He's back! When Mylan Labs stumbled in a dubious takeover bid, resurgent raider CARL ICAHN charged in, hoping to kill the deal, oust management, and make a few bucks for himself.

(FORTUNE Magazine) – ON A SUMMER MORNING LAST YEAR, billionaire financier Carl Icahn was wandering through his New York City apartment, getting ready for another day at the office. While he was shaving, a news report on CNBC suddenly caught his attention. Mylan Laboratories was planning to acquire King Pharmaceuticals for $4 billion. Icahn, who had never paid much attention to Mylan, watched with increasing interest that day as the company's shares sank 16%. "The stock was going way down, and I wondered, 'What did this management just do?'" recalls Icahn. Sensing the kind of misstep that creates opportunities for outsiders, he made a few calls. By the end of the day he had purchased his first million shares in Mylan through his High River investment company. By October he became Mylan's largest shareholder, with a 9.8% stake worth about $460 million. His goal? Kill the merger.

A few months later, Icahn, 69, got his wish. In late February, backed into a corner with a plan that was beyond repair, Mylan CEO Robert Coury, 44, called off the deal. But Icahn wasn't done. Less than 24 hours later he nominated a slate of 11 directors (including himself) to go up against Mylan's existing board at the annual meeting this fall. Icahn knows better than anyone that proxy battles are expensive and difficult to win. What are his chances of prevailing this time? One of Mylan's larger shareholders sums it up this way: "I think we're to the point where all Icahn had to do was put up warm bodies for directors and they'd be voted in."

Mylan-King has become one of the weirder takeover battles of recent times, a slapstick saga featuring poison pills, dueling slates of directors, restated earnings, an SEC investigation, a controversial CEO, and a corporate raider with a full head of steam. You might almost think you were back in the roaring '80s, but this is very much a tale of today: a sign, perhaps, that despite all the corporate governance reforms that followed the stock market crash of 2000, some things never change.

MYLAN IS ONE OF THE country's oldest generic drug companies. It was founded in West Virginia in 1961 by Milan Puskar and Donald Panoz to distribute medicines to rural doctors. By the late 1960s, Mylan was manufacturing vitamins along with generic penicillin and tetracycline. One of its biggest claims to fame is its unblemished safety record. In its 44 years it has never had a product recall or received a warning letter from the Food and Drug Administration. And while investors have been amply rewarded for sticking with Mylan over the years, the past 12 months have been very rough, with its stock plunging 26%. Many put the blame for Mylan's turn of fortunes squarely on Coury.

Coury has had Mylan investors scratching their heads ever since he was named CEO in August 2002. He had virtually no experience in the drug industry. He held an engineering degree but had sold insurance and estate-planning services throughout the 1980s and 1990s. Eventually, he taught himself business consulting and started helping out friends and acquaintances. In 1995, after working on a personal business deal for Mylan chairman Milan Puskar, Coury was brought in to consult on the company's employee benefits plan. By 2002 he was on the board; seven months later he got the keys to the corner office.

Investors who were surprised by Coury's sudden rise to power told FORTUNE they soon became incensed over the way he was running the firm. First, a company owned by Coury's brothers showed up on the Mylan payroll, earning $100,000 last year for providing "investment advisory services." "It's unbelievable," says an analyst at a mutual fund company that holds Mylan shares but didn't want to be named. "I was still trying to figure out why he was named CEO, and he's putting his brothers on the payroll. This isn't a family business." Coury says the business relationship was in place before he was named CEO.

Other investors were dismayed by Coury's pay package: $9.25 million in salary, bonus, and restricted stock last year. Not only is he the highest-paid CEO in generics, but he banks more than the CEOs of Bristol-Myers Squibb and Johnson & Johnson. "Have you seen what Coury gets paid?" asks Liu-Er Chen, a senior portfolio manager at Evergreen Investments who sold his Mylan shares last fall. "These guys pay themselves really, really well."

