Activist shareholder Carl Icahn did a bit better his second time around in a proxy fight with Forest Laboratories Inc., as one of his slate of four nominees to the company’s 10-member board of directors was elected on Aug. 15. Notably, the new director, former OSI Pharmaceuticals Ltd. Chief Financial Officer Pierre Legault won a spot on the board at the expense of long-time member Dan Goldwasser, who chaired the board’s compensation committee.

Compensation practices at Forest had been among the issues of dispute between the New York-based, primary care-focused pharma and Icahn Enterprises, which is the second-largest individual shareholder in Forest with a holding of nearly 10% Also see "Forest’s Solomon Holding Firm As Icahn Presses Second Consecutive Proxy Fight" - Pink Sheet, 10 July, 2012.. In 2011, Icahn also had waged a proxy fight, but all four of his nominees were defeated.

Forest’s share price barely moved on the news, finishing trading Aug. 15 down 0.29% to $33.86 apiece. This ran counter to a prediction by Leerink Swann & Co. analyst Seamus Fernandez, who, in an Aug. 14 note previewing the shareholders’ meeting, said if Icahn succeeded in seating just one or two directors, “we believe Forest shares would respond very positively as we believe it is Icahn’s intention to encourage a sale of the company.”

In a release, Icahn said he was “very pleased” with the outcome, even though “the deck is stacked heavily in favor of incumbent management in proxy contests.” Forest enjoys apparently uncritical support from more than one-quarter of its shareholders “no matter how bad[ly] the company is performing and how bad its corporate governance is,” Icahn asserted.

In its own release, Forest attempted to spin the day’s vote as a victory for the status quo at a company facing a patent cliff as well as questions about the succession plan for 84-year-old, long-time CEO Howard Solomon. Presiding Independent Director Kenneth Goodman, derided by Icahn as a Solomon crony, said he was “gratified by the strong support from our shareholders.” Goodman was president and chief operating officer of Forest from 1998 to 2006.

“The election of only one of Mr. Icahn’s four nominees reflects our shareholders’ continued confidence in Forest’s strategy, corporate governance practices, and the strength of our pipeline and portfolio of products,” Goodman stated.

Cronyism, Nepotism Alleged By Icahn

Preceding the Aug. 15 shareholder vote was a duel of press releases and business media reports in which Icahn criticized Solomon’s management of the patent cliff around top-seller Lexapro (escitalopram), which lost exclusivity in May, and Namenda (memantine HCl), which goes off-patent in 2015; alleged an internal plot to promote Solomon’s son to the chief executive’s seat; and cited cronyism on the board, specifically mentioning Goldwasser and Goodman.

Forest responded by questioning the pharmaceutical industry acumen of Icahn’s nominees as well as the motivations they would bring to the company’s board. Howard Solomon also defended the promotion of his son, David, to a vice presidency at Forest while noting that Icahn had appointed his own son to several corporate boards.

In a July 17 open letter to the Forest board, Icahn charged that “under your watch, Forest has underperformed [its] self-chosen peer companies by 21% since last year’s meeting.” He questioned the “independent” status of Goodman, calling him Howard Solomon’s “right hand man” for 20 years, as well as Goldwasser’s direction of the compensation committee given his 35 years on the board.

In an Aug. 13 letter to shareholders, Forest urged the re-election of all 10 directors, saying the company “has been strategic, methodical and relentless in developing a next generation of products that will build sustainable value for shareholders.” The letter noted that three new independent directors had been elected in 2011 and those members had moved into key roles, chairing the audit committee and the nominating and governance committee, as well as taking seats on the compensation committee.

During its second quarter earnings call July 17, Forest again made the argument that it is outperforming similar-sized companies such as Shire PLC and Warner Chilcott PLC, saying it was the only mid-cap pharma ever to produce four blockbuster products. Recent launches such as respiratory drug Daliresp (roflumilast), anti-depressant Viibryd (vilazodone) and beta blocker Bystolic (nebivolol), as well as two launches anticipated before the end of 2012, had positioned Forest admirably to overcome its patent cliff, the company contended Also see "Forest’s Recent Launches Boosting Diversity, But Gaining Traction Slowly" - Pink Sheet, 17 July, 2012..

Wall Street analysts are mixed on the potential of Forest’s reworked portfolio and late-stage pipeline. Robert W. Baird & Co. Inc. analyst Thomas Russo rates the company’s stock “neutral” but isn’t entirely downbeat about its future prospects “The track record in development and regulatory is exemplary [and] the company is executing well,” he wrote in a July 19 note. “However, profitable sales is the ultimate measure of success, and, on the current course, a return to mid-20s or better operating margins projects for [later this decade] at best.”

But Cantor Fitzgerald analyst Irina Rivkind, in an Aug. 15 note, said Forest’s launches are tracking at the pace predicted by company management. Using July retail monthly prescription data from Source Healthcare Analytics, she reported that total prescriptions for Viibryd were up by 4,328 compared to June, while for Daliresp there was an uptick of 1,718 scripts.

“We still believe that Viibryd is poised to outperform management’s full-year guidance of $175 million, while Daliresp is trending in line with its $85 million guidance,” Rivkind wrote. “Separately, Bystolic [total prescriptions] grew an impressive 20.7% year-over-year, and the drug is now on track to beat management guidance of $449 million for FY2013.”

September Decision On Linaclotide Awaited

Forest received good news on July 23 as FDA approved chronic obstructive pulmonary disease (COPD) drug Tudorza Pressair (aclidinium bromide), while requiring a post-marketing cardiovascular safety study ([A#14120723009]). The company awaits a September FDA action date for gastroenterology drug linaclotide, with the hope of launching both products before year’s end.

One of Icahn’s criticisms of Forest management centered on a recent untitled letter FDA sent the company saying it had marketed Daliresp inappropriately, by both exaggerating the suitable patient population and downplaying safety risks included in the label Also see "Daliresp Sales Pitch Draws FDA Letter After Forest Fails To Heed Advisory Comments" - Pink Sheet, 8 August, 2012.. Both the letter and Icahn pointed out that these findings were troubling since Forest is operating under a corporate integrity agreement due to previous marketing violations.

Carl Icahn’s Partial Victory In Battle For Forest: One Board Seat

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