Solomon To Step Aside As Forest Exec; Icahn Wins Another Victory

President and CEO of Forest Laboratories Howard Solomon will retire at the end of the year. Activist investor Carl Icahn has long inveighed against the 85 year-old exec. This could signal a renewed effort to get Forest back on track, now that its Lexapro losses have slashed revenue and a Namenda expiry looms.

After a few years engaged in battle with Forest Laboratories Inc., activist investor Carl Icahn will get his way with the departure of President and CEO Howard Solomon at year end. Icahn has long complained that the 85-year-old Solomon was a drag on the company. The move likely presages a reinvigorated turn-around effort for Forest; its revenues have declined rapidly in the wake of last year’s patent expiry for antidepressant Lexapro (escitalopram).

Wall Street cheered the news. On May 23, the day of the announcement, investors sent shares up more than 5% to $39.53. Some analysts sent out positive notes, but remained cautious awaiting the selection of a replacement. Forest said it would choose one before year end and that it is continuing a process of evaluating internal and external candidates.

In the year ended March 31, Forest net revenues declined by 32% from the prior year to $3.1 billion due to the loss of patent protection for Lexapro in March 2012. Five launches in recent years have done little to fill the gap thus far (Also see "Many New Products For Forest, But Not Enough To Fill The Lexapro Gap" - Pink Sheet, 23 Apr, 2013.).

Forest has guided to $3.5 billion in revenues for the current fiscal year ending March 31. The company’s current top revenue generator is Alzheimer’s drug Namenda (memantine), which it expects will have $1.6 billion in sales this fiscal year. Namenda loses patent protection in 2015, which Forest hopes to offset with extended release and combination formulations (Also see "Forest Takes Over Namenda Lifecycle-Management Project In Deal With Adamas" - Pink Sheet, 14 Nov, 2012.).

Solomon will retire as President and CEO but he is expected to remain chairman until the 2014 annual general meeting. In order to do so, Solomon must be re-elected by shareholders at this year’s AGM, which Forest typically holds in August. After the 2014 AGM, Solomon will retain the title of chairman emeritus; he will also serve as a senior advisor. Solomon has served as Forest CEO for 36 years.

Proxy Battle Prologue

Icahn held an 11.5% stake in Forest on March 31. He has long alleged nepotism at Forest, arguing that Solomon is grooming his son David Solomon, who is the company’s SVP of corporate development and strategic planning, as his replacement. Wall Street analysts saw Solomon’s retirement announcement as a positive sign that the board will select an external candidate.

In June 2011, Icahn initiated a proxy contest with Forest. That year he was unsuccessful at gaining a board seat; he subsequently gained a single seat on the board in 2012, although he had sought four. The new director was former OSI Pharmaceuticals Ltd. Chief Financial Officer Pierre Legault. He replaced long-time member Dan Goldwasser, who chaired the board’s compensation committee (Also see "Carl Icahn’s Partial Victory In Battle For Forest: One Board Seat" - Pink Sheet, 15 Aug, 2012.).

Icahn’s initial proxy challenge came two months after the U.S. Department of Health and Human Services’ Office of Inspector General had proposed to exclude Solomon personally from participation in federal health care programs. HHS later withdrew the proposed exclusion of Solomon in August 2011.

HHS pursued Solomon after Forest settled federal charges in September 2010 that it had illegally marketed two drugs, hyperthyroidism treatment Levothroid (levothyroxine) and antidepressant Celexa (citalopram), provided kickbacks to physicians, and obstructed an FDA inspection. The company paid more than $313 million to resolve criminal and civil claims (Also see "HHS Office of Inspector General Drops Challenge To Forest CEO Solomon" - Pink Sheet, 5 Aug, 2011.).

Icahn Fades Out, Denner Steps In

Prior to Forest, Icahn pursued Genzyme Corp.’s Henri Termeer as a longstanding executive who was no longer managing effectively (Also see "Icahn Tries To Rain On Genzyme's Investor Day Parade With Proxy Seeking Termeer's Ouster" - Pink Sheet, 6 May, 2010.). In April 2011, Genzyme was acquired by Sanofi for $20.1 billion, plus contingent value rights (Also see "Sanofi Claims Genzyme With $20.1 Billion Upfront And CVRs" - Pink Sheet, 21 Feb, 2011.).

Icahn hasn’t been actively initiating life science positions since the November 2011 departure of his right-hand man in the sector Alex Denner, formerly a senior managing director of Icahn Capital. On March 31, Icahn still held a 13.5% stake in drug delivery company Enzon Pharmaceuticals Inc. Enzon is publicly seeking strategic alternatives, including a sale of the company. Denner remains the chairman of Enzon’s board.

Last year, Denner founded his own activist hedge fund, Sarissa Capital Management LP. On May 23, First Manhattan Co. added Denner to its nine-person proposed board slate for obesity company Vivus Inc. Sarissa’s stake in Vivus is roughly 2%, while First Manhattan holds around 10%. First Manhattan initiated a proxy battle with Vivus in March; the shareholder meeting is July 15 (Also see "Vivus Beefs Up Qsymia Efforts As Eisai Prepares To Launch Belviq" - Pink Sheet, 8 May, 2013.).