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Preliminary Proxy Statement
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Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))
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Definitive Proxy Statement
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Definitive Additional Materials
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Soliciting Material Pursuant to § 240.14a-12
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No fee required.
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Fee computed on table below per Exchange Act Rule 14a-6(i)(4) and 0-11.
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• Operating Performance – Judged on total return to shareholders, the company has underperformed peers over the 3, 5, and 10 year periods leading up to this contest. That relative underperformance has grown particularly strong, moreover, in the last three years as the company approached the patent cliffs for the three blockbuster drugs on which its business model was founded. While new products have steadily progressed through the pipeline over the last several years, and the company is now in the process of launching a more diversified portfolio of products it hopes will eventually recover the ground it is now losing to these patent cliffs, there remain significant risks to the diversified business model it has adopted, as recent studies by equity analysts have pointed out. This is borne out in analyst consensus projections—which, tellingly, are significantly lower than the company’s own long-range guidance. Emphasis Added
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• Preparation for the Lexapro/Nameda Patent Cliffs – As the company reaches the last of the patent cliffs on its blockbusters—Namenda, which generated $1.4 billion in sales in FY12, is expected lose patent protection in April 2015 (FY16) - analyst consensus estimates do not project Forest recovering to its FY12 sales level until FY19. Emphasis Added
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A seven-year trough is a long time for investors to wait for an earnings recovery, especially when considering the substantial visibility into, and lead time to prepare for, patent cliffs. Consequently, [Icahn’s] argument that the board took its eye off the ball by under-investing in R&D when it mattered most appears well founded. The company did not launch any new products between 2004 and 2008: products launched in that period would be sufficiently far up their launch curves by this point, presumably, to help the company buffer the revenue loss from the patent cliffs. This lack of attention to the long-term view, accordingly, would seem to be the root cause of the significant revenue and earnings trough shareholders are now facing. Emphasis Added
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• Composition of the Board – Forest’s board, which includes three current and former executives, is uncommon for non-controlled U.S. corporations. By comparison, none of its self-selected U.S. peers (LLY, MRK, PFE, and WCRX) have a former executive on the board. Though one former executive may in fact be independent under exchange standards, the practice of appointing directors who owe much of their careers to the CEO they will now “oversee” clearly raises practical concerns about de facto independence and the potential conflicts for those directors. Emphasis Added
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• Succession Planning – Succession planning has become an issue for shareholders not just because the current CEO is 84, but because the board has allowed his son David, currently head of Strategic Development, to report directly to his father, presumably, as one equity analyst has noted, because he is “being groomed to take over as CEO.” Forest has disclosed few details about its succession planning, though it has appointed its three newest independent directors to a succession planning committee headed by the presiding director—who also used to report to the same CEO. Emphasis Added
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Given the unusual situation of the long-serving CEO’s son reporting directly to his father, there an explicit risk that that any succession planning process run behind closed doors might turn out to be simply another dynasty building process. Shareholders might well ask whether additional disclosure—of process, selection criteria, and other standards and commitments to ensure an outcome aligned with shareholder’s interests—is warranted, particularly as the company has not denied that David Solomon is a candidate for the position. Emphasis Added
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What the Forest CEO’s letter blithely ignores, in a manner which should be as eye-opening to Forest shareholders as it was irresistible to business writers, is the enormous difference in the consequences of nepotism. The downside risk of dynastic succession at a family-owned hedge fund is borne entirely by the family. The downside risk of dynastic succession at a $9 billion publicly-traded company, however, is borne entirely by the public shareholders invested in that company, whose interests the board of directors are supposed to represent. Emphasis Added
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• Corporate Governance Initiatives – Certain of these changes—the majority vote standard and performance metrics on equity awards—stand out as particularly meaningful for shareholders.
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Others, however, serve more to highlight how poor some governance practices and standards were before recent events began to shine a bright light on things. A no-repricing policy, for example, has long been a standard feature of equity programs. Creating a presiding director, similarly, may ring hollow to shareholders when the role is immediately filled with a former executive who recently reported to the current CEO. That the board did not take further action, after the 2011 proxy contest, to appoint new presiding director without any such complications or entanglements does little to help the case. Emphasis Added
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• Conclusion on Need for Change – These operating issues may be exacerbated by lingering concerns, which [Icahn] has foregrounded, about the board’s de factor independence from, and willingness to challenge, its long-time Chairman and CEO. These concerns persist despite the election last year of three new, demonstrably unaffiliated directors, and their subsequent appointment to leadership positions within the board, perhaps the company has not addressed directly numerous issues—such as the CEO’s son reporting directly to the CEO, or former executives being appointed to oversee the CEO to whom they reported for decades. Emphasis Added
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Individually each of these instances may be explained away. Collectively, in the context of a long-term decline in shareholder value, an impending half-decade of diminished returns resulting from the failure to plan around known patent cliffs, and the adoption of a riskier, less-focused and thus less cost-efficient business model, they strongly suggest the a compelling case for change at the board level. Emphasis Added
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• Recommendation of Daniel Ninivaggi – Lack of scientific experience in the boardroom, clearly, is not the root cause of the current business challenges…The challenges at Forest—failure to plan effectively around known patent cliffs, inefficient cost structure, perhaps loss of focus—are core business issues more than they are sector-specific challenges. What Ninivaggi does bring to the table is considerable experience as an operating executive in a similarly-challenged industry, broad boardroom experience across a number of business models and challenges, and the perspective of a large shareholder—his employer—anxious to see things improve. Emphasis Added
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• Recommendation of Pierre Legault – Given the increased margin pressure Forest will experience over the coming years—and the relatively tight margin for error with which its business practices, particularly around cost control, appear to have left it—former OSI Pharma CFO Pierre Legault would also appear to bring a much-needed skillset and business discipline to the board. At OSI, Legault oversaw the consolidation of its U.S. operations, which was expected to result in annualized savings of over $15 million—or roughly 10% of operating income. At Aventis, Legualt led an e-business unit where his primary focus was dedicated to sales force modernization, skills from which the board could also benefit. Emphasis Added
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