Lilly's stock price fell roughly 2 percent, to $50.73.
The U.S. Food and Drug Administration said in a "not approvable" letter that it needs more information on the medicine's major side effect, excessive sleepiness, Lilly said.
Long-acting Zyprexa, sometimes called Zyprexa Adhera or Zyprexa Depot, is intended to treat schizophrenia in patients who might struggle to take the drug as a daily pill. Nurses likely would administer the injections every two or four weeks.
Today, pharmaceutical analyst Jon Lecroy of Natixis Bleichroeder sent a note to investors titled, "Zyprexa Depot Dead?" and shaved $2 from his price target for Lilly shares. He now expects them to climb to $53 this year.
Analysts expect modest revenue from long-acting Zyprexa. Morgan Stanley analyst Jami Rubin predicts the drug will rack up sales of $400 million by 2011.
That's the same year Lilly begins to face competition from generic Zyprexa pills in the United States and Europe. Generics are expected to eat into the nearly $4.8 billion in global sales Zyprexa posted last year.
Lilly's patents on long-acting Zyprexa would not expire until 2018.
Excessive sleepiness, or sedation, occurred in about 1 percent of the patients tested with the long-acting, injectible Zyprexa. Pharmaceutical analysts thought the drug would be approved with a warning on its label about sedation.
However, a new case of sedation occurred shortly before Feb. 6, the day Lilly fielded questions from an FDA advisory panel of scientists about severe sedation. The most recent case occurred more than three hours after the patient was injected; previous cases of sedation had occurred sooner after injection.
The agency's rejection came despite the panel's voting Feb. 6 to recommend approving the long-acting version.
"We are disappointed by the FDA's decision and we are committed to ongoing discussions to better understand the agency's perspective regarding this recent case of excessive sedation and to define the path forward and the associated timeline," said Dr. Jennifer Stotka, Lilly's vice president of U.S. regulatory affairs.
The only approved drug similar to long-acting Zyprexa is Risperdal Consta, which is sold by a subsidiary of New Jersey-based Johnson & Johnson. Schizophrenia patients take Consta by injection every two weeks.
Sales of Consta grew 20 percent in the last three months of 2007, J&J reported this month. For the year, Consta sales exceeded $1 billion. Many patients who were taking daily Risperdal pills have switched over to the long-acting injections.