Activist investor Carl Icahn has proposed a new slate of board members for Forest Laboratories Inc. for the second consecutive year, amid concerns about succession plans given the age of the specialty pharma’s 84-year-old CEO, Howard Solomon.

Forest is fighting back, however, urging shareholders to re-elect the company’s entire 10-member board to new one-year terms and announcing it has hired a recruiting firm to bring in a potential successor to Solomon, who has held the chief executive’s spot for 35 years.

The latest volley between Icahn and Forest picked up steam in late June, as Icahn sued the company under Delaware corporate law alleging it was concealing a secret plan to succeed the CEO with son David Solomon, currently Forest’s senior VP for corporate development and strategic planning since November 2010.

In 2011, Icahn, Forest’s second-largest individual shareholder with an equity stake of just under 10%, proposed a slate of four candidates for the company’s board, citing concerns about Forest’s plans to deal with pending sales losses due to the 2012 patent expiration of top-seller Lexapro (escitalopram) and the 2015 patent expiry of another high-selling product, Namenda (memantine HCl) Also see "Forest Holds Off Icahn, But Battle Likely Looms" - Pink Sheet, 18 August, 2011.. Shareholders voted down all four candidates, while approving three new Forest-backed board members.

On May 30, Icahn announced a similar strategy for this year’s Forest annual meeting, scheduled for Aug. 15. His new slate of four candidates for the board was led by Icahn Enterprises executives Eric Ende and Daniel Ninivaggi, along with former health care executives Andrew Fromkin and Pierre Legault Also see "Deals Of The Week: Stiefel/Welichem, Bayer/Covance, Ensemble/Genentech" - Pink Sheet, 4 June, 2012.. On July 9, Forest fired back, releasing an open letter to Icahn and definitive proxy materials for the annual meeting, both of which denigrated the Icahn slate as lacking pharmaceutical industry experience and posing potential conflicts of interest.

The tensions come amid the onset of Forest’s patent cliff, which began March 14 with loss of exclusivity for the antidepressant Lexapro. Investors have remained concerned about primary care-focused Forest’s ability to mitigate revenue losses due to generic competition. Forest argues that its pipeline and business development efforts compare favorably to similar-sized and even bigger biopharmaceutical companies. During a June 20 investor presentation, the firm talked up both its recent launches and its strategy for additional NDAs in the coming years, centered in therapeutic areas such as respiratory health Also see "Forest’s Respiratory Pipeline: Can It Open The Revenue Airway?" - Pink Sheet, 26 June, 2012..

Having launched blood pressure drug Bystolic (nebivolol) in 2008 and fibromyalgia drug Savella (milnacipran HCl) in 2009, Forest added to its new product portfolio with three launches in 2011: Teflaro (ceftaroline fosamil), a broad-spectrum antibiotic; Daliresp (roflumilast), a respiratory drug; and Viibryd (vilazodone HCl), an antidepressant; all gained from in-licensing agreements.

During its fourth-quarter 2011 earnings call April 17, Forest reported growing sales for Bystolic and Savella, along with solid launches for the three new products introduced in 2011. The firm also projected that each of the three newest products would experience sales growth of nearly 300% or better in 2012. The newcomers, however, are growing off of very small bases and are not likely to make up for much of the Lexapro loss; Forest conceded that sales of the antidepressant would decline sharply in 2012 to $250 million.

Forest Cites Pipeline Success

In its July 9 proxy materials, Forest noted that two NDAs have been filed this year, for chronic obstructive pulmonary disease candidate aclidinium and gastroenterology drug linaclotide. FDA regulatory decisions on the filings are expected in July and September, respectively.

“Forest’s track record of new product development compares favorably to its specialty-pharma peers, as well as many of the industry’s largest companies,” the document states. “For example, Forest has had more new molecular entity approvals and new drug application (NDA)/BLA filings over the last three years than similarly sized companies such as Shire PLC or Warner Chilcott PLC, and has had the same number or more than much larger companies like GlaxoSmithKline Inc., AstraZeneca PLC, Merck & Co. Inc. and Eli Lilly & Co.”

