BOSTON In his proxy fight against Forest Laboratories Inc FRX.N, Carl Icahn is fond of touting his past successes in the healthcare sector.
He points to Amylin Pharmaceuticals Inc AMLN.O, Biogen Idec Inc (BIIB.O), Genzyme Corp and ImClone Systems, whose shares soared after his nominees joined their boards. And he suggests his four proposed directors for the Forest board will be able to replicate those successes.
Industry experts say that such a result is far from certain. They say Icahn's performance in the sector has been driven by two individuals - Alexander Denner, a former senior managing director at Icahn Enterprises, and Richard Mulligan, a world-renown genetics professor at Harvard University - who are no longer with him and are not on the Forest slate.
Denner left Icahn last year to form a hedge fund of his own, and Mulligan is joining him. Neither would discuss the situation at Forest, whose annual meeting will be held on August 15.
For the past six years, Denner and Mulligan have helped Icahn identify new investments and restructure companies in which he took a significant stake. A rough calculation based on publicly available data suggests that Icahn's healthcare investments generated a return of about $2 billion during that time.
Such results are highly unusual. Large activist hedge funds tend to avoid the drugs sector, which typically requires a sophisticated understanding of science. Those who have worked with Denner and Mulligan say they bring a unique set of skills to the process that will not be easy to duplicate.
"Their contacts, their understanding of the science and the nuances of what's happening in the world of biotech have been terrific," said Robert Pangia, a long-time director of Biogen.
Icahn says his nominees - Daniel Ninivaggi, president of Icahn Enterprises; Eric Ende, a former analyst at Merrill Lynch; Andrew Fromkin, the former chief executive of Clinical Data; and Pierre Legault, a former executive at several big drugmakers as well as a small biotech, can achieve the same kind of results.
"The most important thing on these boards is to have someone who is willing to take the difficult steps to hold management accountable," Icahn said in an interview.
None of his representatives have Mulligan's scientific credentials, but Icahn says an activist director can be effective without specific industry expertise as long as that person has financial acumen. He says Ninivaggi is a "perfect example."
"Dan was one of the people responsible for the success of Motorola Mobility, despite the fact that he has no technology expertise," he said.
Under pressure from Icahn, Motorola spun off its cellphone business last year into Motorola Mobility Holdings Inc (MMI.N). Shortly afterwards, Google Inc GOOG. agreed to acquire Motorola Mobility for $12.5 billion.
IMPETUS FOR CHANGE
Forest's investors can be forgiven for wanting change. Judged on total return to shareholders, the company has underperformed peers over the three, five, and 10- year periods leading up to this contest, according to proxy advisory Institutional Shareholder Services.
Icahn argues that 84-year-old Chief Executive Howard Solomon has been over-compensated and accuses the company of promoting Solomon's son beyond his ability with the possible intention of installing him nepotistically in the top job.
Forest counters that it added three new independent directors last year and that it has hired an outside firm to help with a succession plan.
Adding to the confusion, two of the most influential proxy advisors are giving conflicting advice.
ISS recommends two Icahn nominees. The firm said Ninivaggi's experience on boards facing a variety of challenges could help address what it describes as Forest's failure to plan effectively for the loss of patent protection for its antidepressant Lexapro and Alzheimer's drug Namenda.
And it said Legault might be able to help the company modernize its sales force, a task he undertook at drugmaker Aventis, which was acquired by Sanofi in 2004.
Glass Lewis & Co, however, recommends rejecting all of Icahn's nominees.
"While we believe that the dissidents have correctly identified certain areas of concern, we do not believe that these issues, in the aggregate, are so egregious as to warrant the support of the dissident nominees," the firm said.
ELEMENTS OF SUCCESS
There is no way to predict whether Icahn's team would be successful if elected. But the elements that have made Denner and Mulligan successful indicates that from a healthcare activist point of view, they would have big boots to fill.
"I didn't know Alex well prior to his coming on the board," said Stephen Sherwin, a director of Biogen, "but he has an unusual mix of business and scientific acumen and experience."
Those who have worked with the two say that their success has as much to do with intangible aspects of personality and persuasiveness as with their scientific and business skills.
"It takes a special kind of talent to effect change in the face of a hostile board," said Jason Aryeh, general partner at JALAA Equities LP, an activist hedge fund focused on small to mid-cap biotechnology companies. "Carl has a big stick and can clearly put his foot down on someone's throat, but that doesn't always work. You have to know how to titrate the pressure and Alex has a feel for titrating it."
When the pair arrived at ImClone in 2006, for example, its founder had been sentenced to seven years in prison in an insider trading scandal. The company had chewed through multiple chief executives, and morale was low.
"There was a real void of scientific leadership," said Andrea Rabney, the company's former head of communications.
Denner and Mulligan, those who worked alongside them said, reinvigorated the scientists, recalibrated the commercial strategy and turned it into an attractive acquisition candidate.
"The people sitting in the office doing the work were Richard and Alex," said David Sidransky, who was on the board when they joined. "Alex was there every day, all day, into the wee hours of the morning. They picked up the company and they really created an incredible amount of value."
In 2008 they sold ImClone to Eli Lilly & Co (LLY.N) for $6.5 billion. The experience set them up for future success at Biogen and Genzyme, acquired by Sanofi (SASY.PA) last year for $20 billion.
CHANGES AT FOREST
Forest is a different kind of animal than ImClone in that it relies less on its own drug discovery for growth and more on products licensed from others. Its expansion was fueled by its blockbuster antidepressant Lexapro, which lost patent protection earlier this year. The company believes it will make up for those lost sales with as many as nine new products.
Last year alone it launched new drugs to treat infection, depression and respiratory disorders. It won approval for another respiratory drug this year and expects a green light for drugs to treat chronic constipation, depression and schizophrenia in the coming year.
Icahn maintains the company's sales force cannot efficiently market products in so many therapeutic areas and recommends divesting products that are not "core" to the business.
Forest counters that while Icahn's plans would undoubtedly cut costs, the decrease in revenue from divested assets would likely offset any cost reductions. Some of its shareholders agree.
R.J. Kirk, one of biotech's savviest dealmakers and a Forest shareholder, says Icahn's presence at the company is the only thing that he worries about. No drugmaker is smarter in the use of its sales force, he says.
"They became the biggest company in anti-depressants by launching a big sales force that they couldn't afford and did all sorts of creative financing around it," he said.
Kirk conducted what was arguably the first proxy battle in biotechnology with a successful campaign against Scios in 1999. He was formerly the chairman and majority owner of Clinical Data, which Forest acquired last year for $1.2 billion.
Icahn nominee Fromkin served as Clinical Data's CEO and Kirk says he grew into a good manager. But Kirk said he doesn't believe Forest needs more good managers.
"If I went on that board I would let their existing plans play out," he said. "I agree that the intrinsic value of the company is greater than the market value, but when you have such young products it's all about putting your head down and going to work. Carl Icahn just doesn't have a coherent alternative thesis."
(Editing by Michele Gershberg, Bernard Orr)