Executive pay and Compensation and Eli Lilly and Co. and Health Care & Life Sciences

Taurel draws fire for getting rich while stock struggles

May 28, 2007

As an investor, what would you do? Since the CEO took office nine years ago, the company's stock has returned just 1 percent per year. Meanwhile, the CEO has taken home $44 million in pay and been given stock options valued at $114 million more. Out with the bum! Right? But most shareholders in this firm--Eli Lilly and Co.--aren't raising a call for its CEO--Sidney Taurel--to hit the trail.

"We are frustrated like others," said George Farra, principal of Woodley Farra Manion Portfolio Management, an Indianapolis money manager that holds 287,000 Lilly shares. "At the same time, we understand the issues he's dealt with."

The biggest issue Taurel faced came in 2000 when a federal appeals court shocked Lilly by stripping it of its patent rights for Prozac, a $2.5-billion-a-year blockbuster depression treatment.

Taurel silenced most would-be critics a year later when he accepted only $1 in salary.

But he has plenty of critics now. Since the Prozac decision, Lilly also has lost its 80-year hold on the insulin market and has failed to fend off competitors to its No. 1 blockbuster, Zyprexa.

The Indianapolis-based company's manufacturing plants have hit snags with regulators, as have several of the compounds it has touted as future winners.

Just this month, Forbes magazine singled out Taurel as one of the six most "overpaid bosses" in corporate America. And Taurel's pay landed Lilly on the Corporate Library's "Pay for Failure" list of 12 companies that pay most for the worst stock performance.

In spite of their disappointment, however, many investors credit Taurel for keeping Lilly profitable and productive after the loss of Prozac's patent. Since then, Lilly has launched nine new drugs, nearly twice as many as it launched in the 1990s. Last year, Lilly earned $2.7 billion on sales of $15.7 billion.

"They didn't execute as well as they could have," said Les Funtleyder, a health care analyst at Miller Tabak & Co. in New York. "But nobody's really executed brilliantly," he said. "The domestic pharmaceutical group has been under pressure just in general--some more than others."

Indeed, compared with the Standard & Poor's 500 Index, Lilly looks bad. But compared with its large, U.S. pharmaceutical brethren, Lilly looks pretty good.

That's because all pharmaceutical companies have suffered under increased U.S. Food and Drug Administration scrutiny. More drugs have been pulled off the market. More new drug applications have been denied. Fewer drugs that have been approved have achieved blockbuster status.

Meanwhile, drugmakers have continued to face constant product liability lawsuits. For example, Lilly has settled 26,000 Zyprexa lawsuits--for $1.2 billion. Competitors Johnson & Johnson and AstraZeneca plc have faced similar suits for their respective antipsychotic drugs, Risperdal and Seroquel.

Amid the turmoil, investors interested in health care have gravitated more toward biotech firms and health insurers.

Lilly is the only major U.S. pharmaceutical company not to change CEOs at least once in the last nine years. Its board has stayed with Taurel, 58, a native of Morocco who has spent his entire 36-year career with Lilly.

From July 1, 1998--Taurel's first day as CEO-until year-end 2006, Lilly's stock performed worse than three U.S. pharmaceutical companies--J&J, Abbott Laboratories and Wyeth--and better than four others--Pfizer Inc., Merck & Co. Inc., Bristol-Myers Squibb Co. and Schering-Plough Corp.

As a group, U.S. drugmakers lagged the stock gains of European counterparts, such as Novo Nordisk A/S and Novartis AG.

"Although we at Lilly, as well as our shareholders, would like to see the pharma industry stocks perform better, it should be noted that, during Sidney's tenure as CEO, Lilly stock has performed favorably when compared to many of our peer companies and to the overall industry average," said Lilly spokesman Phil Belt.

In spite of its struggles in recent years, Lilly has made Taurel a rich man. Since becoming CEO, he's cashed in stock options worth $65 million. And the options he still holds will be worth tens of millions more if the company's shares spike.

Options give executives the right to buy shares in the future at the price on the date of grant. The estimated value of $114 million for the grants he received since moving into the top job is based on the assumption that shares appreciate 5 percent a year for the 10-year life of the grants.

Still, Taurel might have become richer at other drugmakers. Since he became Lilly's CEO, only Merck paid less for the services of its top executive.

Three other drugmakers--Pfizer, Wyeth and Abbott--also made the Corporate Library's "Pay for Failure" list. Since Taurel became Lilly's CEO, those companies have paid their chiefs $256 million, $195 million and $175 million, respectively.

So, by comparison, Lilly has paid Taurel at discount-rack prices: up to 60 percent off.

Taurel declined to comment for this story. But in an interview in February on CNBC, he defended the hefty pay CEOs receive.

"The pressures that come with this job have increased enormously over the last few years, from regulators, from the media, from customers, from your own employees," Taurel told the business television network. "So I think those who perform deserve the sort of compensation they are getting.

"The important thing is, is the compensation really, really being related to performance? If it is not, then it's fair to criticize."

And Taurel is being criticized.

In April, a Wall Street Journal blogger noted that Lilly subtly boosts its executive pay by using benchmarks like J&J, a company three times the size of Lilly for which pharmaceuticals are its smallest business unit.

J&J has generated a 99-percent return for its shareholders since Taurel took the helm at Lilly. And in that time, it has rewarded its CEOs with $189 million.

A string of comments that followed bashed Lilly for its pay practices. Lilly shareholder Scott Strumello wrote: "There's little doubt Lilly is no J&J, if they were, their returns to investors would be better."

Some investors still anticipate big things from Lilly, based primarily on drugs it's trying to bring to market. Pittsburgh-based Symons Capital Management has bought 113,000 shares of Lilly since March because of what it considers the company's low stock price and attractive pipeline.

"Quite honestly, we got in because the share price got knocked down," said Richard Foran, Symons' vice president of research.

So far, it looks like a good investment. Lilly's stock is up 16 percent for the year. This month, Kiplinger's magazine picked it as a stock with promise.

But many others, from Wall Street to Meridian Street, feel burned by Taurel & Co. because several of Lilly's highly touted new drugs have fallen short of expectations.

Drugs such as Xigris for sepsis and Strattera for attention deficit disorder failed to generate the sales analysts and investors hoped for. Many of Lilly's fastest-growing drugs--such as Cialis for impotence and Byetta for diabetes--were developed by other firms, which then negotiated with Lilly to market them.

"Lilly was always kind of pounding their chest and talking about how great their pipeline is," said Ken Skarbeck, managing partner of Aldebaran Capital in Indianapolis.

"The [drug] companies have turned more into marketing companies rather than science-based companies. I think that's when they've gone downhill."

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