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Bristol-Myers ousts embattled CEO, spurring takeover speculation

Last updated: 9/12/2006 5:59:00 PM

BOSTON (MarketWatch) -- Bristol-Myers Squibb Co., under pressure from a court-appointed overseer, on Tuesday fired Chief Executive Peter Dolan just weeks after a deal he brokered to keep a generic competitor to the company's blockbuster drug Plavix off the market triggered a government investigation.

Shares of Bristol-Myers, which have tumbled sharply during Dolan's five-year reign, closed up 4% at $24.32 amid heightened speculation the company could be up for sale.

Bristol-Myers (BMY) said Dolan would be replaced immediately by board member James Cornelius, who until a few months ago headed Guidant Corp., the troubled maker of cardiac devices. Bristol-Myers also forced out its general counsel, Richard Willard, and named Sandra Leung, corporate secretary, as acting counsel.

Last year, Dolan had been forced to relinquish his position of chairman, and Bristol-Myers was forced to accept a federal monitor under an agreement with the Justice Department to settle allegations of illegal tactics to inflate sales.

The dismissals came on the recommendation of Frederic Lacey, the federal monitor, who had been investigating the company's corporate governance regarding the Plavix deal. Despite the recommendation, Lacey, a former judge, did not find Dolan or Willard guilty of any misconduct, according to Bristol-Myers.

At a press conference held late Tuesday, Bristol-Myers chairman James Robinson said that that while Dolan's departure was "involuntary," Dolan "fully understands...that it's in the best interest of the company.

He added that Dolan "was not fired for cause."

Robinson also said that if the board did not agree with the Lacey's recommendation, it could have appealed to the U.S. Attorney for New Jersey. If it had lost the appeal, the company would then have to comply with Lacey's request.

"We concluded it was time for a change," said Robinson, of the board's decision.

Dolan and Willard were chief architects of an arrangement with Canada's Apotex Inc. that was intended to keep the generic version of Plavix, now Bristol-Myers' chief revenue source, off the market until 2011. In return, Apotex would have received at least $40 million in payments.

Apotex had been suing for years to have a key Plavix patent declared invalid in order to open the door to generic competition. Plavix, which is used to prevent blood clots, was the second best-selling prescription drug in world last year, with worldwide sales of around $5.9 billion.

In late July, however, the Apotex deal was shot down by the nation's state attorneys general, who had the authority to veto the agreement under the government's settlement. The Federal Trade Commission also indicated it would reject the agreement. Around the same time, Dolan's offices were raided as part of a criminal probe by the Justice Department's antitrust division.

Reports then surfaced that in negotiating with Apotex, Bristol-Myers had agreed that if regulators rejected the deal, it wouldn't seek the treble damages it would have been entitled to under the law if Apotex launched its product early and was later found to be guilty of patent infringement.

Adding insult to injury, Apotex Chairman and Chief Executive Officer Barry Sherman told the Wall Street Journal in early September that he agreed to the deal betting that regulators would indeed shoot it down.

At Tuesday's press conference, Robinson implied that Sherman had negotiated in bad faith.

"In hindsight, maybe we shouldn't have negotiated in the first place, as we were negotiating in good faith," said Robinson. "I'm not sure that was reciprocated."

Bristol-Myers emphasized Tuesday that neither the monitor nor an external investigator hired had found any evidence that any of its employees broke the law in negotiating the Plavix deal. Bristol-Myers co-markets Plavix with European drugmaker Sanofi-Aventis (SNY) , which is also being investigated as part of the probe into the Apotex deal.

Series of crises

Dolan's tenure at Bristol-Myers, one of the world's leading pharmaceuticals companies, was marked by a series of crises ranging from federal investigations of accounting practices to failed investments to its loss of market exclusivity for one of its key revenue sources, Pravachol, and culminating in the debacle surrounding Plavix.

The company said that Robinson will lead a committee to review both internal and external candidates for the CEO position. Dolan will serve as an adviser to aid in the transition.

"We're going to move expeditiously to find a new CEO," said Cornelius, during the press conference Tuesday night.

Despite possessing an attractive product pipeline, New York-based Bristol-Myers has seen its stock slide more than 50% since Dolan took over in 2001.

Meanwhile, the appointment of Cornelius to replace Dolan has stoked speculation that Bristol-Myers, which has long been viewed as a takeover prospect, could be putting itself on the auction block.

Cornelius left Guidant, which was plagued by several high-profile product recalls during his tenure, after it was acquired by Boston Scientific Corp. (BSX) earlier this year. Cornelius also once served as the chief financial officer at Eli Lilly & Co.

Cornelius is also known for steering Guidant through a high-stakes bidding war between Johnson & Johnson and Boston Scientific, one that allowed Guidant to fetch a hefty price.

"We believe, given Cornelius's background, that the market will continue to raise the possibility of Bristol as a takeover candidate," wrote Bank of America analyst Chris Schott, in a note to clients.

However, analyst Chris Shibutani at J.P. Morgan said a buyer was unlikely to emerge until Bristol-Myers resolves lingering questions about Plavix's market exclusivity.

On Aug. 8, Apotex announced it had launched its generic version of Plavix, even though the drug's patent isn't slated to run out until late 2011.

A federal court has since granted an injunction barring further sales of the generic product until the companies' settle their patent litigation. A trial is scheduled for late January.

"The priority now is Plavix, Plavix, Plavix," said Robinson on Tuesday, adding that the companies intend to vigorously fight to protect Plavix's patent.

Lower profit forecasts

But the injunction didn't compel Apotex to recall product it had already shipped, which had been gobbled up by drug distributors. As a consequence, both Bristol-Myers and Sanofi-Aventis were forced to lower their 2006 financial forecasts, admitting that the market had been flooded with the generic product.

Also haunting Dolan has been his decision to have the company sink a reported $2 billion into then-fledgling biotech group ImClone Systems (IMCL) , which was developing an oncology drug called Erbitux. After weathering a now-infamous insider trading scandal that ensnared Martha Stewart, ImClone now faces more competition for Erbitux, which is its only marketed product.

ImClone's struggles were highlighted in January, when announced it was open to being acquired. The company later took itself off the market in August, stating that the bids it had received were inadequate.


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