In June, under the gilded ceiling of the Gotham Hall Grand Ballroom in Midtown Manhattan, Howard Solomon was honored before hundreds of gala-goers for his contribution to the prevention of suicide among young people.
Solomon is the chairman and chief executive officer of Forest Laboratories Inc. (FRX), and the event was a fundraiser for the Jed Foundation, which works with college students to promote mental health. When his son Andrew took the podium, he called Solomon an appropriate honoree, “because his tenure in the pharmaceutical industry has led to drugs that save untold thousands of lives.”
“One of the lives he has saved, over and over again, is mine,” Andrew continued, before summoning his father with a simple, “Dad.”
The 83-year-old -- with large glasses and a balding pate -- resembles a kinder version of Mr. Burns from “The Simpsons,” and is a familiar figure at galas and fundraisers, whether as a trustee at New York-Presbyterian Hospital or a board member of the Metropolitan Opera and the New York City Ballet. His philanthropy and social standing is built on the wealth and reputation he has amassed in more than 30 years as chief of Forest Laboratories, a company whose success has largely been built on one drug, the antidepressant Celexa.
Forest’s aggressive marketing of Celexa and flouting of regulations has also put Solomon on a less comfortable stage, Bloomberg Businessweek reports in its July 18 issue. He’s at the center of a debate over the accountability of the pharmaceutical industry and its leadership, and the limits of government power.
On April 12, Solomon learned that the Office of Inspector General, or OIG, which handles the U.S. Department of Health and Human Services’ efforts to fight waste and fraud in government health programs, is considering “excluding” him. Technically, this means exclusion from doing business with federal health programs like Medicare, Medicaid and the Veterans Affairs Department. Functionally, it means a ban from the entire health- care industry. Personally, it would be a censure, the equivalent of an official shaming. And it seems to presage an increased federal effort to hold executives accountable, making corporate misbehavior personal for leaders who may have seen monetary punishment as a mere line item for shareholders to bear.
While OIG has not publicly announced a decision, the potential move is already disrupting the company. Forest is facing a proxy battle and lawsuit from Carl Icahn, the corporate raider and activist shareholder. Firms he controls have built a stake of about 7 percent in Forest, made four nominations for the nine-member board and are suing in Delaware Court of Chancery for details on why the U.S. may bar Solomon. Forest has said the suit is without merit.
Exclusion is common enough -- the Health and Human Services Department punishes about 3,000 people a year this way, often because of criminal convictions. Solomon stands out because the Justice Department has never charged him with wrongdoing, nor has he admitted to any, not even in Forest’s $313 million settlement last year on charges related to the marketing of antidepressants and the distribution of an unapproved drug, the thyroid medication Levothroid.
If Solomon is excluded, Forest would have to get rid of him, or lose its business with the government. Despite the risks, an April 13 company press release disclosing the notice letter struck a defiant tone, quoting board member William J. Candee III saying, “Mr. Solomon has always set a tone of the highest integrity from the top...We believe the potential HHS- OIG action may well be beyond its legal authority.”
Solomon submitted his response last month, according to Lesley Bogdanow, a company spokeswoman, who declined to comment further on the matter. Now he must wait for a decision from OIG. And the drug industry is left to ask: Why Howard Solomon?
“He’s been in the business for longer than I’ve been alive,” says David Amsellem, a 35-year-old pharmaceutical industry analyst at Piper Jaffray in New York. “If you want to make an example out of someone, a longtime respected industry veteran -- if that kind of person is not immune, what does that say for everyone else?”
Solomon has headed Forest Labs since 1977, and under his watch annual sales have grown to $4.2 billion, in the year ended March 31, 2011, from $5.1 million. In many ways, this story begins in 1994, when his son Andrew first struggled with depression. Andrew would go on to write about the illness in “The Noonday Demon,” which won the National Book Award in 2001. The younger Solomon writes of a father who helped bathe and feed him during the worst of his bouts, and dedicates the book to the man “who gave me life not once, but twice.”
