Carl Icahn Activist Letter to Forest Holders: A State of Crisis

Activist investing can sometimes be a bit like a tennis match to watch. And sometimes it can yield great profits for investors. Carl Icahn is picking up his attack on Forest Laboratories, Inc. (NYSE: FRX). What makes this an interesting case is that Forest is worth $9.1 billion, and it is a drug company that actually pays no dividend.

Carl Icahn is not new on the case of Forest Labs. He is getting much more vocal though. On Tuesday he published a letter that has been sent to shareholders to try to force change on the situation there ahead of the company’s annual meeting of shareholders, which is currently slated to take place on August 15, 2012.

Icahn noted, “Your vote is important as the company is at a critical juncture and our four director nominees have the necessary qualifications, experience and shareholder perspective to help fix the problems at Forest Labs… I believe Forest Labs is in crisis.”

Icahn goes on to note that Howard Solomon was wrong in the past with his overly optimistic predictions. He says the stock price is down 11% in the past 10 years and is down more than 50% from its peak, and he said that the company “was completely unprepared for the Lexapro patent cliff resulting in an estimated 80% decline in earnings for the upcoming fiscal year.”

Icahn goes on to say that Howard Solomon will be wrong again about his currently optimistic view of the company’s pipeline and points out that the company’s new pipeline drugs have missed guidance eight out of 11 times in the past four years. He also called out the Namenda patent cliff that will occur in 2015 as something that could be devastating.

One key issue that Icahn is warning about is that the company will squander its $3.2 billion in cash to make up for its inadequate pipeline and projected revenue shortfalls. Icahn again has brought up that David Solomon, Howard’s son, is not up to the task of his duties.

Icahn is also attacking the board and said, “In my opinion at least 5 of the 10 current board members lack independence.” Icahn is seeking to nominate his own board of directors to force change. At $34.28, Forest has traded in a 52-week range of $28.47 to $38.43, and the consensus analyst price target from Thomson Reuters is $36.32.

JON C. OGG