Analysis: After 34 years, Forest's CEO takes stand

By Lewis Krauskopf

NEW YORK (Reuters) - Forest Laboratories Inc <FRX.N> chief Howard Solomon will likely have to cede some control over the drugmaker he has stewarded for over three decades to resolve a showdown with billionaire Carl Icahn.

But he is expected to face calls for some fresh perspective on the nine-member board, where Icahn is seeking to place four of his own nominees. Icahn may gain at least one seat, allowing him to push for more cost cuts and share buybacks and to influence a succession plan that could favor Solomon's son, David.

"There are a lot of larger holders of this stock who I think probably are not interested in ousting Solomon," said Cowen & Co analyst Ian Sanderson. "But I do think that even the large holders probably would not mind if there was some new blood brought onto the board."

Those holders could include ClearBridge Advisors, Forest's fifth-largest shareholder at 6.35 percent, which supported Icahn's 2007 bid for a seat at mobile phone maker Motorola.

Responding to the possibility that he might only gain one board seat, Icahn said in an interview that his group deserves more presence given his track record in driving value at other biopharmaceutical companies, such as ImClone, Genzyme and Biogen-Idec Inc <BIIB.O>.

"It takes a strong representation on the board, and we think we deserve a strong representation," Icahn said. "I really believe that shareholders will support us because look at what we've done for shareholders in the biopharmaceutical world. We're going to try to enhance value as we've done in the past."

Losing any measure of control would be notable for Solomon. Though virtually invisible to Wall Street -- he tends not to speak on earnings calls or at investor conferences; one analyst recalls meeting him just once in 17 years -- Solomon is deeply identified with the company he has run since 1977.

"He is Forest Labs," said Scott Richter, a portfolio manager with Fifth Third Asset Management.

Solomon has become more vulnerable to attack as Forest struggles to address future revenue holes from top drugs going off patent and as the U.S. government threatens sanctions against him personally.

U.S. regulators are weighing whether to bar Solomon from participating in federal healthcare programs after his company last year agreed to plead guilty and pay more than $313 million to resolve charges over improper marketing of several drugs.

Indeed, the government action could eventually force Solomon out, regardless of Icahn's desires.

Having built a roughly 7 percent stake that makes him Forest's fourth-largest shareholder, Icahn has chided the board for spending money to back Solomon against the government and has sued to get access to details of the case.

"We think that governance has been an issue at Forest, and we think that investors are better off with Icahn," said David Maris, an analyst at CLSA. "The current management has positioned the company poorly."

Forest declined to comment.

ENOUGH TO REPLACE LEXAPRO?

Solomon had already been facing a turbulent period after building Forest into a formidable marketing machine.

Revenue at the New York-based company, with a market value of more than $11 billion, is projected to drop by about one-fourth after its Lexapro antidepressant loses patent protection early next year. Another big patent expiry -- for its Namenda Alzheimer's drug -- is expected in 2015.

Company shares are worth about half of what they were at their height in 2004 and a third less than peak 2007 levels, though they had begun to rebound before Icahn made his move.

"I'm sure it's a huge distraction for him and the senior management team," Susquehanna Financial Group analyst Gary Nachman said of the Icahn and government challenges. "This is a company that Howard built and it's very much his and I think he would prefer to keep it that way."

To replace losses of Lexapro and Namenda revenue, Forest is following a course long-implemented under Solomon, a Yale University-trained lawyer: It buys or licenses products in the late stages of development and then uses its sales force to sell them in the United States.

It paid $1.2 billion for Clinical Data Inc and its new antidepressant Viibryd. Forest recently won approval for respiratory drug Daliresp and antibiotic Teflaro and has drugs in late-stage development for irritable bowel syndrome and chronic obstructive pulmonary disease.

That marketing strategy has paid off in the past. Solomon built Forest into a company with more than $4 billion in annual revenue largely due to two antidepressants, Celexa and then Lexapro, its chemical cousin.

For Solomon, the drugs are also personal: His son Andrew suffered from severe depression and wrote the award-winning book, "The Noonday Demon: An Atlas of Depression."

Now, however, some question whether Solomon's strategy will be enough to sustain profits.

Richter, the Fifth Third portfolio manager, sold his stake in Forest earlier this year but is weighing whether to buy the stock again now that Icahn is involved. Richter said he would hope the famed investor could cut costs or buy back more shares.

"Forest is kind of charging down this same-as-it-ever-was path," Richter said. Icahn's entry could mean "a more fiscally responsible, shareholder-friendly posture and that's why I'm intrigued with it again."

ICAHN'S AIMS

Solomon is also fighting the potential exclusion by the U.S. Health and Human Services Department's Office of Inspector General. An OIG spokeswoman said no decision had been made.

A Freedom of Information Act request by Reuters for information about the case was denied by the OIG, which cited the fact that it is "an open and ongoing investigation."

Icahn has not yet demanded Solomon's ouster. But he has criticized the company's strategy for dealing with the Lexapro expiration, pointed to its share price decline over the past seven years and questioned Solomon's stock sales.

While Icahn has tried to engineer the sale of many of the biotech companies in which he has become active, analysts are skeptical that Forest is a legitimate takeover target.

Some believe the company's emphasis on primary care markets would not appeal to large drugmakers more interested in specialty areas, while Forest's tangle of partnerships on many of its licensed drugs could complicate an acquisition.

The board, however, may be vulnerable. Aside from Solomon, 84-year-old William Candee has served as a director since 1959, while two other board members have served since 1977, according to the company's preliminary proxy filing.

Icahn's involvement may also have a role in succession planning. Forest in November promoted four executives, including David Solomon, the company's senior vice president for corporate development and strategic planning.

After Forest's Chief Operating Officer Lawrence Olanoff retired last year, some shareholders are concerned that Solomon is grooming his son for the top job, Sanderson said.

"While David may be fully capable, I think investors just don't like the looks of that, and David has not been a visible operating officer of the company," Sanderson said.

(Editing by Michele Gershberg and Gerald E. McCormick)