Howard Solomon declined to comment for this article, and rarely grants interviews. He did speak with Businessweek in May 2002. “I didn’t understand what Andrew was suffering, that he was really ill,” he said then. “I told him, ‘Cheer up, hang in there, it will pass.’ Andrew made me understand.”
The experience inspired Solomon to seek better treatments for his son’s illness, eventually leading him to citalopram, an antidepressant already sold in Europe. Forest introduced citalopram, under the brand name Celexa, in the U.S. in September 1998. Celexa, one of a class of antidepressants called selective serotonin reuptake inhibitors, or SSRIs, was a hit, and transformed Forest. Profits grew almost tenfold from 1998 to 2002, with Celexa accounting for 69 percent of sales that year.
Forest even skirted the patent expiration cliff, winning approval in 2002 for Lexapro, a version of Celexa that Forest said was a more potent SSRI than its parent. Lexapro made up 55 percent of Forest’s sales last fiscal year.
Solomon’s reward has been huge. He made $8.86 million last fiscal year, and more than $8 million in fiscal 2010 -- in addition to exercising share options worth $21.8 million that year, according to company filings.
Forest’s troubles began in 2001, when Joseph Piacentile, a non-practicing physician in New Jersey, filed an action alleging Forest was providing kickbacks to doctors who prescribed Celexa. In 2003, Christopher Gobble, a salesman who had been fired in 2002 by Forest Pharmaceuticals, a subsidiary, filed a whistleblower suit in federal court in Boston alleging the company was illegally pushing doctors to prescribe its antidepressants to children. He claimed he had been given a list of pediatric specialists to target, and as in the earlier case, that doctors were given kickbacks.
The Justice Department intervened in the cases and filed its own claims in February 2009, adding Forest to a growing list of drug companies under fire for off-label marketing.
That year, Pfizer agreed to pay $2.3 billion for having illegally promoted a painkiller and three other drugs, and Eli Lilly & Co. (LLY) reached a $1.4 billion settlement in a case related to the marketing of its antipsychotic drug Zyprexa.
In September 2010, more than seven years after Gobble filed his suit, Forest Pharmaceuticals agreed to plead guilty to three criminal charges and settled civil claims filed by the Justice Department. Forest admitted that it obstructed the U.S. Food and Drug Administration by concealing information, distributing an unapproved thyroid drug and illegally promoting Celexa for use by children and adolescents.
While Forest applied to the FDA for pediatric use of Celexa and was eventually denied, it marketed the drug to doctors by hiring speakers to tout its benefits for young patients, the company admitted. It also admitted it suppressed negative results of research in Europe that found Celexa no more effective in treating depressed children and adolescents than a sugar pill; 14 patients in the study taking Celexa attempted suicide or contemplated suicide, compared with five in the placebo group. The settlement added up to a little more than one fifth of total sales of Celexa in 2003, the year Gobble sued.
Forest’s promotion of Celexa in the pediatric market coincided with growing concern over a link between the use of SSRIs and suicidal thoughts in young people. The FDA in 2005 required drugmakers to add the strictest, so-called black-box warning on SSRIs, explaining the increased risk for children and adolescents. In 2007, the FDA extended the label warning to people 18 to 24 years old.
The September 2010 settlement would have been a natural end to the story: Drug company admits wrongdoing, pays fine, goes back to business. Then, on Oct. 20, the inspector general’s office released a notice titled “Guidance for Implementing Permissive Exclusion Authority,” a coincidence of timing that has taken on significance in hindsight.
The OIG regularly excludes doctors and other health-care professionals convicted of misdemeanors or felonies committed against Medicare, Medicaid or other federal health programs, among other mandatory exclusions under the Social Security Act.
The October notice gives greater detail about the government’s ability to exclude company officers or managers in the absence of evidence that the person knew or should have known of misconduct.
The move to use exclusion more freely may reflect a sense among regulators that despite success in winning billions of dollars in settlements from drugmakers over off-label marketing, companies may consider such losses merely a cost of doing business. In the wake of the Pfizer and Lilly settlements, to take two examples, neither CEO lost his job.