However, the dispute between Icahn and Solomon seems to be taking a more personal tack this year, with each criticizing the business acumen of the other’s son and alluding to the possibility of nepotism. In a June 29 letter to the Forest board, Icahn asserted that minutes from an April 2011 board meeting indicate that David Solomon’s promotion to a senior vice presidency at Forest was done “with a view to developing a succession plan to ultimately filling the COO and CEO positions.”

“Forest Labs is not a dynasty to be despotically handed down from father to son ignoring the great risk of this action to its shareholders,” the letter added in all-capitals type.

In his July 9 letter, Howard Solomon accused Icahn of leveling “wild and baseless accusations, innuendo and distortion of the facts.” He contended that a committee of independent directors would select Forest’s next CEO and was being assisted by executive search firm Spencer Stuart. The committee will consider “both our deep bench of internal candidates and external candidates,” the senior Solomon noted, adding that he would recuse himself from any role in the decision if his son emerged as a candidate.

To the Icahn letter’s charge that Forest has a “cloak and dagger approach regarding its succession planning,” Solomon cited common business practices. “Obviously, Forest is not able to name my successor before the board makes that decision, and like most companies, we are not inclined to disclose a succession plan prior to its implementation,” he wrote.

In the proxy materials document, Forest noted that since last year’s annual meeting, Icahn has had an open invitation to “discuss his ideas or provide feedback” but did not contact the company again until announcing his new attack in May. The company contends that this year’s Icahn-backed slate “is even weaker than last year’s,” as it is led by Ende, who received the fewest votes of the 14 board nominees last year.

“Ende also has a highly unusual compensation arrangement with Mr. Icahn that a corporate governance expert has already drawn into question because it gives him incentives to favor Icahn’s profits over the interests of the rest of our shareholders,” the document says. Ende’s compensation arrangement entitles him to a portion of Icahn’s profits if the sale of his Forest holdings brings a per-share price above a certain threshold.

Ninivaggi also is an Icahn employee “with no pharma experience,” Forest wrote, while other nominees Andrew Fromkin and Pierre Legault “have limited relevant experience.” Further, Fromkin was CEO of Clinical Data Inc. at the time of its 2011 purchase by Forest, bringing Viibryd into the specialty pharma’s portfolio Also see "Forest Buys Clinical Data And Extends Its Antidepressant Portfolio" - Pink Sheet, 22 February, 2011.. Fromkin, therefore, “would not be considered independent under our own corporate governance guidelines” or those of the New York Stock Exchange, Solomon’s letter said.

Analysts See Risk In Primary Care Focus

Analysts are mixed on whether Forest is on the right track in terms of its business strategy. In notes circulated after the mid-June investor presentation, the company received ratings ranging from “buy” (Cantor Fitzgerald) and “outperform” (Credit Suisse Group) to “neutral” (Robert W. Baird & Co. Inc.) and “negative” (Susquehanna Financial Group).

Susquehanna analyst Gary Nachman, in a June 21 note, said Forest focuses greatly on the primary care audience at a time when many big pharma companies are seeking out specialty niches that offer lower investments with greater return. “Forest should be more aggressive using its balance sheet to acquire meaningful on-market assets and try to generate significant synergies from those, rather than take on so much pipeline and execution risk,” he wrote. Forest currently has about $3 billion in cash with no debt.

Cantor’s Irina Rivkind, however, thinks Forest will gain additional traction in the primary care space, leveraging the ongoing efforts of its commercial team, as it brings a broad pipeline forward. “Management is transitioning Forest to an even more powerful commercial entity with deep therapeutic verticals, selling synergies and a bright growth outlook beginning next year,” she wrote June 21.

Baird analyst Thomas Russo told “The Pink Sheet” DAILY that Forest has a contrarian business development strategy of bringing in primary-care centric products that will not sell themselves.

“So, we have a situation where the company this year projects to spend about 25% more on SG&A than it did four years earlier, but deliver about 15% less on the company top-line,” Russo said. “This will get better, but we think these kinds of products actually need that kind of support, and so we have a hard time seeing how the problem really ever goes away in today’s health care environment. The ultimate measure of success isn’t just getting the products approved but generating sales in a somewhat efficient manner. At this point, Forest would not be an easy ship to turn.”

Forest’s Solomon Holding Firm As Icahn Presses Second Consecutive Proxy Fight

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