Updated from 12:17 p.m. EDT

Bristol-Myers Squibb ( BMY) removed Peter Dolan as chief executive, a day after an independent monitor recommended he be fired, and replaced him temporarily with James Cornelius, the former chairman of Guidant.

Leaving along with Dolan is Richard Willard, senior vice president and general counsel. Sandra Leung, vice president and corporate secretary, was appointed to act as interim general counsel.

The departures follow a recommendation on Monday from Frederick Lacey, a former federal judge assigned to monitor the company's corporate conduct, that the executives be terminated.

James Robinson III, the chairman of the board, said he wanted to express "deep appreciation and respect for Peter for his unyielding commitment to our company's mission, values and purpose, and for his many impressive achievements in developing and executing a successful strategy that has put Bristol-Myers Squibb squarely on a path toward growth and leadership for the future."

Those observations are debatable, considering that under Dolan's watch more than half of Bristol-Myers' market capitalization vanished. Since May 2001, when he became CEO, the company's stock is down 56.4%. During the same period, the S&P 500 is up 2.6% and the Amex Pharmaceutical index of big drug stocks is down 12.8%.

By early afternoon, the stock was up 58 cents, or 2.5%, to $23.98 on heavier-than -average trading.

"We view the removal of Dolan as an indication that the board is listening to investors," says David Moskowitz of Friedman Billings Ramsey. JPMorgan's Chris Shibutani says Dolan's departure was a positive development and the appointment of Cornelius a logical choice.

Dolan and Willard were ousted in the wake of their roles in negotiating a deal with the Canadian generic-drug maker Apotex that was meant to forestall generic competition for Plavix , the Bristol-Myers' blockbuster sold under a licensing arrangement from France's Sanofi-Aventis ( SNY).

However, that agreement proved to be both ill-conceived and an expensive embarrassment. To begin with, the deal required approval by the Federal Trade Commission and the states' attorneys general. Before the FTC could even reach a decision, the states' top legal officers rejected the proposal.

Making matters worse was a stipulation that Bristol-Myers and Sanofi-Aventis were bound by terms that delayed their effort to block Apotex from selling generic Plavix. As a result, Apotex sold its copycat drug for about three weeks before Bristol-Myers and Sanofi-Aventis secured a preliminary injunction halting shipments.

However, the judge who agreed to the injunction, pending a full hearing on the Plavix makers' patent infringement suit against Apotex, didn't order a recall of the generic drugs that had already been sent out. That forced both Bristol-Myers and Sanofi-Aventis to reduce their 2006 earnings estimates .

More importantly, the Apotex pact raised questions about whether Bristol-Myers had violated a 2005 deferred prosecution agreement that was reached with the U.S. attorney's office in New Jersey in another government investigation.

That matter involved allegations of "channel stuffing," that is, the hyping of wholesaler inventory figures to improve sales, as well as accounting irregularities. As part of the agreement, Bristol-Myers paid $300 million to a shareholder fund that had already been established under a previous settlement with the Securities and Exchange Commission.

Bristol-Myers made several other payments to shareholders related to the channel stuffing and other issues , including its relationship with ImClone Systems ( IMCL). ImClone developed the cancer drug Erbitux and signed a collaboration deal with Bristol-Myers.

The total bill for Bristol-Myers Squibb to mollify regulators and shareholders was $839 million.

The U.S. attorney deal essentially put Bristol-Myers on probation, removing the risk of a criminal complaint as long as the company acted within the stated guidelines for two years.

The deferred prosecution agreement also resulted in Dolan losing his job as chairman. He was replaced by Robinson, a Bristol-Myers director since 1976, as nonexecutive chairman. Robinson is a former chairman and CEO of American Express ( AXP).

Lacey was brought in to ensure that Bristol-Myers lived up to its end of the bargain and to monitor its corporate behavior through at least April 2007. Lacey had served as an independent adviser to the company since June 2003.

According to Bristol-Myers, both Lacey and Christopher J. Christie, the U.S. attorney for New Jersey, met with the board on Monday.

The company said Tuesday that Lacey's recommendation followed an inquiry by him and the U.S. attorney into "issues related to corporate governance in connection with the negotiation of a settlement agreement of the pending Plavix patent litigation." However, neither found "that there had been any violation of the deferred prosecution agreement. No finding of any unlawful conduct by the company or any of its employees has been made."

Bristol-Myers added that its outside counsel, which is investigating the Plavix negotiations, "also confirmed that there is no evidence from which to conclude that the company or any of its employees acted unlawfully."

The company said Lacey's review was separate from a criminal investigation that the Justice Department' antitrust division launched into the Apotex arrangement. Lacey might make additional recommendations regarding "governance matters" when he issues his final report on the probe, Bristol-Myers said.

Because of the problems Bristol-Myers has had to deal with, its dividend has at times been thought to be in jeopardy, but for now at least it appears to be safe. Bristol-Myers declared a quarterly dividend of 28 cents a share and said it expects to pay the same rate in 2007, subject to the normal quarterly review by the board.

At the same time, the projected payout also assumes a favorable outcome to the Plavix litigation and an absence of sustained competition for the blood thinner next year.

Dolan, 50, is the third Big Pharma CEO in 17 months to leave his post earlier than had been planned.

Raymond Gilmartin left Merck ( MRK) in May 2005, about 10 months ahead of his planned departure at the mandatory retirement age of 65. Gilmartin was replaced by long-time Merck executive Richard Clark .

Gilmartin paid the price for his company's sinking stock price and the mushrooming lawsuits stemming from Vioxx, the arthritis drug that Merck removed from the market in September 2004 for safety concerns.

Then, in late July, Pfizer ( PFE) announced that Hank McKinnell had resigned as CEO immediately but would remain chairman until February. McKinnell was replaced by Jeffrey Kindler, one of the three vice chairmen who had been vying to succeed him.

McKinnell left about 12 months ahead of the mandatory retirement age of 65 amid a growing chorus of boos among analysts and a stock price that had fallen nearly 40% since he became CEO in January 2001.

At Bristol-Myers, Robinson, the chairman, will lead a committee to find a new CEO. Robinson said he will look inside and outside the company, adding that Dolan will act as an adviser.

Until then, the temporary CEO is Cornelius, who joined the Bristol-Myers board in January 2005. He previously served as chairman and interim CEO of Guidant, now part of Boston Scientific ( BSX). Before that, he was chief financial officer and a director of Eli Lilly ( LLY), Guidant's former parent.

"Jim's extensive experience in the health care arena will be critical in ensuring a smooth transition of leadership of this great company," Robinson said.

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