In March, Lewis Morris, chief counsel to the inspector general, testified to Congress that “we are concerned that the providers that engage in health-care fraud may consider civil penalties and criminal fines a cost of doing business.” The government is forced to allow major pharmaceutical makers that have been convicted of crimes, and have paid millions in fines, to continue to participate in health-care programs, he said, because of the “potential patient harm that could result from an exclusion” of an entire company.
One solution, Morris told lawmakers, “is to attempt to alter the cost-benefit calculus of the corporate executives who run these companies,” and “influence corporate behavior without putting patient access to care at risk.”
The OIG declined to comment for this article, and as a matter of policy does not comment on pending legal matters, according to spokesman Donald White.
The concept that a chief executive should take responsibility when bad things happen at a company, no matter what their roles in the misconduct, has precedent. Under the Sarbanes-Oxley Act, the Securities and Exchange Commission can claw back compensation from executives of companies that restate their financials, even if those executives haven’t been accused of personal wrongdoing, according to Edmund T. Baxa Jr., an Orlando-based partner at the law firm Foley & Lardner.
“Some of these companies are making so much money from these sales that there’s no amount of punishment that we can heap on the corporation, because it’s not personal,” says Patrick Burns, a spokesman for Taxpayers Against Fraud, a nonprofit advocacy group that supports the use of the False Claims Act, under which Gobble filed his suit. Burns’ argument echoes public outrage that banks and their CEOs have faced few legal repercussions for the financial crisis their risk-taking helped create.
“If you make Forest pay $313 million, then who pays that?” asks Burns. “The answer is the stockholders. But the people who design these frauds, who ignored these frauds after repeated warnings, as is the case here -- they get increased end-of-year bonuses, better stock options, and they get to parachute out.”
Industry defenders note that pressure on drug companies has been increasing. The government’s case against Forest grew out of Gobble’s whistleblower suit, which is a so-called qui tam action under the False Claims Act. Qui tam actions allow private citizens to sue on behalf of the U.S. government and share in any settlement money.
Gobble received about $10 million as part of the Forest case. The U.S. government has won more than $11 billion between 2000 and 2010 in qui tam health-care cases it joined, and they have led to some of the Justice Department’s biggest settlements with drugmakers, including the Pfizer and Lilly agreements.
According to Brien T. O’Connor, a lawyer at Ropes & Gray in Boston who has defended pharmaceutical makers in qui tam cases, such payouts stack the odds in favor of the government, creating a perception of an epidemic of fraud that may not exist.
Long before Forest’s settlement, Solomon used his annual letter to shareholders to rail against mischaracterizations of the industry, and the overreach of lawyers. Even as he celebrated the extraordinary success of Celexa in 1999, Solomon complained that pharmaceutical makers were “prey to marauding strike suit attorneys who involve us in totally baseless and highly expensive litigation.”
He wrote then that such abuse of the legal system leads to higher health-care costs, and that Forest’s policy was to resist settling these cases. And in a letter to shareholders last year, Solomon wrote that “pharmaceutical companies seem especially vulnerable to extravagant claims based at best on grossly exaggerated and often on totally fabricated events.”
As for the possible exclusion, Solomon discussed it in a letter addressed to all Forest employees in response to Icahn’s attacks. High River, an Icahn fund, sued Forest on June 28, seeking more details on the potential exclusion, calling the company’s disclosures about the affair “opaque, inaccurate and seemingly designed to reveal the least possible information.”
In the letter to employees, disclosed in a company filing, Solomon said: “Mr. Icahn is also critical of the company’s decision to support my challenge to the potential exclusion action. I have not been accused of any wrongdoing by the government, and the HHS-OIG’s notice of its intention to consider excluding me is an unprecedented action, based solely on my role as a director and officer of the Company, and not on any individual conduct. I remain committed to challenging this potential action through the legal process.”
Shareholders aren’t showing signs of concern so far. The company’s shares, Solomon pointed out in the letter to employees, have outperformed the Standard & Poor’s 500 Index over the past year, three years and five years. And since the company disclosed the potential exclusion, the stock has gained 15 percent.
To contact the editor responsible for this story: Gary Putka at email@example.com