Eli Lilly, Verastem and the Defenders of Shareholder Value

NEW YORK ( TheStreet) -- "Drug development is risky."

That simple, four-word sentence deflects a lot of criticism in healthcare. At times it can seem like executives at publicly traded biotechnology and pharmaceutical companies face few consequences for failure, even when that failure is repeated over many years. It's as though shareholders have forgotten who actually owns the company.

It's time for investors to stand up and remind management who is boss.

Dr. John Lechleiter has been Chairman, President, and CEO of Eli Lilly ( LLY) since April 2008, although his career with the company stretches back to 1979 and he's been a member of the executive team since 2001. Over the past five years, Lechleiter has received nearly $50 million in total compensation, despite Lilly shares badly underperforming the S&P 500, the Dow Jones Industrial Average, and every other pharmaceutical stock in its peer group. The 10-year data look even worse. Lilly outperforms only Pfizer ( PFE), thanks to the albatross-like leadership of former Pfizer CEO Henry McKinnell.

Lilly's persistent underperformance is no fluke. The company has had one failure after the next, both commercially and clinically. Management has earned this track record through a series of strategic missteps and bad decisions. Last week, for example, pomaglumetad methionil failed as a treatment for schizophrenia, joining semagacestat in Alzheimer's disease, Arxxant for diabetic retinopathy, necitumumab in non-squamous non-small cell lung cancer, and other drugs in the ranks of recent Lilly R&D flops. Lilly's Alzheimer's drug candidate solanezumab will probably be next to disappoint.

Astonishingly, shareholders have barely lifted a finger in complaint. This speaks in part to the protective power of the dividend -- Lilly's has nearly a 5% yield -- but also to investor unwillingness to speak out against management. Lilly should be restructured aggressively -- the company has one of Big Pharma's most bloated cost structures -- and creatively reimagined. (Management scoffs at any suggestion that its R&D spending might be inefficient.) Unfortunately, much-needed change at Lilly doesn't seem likely until the company's failures become so flagrantly embarrassing that even the most dividend-obsessed shareholder loses patience. That's too long to wait.

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