5 Reasons Forest Labs' CEO Should Let Carl Icahn Have His Way

Last Updated Jun 14, 2011 9:19 AM EDT

Forest Labs (FRX) sounded a combative note, as usual, in its statement today that activist investor Carl Icahn wants four of his own people on the embattled company's nine-person board. Don't be fooled. This not a war CEO Howard Solomon is likely to win. Here are five reasons he should step aside and let Icahn have his way:
  1. Solomon is 83 years old. He may still be mentally vigorous but he's already older than the average age at which Americans die. He could go any day. There needs to be an orderly succession plan, not a sudden announcement and then a scramble for alternatives. Look what happened to Cephalon -- three months after CEO Frank Baldino Jr. died the company he founded blinked out of existence.
  2. He's the chairman, CEO and president. In any large company, those are three important jobs that can easily be done by three different people. "Imperial" CEOs who also chair their own boards are bad enough -- boards should be holding CEOs to account, not doing what they say. So having Solomon step back from his own board is a natural first step. Handing the CEO title to a successor is the next. Solomon can stay on as president in the short-term, smoothing the transition, consulting and acting as an ambassador for the company.
  3. He might be excluded from doing business from the federal government. The feds don't care about Solomon's long history with the company, or the fact that he rescued it from a crook, modernized it and brought into the 21st Century. They care about the fact that Solomon claims he had "no knowledge" of Forest's illegal sales of the thyroid drug Levothroid when in fact the FDA sent a letter addressed to him insisting he stop such sales in 2003. It will be very difficult for Solomon to tell a federal court that he didn't know what was going on at his own company when the paper trail leads right to his office. If the feds get their way he will be forced out anyway. Better to leave voluntarily.
  4. Solomon is still trying to market new antidepressants in a field crowded with generics. His last major strategic move, the acquisition of Clinical Data, was titillating because its recently approved antidepressant Viibryd apparently features fewer sexual side effects than others. But what kind of business model is this? There are dozens of antidepressants on the market, many of them cheap, reliable generics. Forest needs new drugs, not me-too drugs.
  5. The stock has tanked in the last seven years. Forest said today, "Over the last 12 months, our share price has increased 47.5% versus 16.9% for the S&P 500." Now look at the longer view: FRX stood at a high of $76.98 in 2004. Currently it trades at $38 and change. Icahn owns 6.5 percent of the stock. You figure out how happy he is with Solomon's stewardship.
It's not that Forest is badly run. Its sales are up in FY2011 and its net income is too. It gets about $3 in revenues for every $1 it spends on sales and admin each quarter -- which is about the industry average. It's that Solomon himself is the problem. He's an unnecessary distraction when he need not be.

Icahn undoubtedly wants to slim down the company and then sell it to the highest bidder. Emotionally, Solomon may not be ready for that -- he's been at Forest since 1977. Financially, it makes a lot of sense.