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business newsIcahn's Board Battle With Forest Labs Comes to a Head
By
Brett Chase
Aug 16, 2011 12:45 pm
Shareholders will vote Thursday on the activist billionaire investor's slate of candidates.
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It’s funny how proactive companies can be when Carl Icahn makes waves. Forest and Icahn face off Thursday at the drug maker’s annual meeting. Icahn nominated four of his own director candidates, saying that Forest isn’t moving aggressively enough to address the damage generic competition will cause when drug patents expire. Forest’s blockbuster antidepressant Lexapro faces generic competition next year.
Shares of Forest rose 3% Tuesday morning to $35.40 on news of the buyback. The stock is up 11% this year.
But what happens to Forest’s stock if the company prevails and defeats Icahn’s board nominees? Buying back stock doesn’t settle the question of future revenue growth. Introduced in 2002, Lexapro generatated $2.3 billion in sales, or more than half of Forest’s revenue in the fiscal year that ended in March.
Forest management’s response to Icahn has been to point to the company’s long-term track record. The company says its stock price has grown almost 800% in the past 20 years. Icahn notes that Forest’s stock price has dropped by half in recent years (the company’s shares traded above $75 each in 2004).
CEO Howard Solomon, who has led the company since 1977, has been backed by some longtime board members but two of them will be stepping down to make way for new candidates put up by the company. (See Forest Labs Answers Icahn With Board Candidates.)
Both sides have trotted out proxy adviser reports but Forest largely trumped Icahn on this front. The leading proxy adviser company Institutional Shareholder Services backed all 10 of Forest’s board candidates. A smaller, competing firm -- Glass Lewis & Co. -- endorsed one Icahn candidate, Richard Mulligan, a Harvard genetics professor. Icahn previously succeeded in getting Mulligan seated on Biogen-Idec’s (BIIB) board. Another firm, Egan Jones, also backs Forest’s slate. The proxy services are influential to institutional investors who don’t have the time to follow board challenges. Some investors automatically follow the proxy adviser recommendations.
Yet Forest isn’t letting down its guard for a minute and is putting up a real fight against the billionaire activist Icahn, who has created change at so many companies. Icahn holds a little more than 9% of Forest’s stock.
In a letter dated Tuesday, which highlighted the $350 million stock buyback, the company acknowledged Icahn’s influence as it met recently with other large investors.
“We have learned a great deal throughout this process and sincerely appreciate the honest and helpful feedback we have received,” the letter says, referring to other investors.
In a letter dated Monday, Forest took a decidedly more negative tone, saying that Icahn’s nominees lacked operational experience and had “shown themselves as not understanding Forest’s business.”
Specifically, the company said Icahn nominee Alexander Denner showed an “apparent lack of understanding of Forest’s business.” Denner runs various Icahn funds. Ichan’s other candidates are Harvard professor and corporate governance expert Lucian Bebchuk and investor Eric Ende.
Finally, Ichan seemed to have Forest on the ropes when he criticized the company’s more than $300 million fraud settlement with the US government last year. In a related inquiry, government officials were considering banning Solomon from the Medicare and Medicaid insurance programs. But Forest announced earlier this month that no such action would take place. (See Forest Laboratories’ Solomon Dodges a Bullet.) The timing seemed fortuitous.
Don’t ever count Icahn out. But if he doesn’t win a single seat and ultimately stops agitating against Forest, it may not be the best thing for shareholders. A study earlier this year found that investors did well when a company challenged by Icahn eventually sold. But companies that stayed independent following an Icahn campaign fared poorly.
Twitter: @brettchase
No positions in stocks mentioned.
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