UPDATE 4-Icahn targets drugmaker Forest Labs' board

Mon Jun 13, 2011 2:30pm EDT

* Four members nominated for nine-member board

* Icahn entities own 6.5 pct of Forest shares

* Forest shares rise 2 percent (Adds details on nominees, further analyst comment)

By Lewis Krauskopf

NEW YORK, June 13 (Reuters) - Billionaire investor Carl Icahn has taken a large stake in Forest Laboratories Inc FRX.N and plans to nominate four directors to its board as the U.S. drugmaker deals with steep revenue declines for its biggest products.

Forest disclosed Icahn's 6.5 percent stake and nominations to its nine-member board on Monday, and its shares rose 2 percent. Icahn representatives were not available for a comment on his plans.

But some analysts say Forest Chief Executive Howard Solomon has failed to outline a convincing strategy to shore up its business ahead of impending patent expirations for its antidepressant Lexapro and Alzheimer's medicine Namenda.

"We have been a little disappointed with management's lack of aggressiveness with transformational M&A considering that they have these big (patent) cliffs that are coming up soon," Susquehanna Financial Group analyst Gary Nachman said.

"The management team has not been using their balance sheet as effectively as they could have," Nachman said.

Analysts speculated that Icahn could push for more aggressive cost cuts or dealmaking, or seek share buybacks, while a sale of the drugmaker was seen as less likely.

Icahn has been instrumental in several shake-ups in the healthcare industry of late, obtaining seats on the board at biotech Biogen Idec (BIIB.O) and weighing in on the $20 billion sale of Genzyme Corp to France's Sanofi (SASY.PA).

With a market value of $11 billion, Forest is a mid-size drugmaker but faces problems similar to bigger pharmaceutical companies. Lexapro, which represents more than half of the company's revenue, is due to lose patent protection early next year. The same fate is expected to befall Namenda in 2015.

The timing of Icahn's move also coincides with government pressure on Solomon following a $313 million company settlement last year for improper marketing and distribution of its drugs.

The U.S. Department of Health and Human Services has threatened to exclude Solomon from federal healthcare programs, which would prevent Forest from doing business with the government as long as he remains CEO. Solomon, who has served as CEO since 1977, is challenging the potential action.

"We're seeing Howard more vulnerable than he has been in the past," Nachman said.

ENOUGH TO FILL PATENT HOLE?

Icahn's affiliated entity, High River Limited Partnership, will nominate Alexander Denner, Richard Mulligan, Lucian Bebchuk and Eric Ende to Forest's board at its 2011 meeting.

Denner, who has served as managing director of Icahn-affiliated entities since 2006, sits on the boards of Biogen, Amylin Pharmaceuticals AMLN.O and Enzon Pharmaceuticals (ENZN.O). He also sat on the board of ImClone Systems, the Icahn-controlled biotech company that was sold to Eli Lilly and Co (LLY.N).

Mulligan, a genetics professor at Harvard Medical School, also sits on the boards of Biogen and Enzon. Ende, a former biotechnology analyst at Merrill Lynch & Co, sat on Genzyme's board as an Icahn representative.

Bebchuk, professor of law, economics and finance at Harvard Law School, was part of Icahn's dissident board slate at Yahoo(YHOO.O) when the investor sought a sale of the Internet company to Microsoft Corp (MSFT.O).

Forest's annual meeting has yet to be scheduled, but is often held in August.

"While we have not yet had a chance to meet with Mr. Icahn to discuss his ideas for the company, we welcome constructive input from all of our shareholders," Solomon said in a statement.

Analysts said they were not surprised that Forest would be a target of investor activism despite the recent strong performance of the stock, which has risen 60 percent in the past year but is still well below 2007 levels.

Forest has been trying to acquire companies and license product rights to make up for the impending patent losses.

It acquired Clinical Data Inc earlier this year for $1.2 billion to get access to the newly approved Viibryd antidepressant. It recently won approval for respiratory drug Daliresp and antibiotic Teflaro and has other drugs in late-stage development for conditions such as irritable bowel syndrome and chronic obstructive pulmonary disease.

Nachman described Forest as having "some singles and doubles but not enough to really fill the holes from Lexapro and Namenda."

Piper Jaffray analyst David Amsellem said its new products will be expensive to launch and come with commercial risk.

"To me, it's not yet clear that what Forest is doing is going to work," Amsellem said.

While Icahn pushed Biogen to put itself up for sale and was successful with Genzyme, Forest may not be as enticing a takeover target.

Motivated buyers could be European or Japanese drugmakers looking for access to Forest's U.S. sales and marketing infrastructure, Nachman said. But Forest's focus is on primary care markets, Nachman said, and "that's been an area where we've seen Big Pharma actually paring down their resources."

Should Forest be acquired, many of its drugs also may revert back to its partners, presenting another obstacle, JP Morgan analyst Chris Schott said in a research note.

Forest shares rose 77 cents to $38.72 on the New York Stock Exchange after hitting a year-high earlier in the session. (Reporting by Lewis Krauskopf; Editing by Derek Caney and Maureen Bavdek, Gunna Dickson and Bernard Orr)

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