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Forest fires back at Icahn

by Jonathan Marino  |  Published July 10, 2012 at 4:00 AM
With its second proxy battle with Carl Icahn just over a month away, Forest Laboratories Inc. has struck back, making the case for its post-Lexapro future and pleading with shareholders to reject the four-man slate nominated by the activist investor.

Forest CEO Howard Solomon sent a letter to shareholders on Monday, July 9, gearing up for the Aug. 15 meeting during which investors will decide whether to keep the pharmaceutical company's board together or inject into it a group nominated by Icahn. Stockholders unanimously rejected Icahn's push in 2011 to put four new members on Forest's board.

Icahn has questioned the succession plans for the 84-year-old Solomon and accused the executive of dumping more than $500 million in stock before the company's best-selling drug, antidepressant Lexapro, lost patent protection. Icahn, who is Forest's second-largest shareholder with a 9.92% stake, has also sued the pharmaceutical company in hopes of gaining access to books and records.

Forest has responded to each Icahn attack with a short statement until making its full case to shareholders on Monday via a letter from Solomon.

"Once again, Carl Icahn has nominated four individuals to the board -- nominees we believe would not serve the interests of all shareholders," Solomon wrote in the letter. "Icahn is again seeking to replace four members of Forest's board and recycling many of the same baseless arguments that were rejected last year by an overwhelming majority of Forest shareholders."

Solomon attacked the credibility of Icahn's four nominees -- Eric J. Ende (whom he nominated in 2011), Andrew J. Fromkin, Pierre Legault and Daniel A. Ninivaggi -- calling the slate "even weaker than last year's." He noted that Ende received the fewest votes of any nominee in 2011 and has a compensation agreement with Icahn that gives Ende incentives to "favor Icahn's profits over the rest of [Forest's] shareholders." Solomon called Ninivaggi -- the head of Icahn Enterprises LP -- "a salaried employee [of Icahn] with no pharma experience." He also claimed both Fromkin and Legault have "limited relevant experience" and that Fromkin is "conflicted" since he served as the president, CEO and executive director of Clinical Data Inc., an entity Forest paid at least $1.2 billion to acquire in 2011.

"Mr. Icahn has had an open invitation to discuss his ideas or provide feedback since his defeat at last year's annual meeting," Solomon wrote. "Rather than engaging in a constructive dialogue over the past year, Mr. Icahn did not contact the company until he threatened another proxy contest in late May, and has since resorted to his standard playbook of wild allegations, rants and litigation tactics.

"This type of mud-slinging is pointless, tiresome and counterproductive for shareholders," he added.

Solomon said that the three independent directors on Forest's board are leading the search for a new CEO and have retained executive search and recruitment firm Spencer Stuart to assist with the process.

Forest focused much of its argument to stay the course on its developing pipeline.

Forest launched three drugs in 2011: Daliresp, for chronic obstructive pulmonary disorder, or COPD; Viibryd, for major depressive disorder; and Teflaro, an antibiotic. It is also positioned to launch at least seven compounds to treat respiratory problems, central nervous system disorders, gastrointestinal ailments and infections by the end of fiscal 2014. And some analysts believe that two of its next compounds, irritable bowel syndrome medication linaclotide and COPD treatment aclidinium, which could both win approval from regulators this year, have potential market upsides of more than $1 billion in annual sales apiece. Forest filed new drug applications with the U.S. Food and Drug Administration for both drugs this year.

Forest has also made a few other moves on the development front. It completed Phase 3 trials for compounds treating major depressive disorder and schizophrenia, signed a development deal with Nabriva Therapeutics AG to co-develop an antibacterial agent that treats serious skin infections and paid $357 million to buy out all the rights for hypertension drug Bystolic, a treatment it feels could eventually eclipse $1 billion in annual sales.

Even so, however, Forest's stock, trading at $35.81 per share midday Monday, is worth roughly half the $76 per share it was worth at its peak in February 2004. The company is also in the midst of the worst of its patent cliff. Lexapro ($2.1 billion in net sales in fiscal 2012) lost market exclusivity in March, and Alzheimer's drug Namenda ($1.4 billion in fiscal 2012) will go off patent in 2015. This has led Forest to cut its guidance for its fiscal 2013 earnings per share as recently as June, and led some analysts to question whether Forest should either buy assets or sell itself to cover for the coming revenue losses.
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Tags: aclidinium | Andrew J. Fromkin | Bystolic | Carl Icahn | chronic obstructive pulmonary disorder | Clinical Data Inc. | COPD | Daliresp | Daniel A. Ninivaggi | Eric J. Ende | FDA | Food and Drug Administration | Forest Laboratories Inc. | Howard Solomon | Icahn Enterprises LP | Lexapro | Nabriva Therapeutics AG | Namenda | Pierre Legault | Spencer Stuart | Viibryd

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Jonathan Marino

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