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Forest CEO Solomon Faces Possible US Ban

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Following a fraud settlement with Forest Laboratories, the US is considering banning chief executive from Medicare and Medicaid.

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Forest Laboratories (FRX) is in a pickle.

Chairman and CEO Howard Solomon was told this week that US officials are considering banning him from participating in Medicare and Medicaid -- effectively excluding his company from these programs -- following a settlement last year in a fraud investigation.

In September, Forest agreed to pay $313 million to settle charges filed under the US False Claims Act. The company also plead guilty to obstruction of justice (a felony) and two misdemeanor charges for distributing an unapproved drug (Levothroid) and promoting the antidepressant Celexa to children.

At the time Forest officials said they were relieved the matter was behind them. Last night, the company took a defiant posture criticizing the government for proposing such an action against Solomon. He has 30 days to respond to the government, telling officials why he shouldn't be banned from US health plans. Solomon said he plans to fight.

The rhetoric may be intended to calm investors but if the feds say he's out -- he's out.

Solomon, CEO since 1977, will be forced to step aside if the government follows through with its threat. What's at stake is government reimbursement for the company's drugs.

"If Mr. Solomon is unsuccessful in reversing the challenge, then we believe he would be forced to step down as CEO rather than risk federal reimbursement of Forest products," Leerink Swann analyst Seamus Fernandez says.

Shares of the company fell less than 1% to $33.73 in morning trading. They're up more than 5% this year.

At age 83, Solomon has shown no interest in stepping down. Some management shuffling took place in November after Chief Operating Officer Lawrence Olanoff announced he would retire at the end of 2010.

The company did note that it has executives who can run the company in the event that Solomon has to step aside, even temporarily. Forest's board sent a signal of strong support for its longtime CEO.

"It would be completely unwarranted to exclude a senior executive against who there has never been any allegation of wrongdoing whatsoever," director William J. Candee III said in a statement. He heads the board's audit committee. "At no time during the government's six-year investigation of Forest was Mr. Solomon ever accused of any wrongdoing in connection with the matters settled in 2010."

Showing a hint of Forest's legal strategy, the company's top lawyer said the government "is contemplating using a statutes that has never before been used under these circumstances and would be exceeding the bounds of its authority."

"Numerous other major pharmaceuticals companies have plead guilty to much more egregious offenses, and none of them has faced the exclusion of a senior executive who has not himself been convicted of a crime or pleaded guilty to a crime," Forest General Counsel Herschel S. Weinstein said in a statement.

He has a point. In 2009, Pfizer (PFE) plead guilty to a criminal violation and agreed to a $2.3 billion settlement in the biggest US health care fraud case ever over marketing the inflammation drug Bextra. While the government showed little tolerance for drug company shenanigans, Pfizer CEO Jeffrey Kindler wasn't banned from doing business with the US. Likewise, Eli Lilly (LLY) CEO John Lechleiter is still doing plenty of business with the government two years after a $1.4 billion US settlement over illegal marketing of the anti-psychotic drug Zyprexa.

Whether there's precedent or not, there's always a first case. Given the emphasis on rising health care costs and US spending, the government may be sending a signal to the entire industry.


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