- with annual sales of $3.5 billion -- goes generic in 2013 or 2014. Cancer drug Gemzar already faces generic competition and its Evista osteoporosis medicine could face steep declines beginning March 2014.

Patent expirations will slash annual revenue from the four drugs by $7 billion from 2010 to 2014, Lilly said. But the company said the decline will be significantly offset by higher overall company sales in Japan and emerging markets, as well as demand for the company's animal-health products.

Lilly expects its earnings per share to decline from 2011 to 2012, rise in 2013 and then fall again in 2014. It expects to return to profit growth after 2014.

(Reporting by Ransdell Pierson and Lewis Krauskopf; Editing by Derek Caney, Dave Zimmerman)

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