Icahn gets Legault onto Forest's board

Activist investor Carl Icahn has succeeded in securing board representation at Forest Laboratories. One of his four candidates, Pierre Legault, former CFO at OSI Pharmaceuticals, beat longstanding board member and chair of Forest's compensation committee Dan Goldwasser to secure one of 10 director positions, giving Mr Icahn increased leverage in his bid to push through change at the company.

Mr Icahn argues that the company's share price has languished unnecessarily in recent years because of what he sees as the company's failure to plan effectively for patent expiries, notably those of the antidepressant Lexapro (escitalopram) this year and the Alzheimer's disease treatment Namenda (memantine) in 2015. He also wants to see operating efficiencies and changes in corporate governance, and has accused the board of being excessively influenced by chairman, president and CEO Howard Solomon, who has run the company since 1977, when Mr Goldwasser also joined the board. Furthermore, he has accused Mr Solomon of grooming his son David Solomon to lead the company, and questioned the latter's fitness for such a role. Mr Solomon Junior is currently in charge of corporate development and strategic planning at Forest.

In touting his candidates prior to the shareholder vote, Mr Icahn said Mr Legault had "a strong operational background in employee supervision and human resources, an area that appears to be lacking at Forest". He also said that Mr Legault's experience in modernising sales forces (notably during his time at Aventis) and cost control (at OSI, where he oversaw the consolidation of the US operations, focused on operating income reduction) would be valuable to Forest.

Dinner for two - or four?

Following the news of Mr Legault's election at Forest's annual shareholder meeting on 15 August, Mr Icahn declared that Mr Solomon had made a "nice gesture" in calling him to offer his congratulations, and said that the two of them were planning to have dinner together, perhaps with their sons (Mr Icahn's son Brett helps manage his investments). "Peace is probably more effective than war and I do think things may go more smoothly than people think," Mr Icahn said in an interview with CNBC, adding: "I've always liked Howard."

Mr Icahn, who through various funds holds a stake of nearly 10% in Forest, believes the company could make one day make a "great acquisition candidate", but he is concerned that the firm has secretively build poison pills into licensing deals to fend off takeover attempts, and is suing the company to reveal details of such agreements to shareholders (scripintelligence.com, 14 August 2012).

For now, he wants to push the company to improve its corporate governance and cost controls to maximise its value to shareholders in any potential sale. He thinks that Forest's pipeline – with the forthcoming anticipated US approval of the irritable bowel syndrome drug linaclotide in particular – gives the company "great potential". Forest's share price currently stands at $33.88 (with a market capitalisation of about $9 billion), less than half of its peak price of $76.98 in March 2004.

Mr Icahn emerged as an activist at Forest in June 2011, when filings showed he and his funds had accumulated a stake of around 6.5% in the firm. In August last year, he tried and failed to win board representation for the first time. With Forest's share price having remained above or barely below $30 since September 2010, rising to around $40 in June 2011, either the company will need to show a marked turnaround in its fortunes to drag its stock upwards, or find a buyer willing to offer a significant premium, for Mr Icahn to realise a decent return on his likely investment.

With only one seat on the board, it remains to be seen how much Mr Icahn will be able to reform the company. Perhaps his breakthrough in gaining access to the boardroom, and the ousting of the director overseeing compensation, will be enough to whet investors' appetites and prompt a re-evaluation of the company's prospects.

Mr Icahn complained in a statement that the proxy system is weighted in favour of incumbent management and said that at Forest shareholders of around 25% of total stock voted in favour of management "no matter how bad the company is performing and how bad its corporate governance is". On the election of Mr Legault, he said: "I hope and believe that the shareholder message sent will be the first step to bringing good corporate governance to this great company - something that has been lacking for decades."

Mr Icahn's other candidates were Daniel Ninivaggi (CEO of Icahn Enterprises and with Mr Legault supported by proxy advisory firm Institutional Shareholder Services), Dr Eric Ende and Andrew Fromkin Previously Mr Icahn has often fielded Drs Richard Mulligan and Alexander Denner in his assaults on biopharma boardrooms, but these two left to form their own hedge fund last year.

Forest issued a statement welcoming Mr Legault to the board. "We look forward to working with him in a constructive manner to build shareholder value for all Forest shareholders over the longer term," the company said.

Forest said the preliminary results of the vote count indicated that shareholders had voted in favour of other proposals submitted by the firm, including an advisory vote on executive compensation. It will be interesting to see by what margin this was supported: at several big pharma companies slim majority support for executive compensation programmes has prompted policy changes, despite the fact that the vote is in any case not binding.