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How Lobbyists Got Forest Labs' CEO Off the Hook With the Feds

By Jim Edwards

Updated on: August 8, 2011 / 4:38 PM EDT / MoneyWatch

The Office of the Inspector General's unusual decision to change its mind and not exclude Forest Labs (FRX) CEO Howard Solomon from doing business with federal healthcare plans is a huge vindication for Forest, and a defeat for investor Carl Icahn, who has criticized Solomon's continued tenure at the top of the company.

Icahn -- who wants to install four of his own directors on the nine-member board of the company -- drew a consolation prize from the cache of documents released by the company following the OIG's decision to not seek a ban on Solomon (and thus Forest) from receiving payments from Medicare and Medicaid: The OIG initially considered excluding seven other executives from Solomon's management.

The OIG sought the exclusion of Solomon after the company paid a $313 million settlement to the Department of Justice in 2010 for the illegal marketing of several products, including Levothroid for thyroid conditions.

Exclusion of executives from doing business with the government is an unusual move by itself. For the OIG to then do a U-turn is almost unheard of. The documents, disclosed by Forest to the SEC following OIG's reversal, indicate that the reversal came after the company lobbied the head of the OIG personally and after the OIG failed to include in its exclusion charge the one count that related to Solomon's "intent" regarding Levothroid.

That turned out to be crucial, because the company admitted to the OIG that Solomon knew his company had ignored FDA guidance and had let stand a decision taken by other executives to continue manufacturing Levothroid without the FDA's approval. The FDA ultimately forced the company to stop. Here's how Solomon executed his Great Escape, according to those documents.

Let the lobbying begin
On March 14, the OIG informed Forest in a telephone call that it was considering excluding Solomon from doing business with the federal government. Such a move would be devastating to Forest, but the company did not disclose the move to investors until April 13.

Forest's law firm, Debevoise & Plimpton, then began lobbying the OIG to reverse its decision. On March 29, its lawyers prepared a 43-page PowerPoint presentation for the OIG. On March 30, the firm wrote a letter addressed to Inspector General Daniel Levinson (pictured), the head of the OIG, begging him not to exclude Solomon and seven other executives. And on June 13, the firm made a 51-page submission to the OIG on Solomon's behalf.

On April 5, Forest held a board meeting to discuss the OIG, at which the board was informed that D&P had already met with the OIG. Later, on April 8, the OIG formally warned Solomon it might exclude him.

The slideshow and the June submission contain a number of statements about what Solomon knew about Forest's illegal manufacture of Levothroid in 2003.

On page 20 of the submission, D&P argued that the decision to continue making and selling Levothroid in 2003 despite FDA guidance years earlier that it considered the substance an unapproved drug was "based on what appears to be a misunderstanding" by Forest's former president/COO and head of regulatory affairs. The two underlings regarded the FDA's action as non-binding guidance, not an order, D&P argued.

The accompanying PowerPoint, in the form of shorthand bullet points, indicates that Solomon was made aware that the FDA had asked the company to phase down manufacturing of the drug, but that he agreed to not follow the FDA's instructions:

Mr. Solomon not involved in decision not to phase down
When became aware, was told guidance non-binding according to Head of Regulatory
No red flags alerted Mr. Solomon that continued distribution in excess of guidance violated the law.

The felony Solomon knew nothing about
Those statements don't address the timing of what Solomon knew and when he knew it. The FDA ultimately warned Solomon personally on Aug. 7, 2003, to stop making the drug (the company ceased manufacturing 48 hours later). That warning followed four other formal and informal warnings to other Forest officials, at meetings and in letters, in 2001 and 2002.

Solomon must have known about those warnings if, as the D&P slideshow says, he "became aware" and was told the FDA "guidance" was "non-binding" before he ultimately responded to the Aug 7 letter. Drug companies almost always follow FDA advice to the letter because to not do so invites regulatory action and lawsuits. Whether it was reasonable of Solomon to agree that FDA guidance is non-binding turned out to be crucial in the failure of OIG's case. A footnote on page 18 of the June submission notes that the OIG had failed to allege in its exclusion letter that Solomon knew his Levothroid factory was churning out unapproved drugs:

Forest also pled guilty to one felony charge of obstruction of an agency proceeding in connection with the conduct that took place at Forest's Cincinnati facility concerning Levothroid. It is our understanding that the OIG does not consider the obstruction charge - the only of the three charges that is intent-based - to be a basis for excluding Mr. Solomon.

In any event, the government did not suggest that Mr. Solomon had any involvement in, or knowledge of, the conduct underlying this charge. Rather the government's offer of proof related solely to employees and plant management personnel based in the Cincinnati facility.

In other words, due to a technicality, the case is dropped.

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Image by Flickr user Andrew Feinberg, CC.