(Recasts with Keytruda comments, adds Eli Lilly results, share prices)

By Bill Berkrot and Ransdell Pierson

NEW YORK, Oct 25 - Merck & Co on Tuesday declared its intention to dominate the large and lucrative lung cancer market, bolstered by a significant expansion of approved U.S. uses for its drug that helps the immune system attack tumors.

Merck's optimistic comments came after it posted better-than-expected third quarter results, helped by growing sales of the cancer drug Keytruda.

Keytruda on Monday became the first of the new immunotherapy drugs approved as an initial lung cancer treatment, when U.S. regulators cleared it for use in patients whose cancer cells express a high level of the PD-L1 protein that the medicine targets. The decision, which came two months earlier than expected, involves up to 30 percent of non-small cell lung cancer (NSCLC) patients.

The Food and Drug Administration also said Keytruda could now be used in patients whose cancer progressed after chemotherapy, even with minimal PD-L1 presence, putting it on a level playing with Bristol-Myers Squibb's rival immunotherapy Opdivo in so-called second line treatment. Roche's new Tecentriq is also approved for second-line lung cancer treatment.

"We believe the increasing familiarity physicians and their staff will have with using Keytruda in first-line NSCLC will help them also dominate the second line market," Credit Suisse analyst Vamil Divan said in a research note.

Bristol's perceived leadership in the hot field suffered a devastating blow in August, when its trial of Opdivo in first-line lung cancer regardless of PD-L1 levels failed to help patients more than chemotherapy.

On a conference call with analysts, Merck said it was already seeing an acceleration in testing for PD-L1 following lung cancer diagnosis, which bodes well for future use of Keytruda. The drug is also approved for advanced melanoma and head and neck cancer and is being tested against numerous other cancers, with analysts forecasting eventual annual sales exceeding $8 billion.

"We remain dedicated to establishing Keytruda as the leader in lung cancer," Adam Schechter, Merck's head of global pharmaceuticals, told analysts.

Lung cancer is by far the largest cancer category.

The company said it was seeing few limitations from health insurers over duration of treatment in lung cancer for the medicine that costs about $150,000 a year.

While Merck waits for Keytruda lung cancer sales to take off, its third-quarter earnings were buoyed by strong demand for its Gardasil vaccine, Januvia diabetes drug and Keytruda in melanoma.

Excluding items, Merck said it earned $1.07 per share, beating analysts' average expectations by 8 cents.

The company raised the mid-point of its full-year forecast, excluding special items, and now expects to earn $3.71 to $3.78 per share, up from its prior view of $3.67 to $3.77.

LILLY PROFIT DISAPPOINTS

Another U.S. drugmaker, Eli Lilly and Co, is also counting on new drugs to spur future growth after reporting lower-than-expected third-quarter results that were hurt by disappointing sales of its Humalog insulin and animal health products.

Excluding special items, Lilly earned 88 cents per share, 8 cents shy of analysts' average estimates, according to Thomson Reuters I/B/E/S.

But Lilly maintained its full-year forecast of $3.50 to $3.60 per share, excluding items, and said it was seeing increasing demand for it newer Trulicity and Jardiance diabetes drugs and Taltz psoriasis treatment.

Lilly's fortunes, already on the rise, could take flight if its experimental Alzheimer's disease treatment solanezumab proves able to slow cognitive declines in a late stage study of patients with mild disease. Those results are expected before the end of the year. Any successful Alzheimer's treatment is expected to reap many billions of dollars in annual sales.

Merck shares were up 2 percent at $61.95, while shares of Eli Lilly were up 0.5 percent at $77.99.

(Additional reporting by Reporting by Ankur Banerjee in Bengaluru; Editing by Martina D'Couto and Nick Zieminski)