And then there's Coury's quirky personality. Within a few minutes of meeting him, you realize you're not talking to a typical CEO. "There's fire and there's smoke," he says, on a February morning in New York. Coury wiggles his fingers on the table to illustrate fire. "Fire is substantive. Smoke moves around, distorts things. I have to work in the fire." Then, puffing air out of his cheeks and waving his hands, he adds, "but Carl, he moves with the smoke."

In interviews for this story, several Wall Street analysts and large investors said they were put off by his in-your-face, high- intensity speaking style, describing him as "a TV evangelist" and "slick." Coury's friends claim people are simply seeing his passion. "If your image of a CEO is someone who is a very schooled communicator who picks his or her words very carefully, Robert's not that," says Carl Ferenbach, managing director of Boston private-equity firm Berkshire Partners. "Robert speaks from the gut." A fiery Puskar, 70, bristles at what he perceives as unfair attacks on his protégé. "Robert has great ethics," says Puskar, his voice rising. "He knows what's right is right and what's wrong is wrong. I honest-to-God never understood why Wall Street doesn't like him."

Of course, Wall Street would have been happy to overlook any CEO quirks had the company not run into trouble. For the fiscal year ended March 2004, Mylan earned $1.10 a share, a 14% increase over the prior year. In the following quarters, though, Mylan's gross margins dropped to 50% from 55% and the company began missing Wall Street's earnings estimates by a mile. Analysts now expect Mylan to earn 72 cents a share in fiscal 2005, a 34% drop from last year. Coury blames Mylan's earnings shortfall on factors that have affected the whole industry: fierce competition, unexpected negative FDA and court rulings, and new tactics by Big Pharma.

For the past two decades generic outfits like Mylan have flourished thanks to rules created by 1984's Hatch-Waxman Act. Under that law, a company that successfully challenged the patent on a prescription drug is rewarded with the exclusive right to market a knockoff drug for 180 days. With that kind of a head start, the company could grab market share.

In late 2003, finding it harder to extend their patents, big drugmakers began aggressively licensing generic versions of their drugs as a way to keep some of the profits. Mylan had won the exclusive rights to market a generic version of Macrobid, a treatment for urinary-tract infections. But when it announced the launch of its drug, rival Watson Pharmaceuticals said it would be selling a similar product, licensed from Macrobid's creator, Procter & Gamble. With two companies peddling the same pill at the same time, prices fell sharply, and Mylan says it lost millions of dollars during a period when it should have been the exclusive dealer. Coury argues that authorized generics severely diminish the incentive to challenge patents. "It forces us to think awfully hard about whether we want to go through the time and expense in challenging these patents if we're not going to get a payout," says Coury.

With Mylan's core business threatened, Coury decided it was time to steer the company in a new direction--a decision that has led to the current mess. Mylan would launch its own proprietary, patent-protected drugs. It already had one lined up: Nebivolol, a beta-blocker that is being successfully marketed in Europe for hypertension. Mylan bought the license for the drug in 2001 and holds the right to market it in the U.S. until 2020.

If done right, Nebivolol could be a $1-billion-a-year product. But Coury had a problem. Mylan lacked a sales force to visit doctors' offices and hawk Nebivolol. Soon he came up with an answer: Mylan would acquire King, a company with 1,200 salespeople and experience in marketing its own cardiovascular medicine. On the surface it seemed like a perfect fit. The deal turned out to be a bad move.

"MYLAN SHOULD PUNCH ITS BANKER in the nose," says David Maris, a Banc of America Securities analyst. "I don't know what component wasn't bad about this deal." Maris and other analysts said King's sales force wasn't strong enough to launch Nebivolol while continuing to plug away at its own top-selling drug Altace, an ACE inhibitor that makes up $537 million, or 35% of King's revenues. And some analysts worried that Altace's patent, scheduled to expire in 2008, would be successfully challenged. There were also objections to the 61% premium Mylan offered for King's shares despite the fact that King was under investigation by the SEC.

The widespread doubts about the deal sent Mylan's shares plummeting, and gave Icahn his opening. "This whole deal was the quintessential example of what's wrong with so many American corporations," he charges, speaking in his sleek Midtown office in the GM Building. "They were paying too much for a company that had numerous problems." As soon as Mylan's board learned Icahn was moving into the stock, it tightened up its takeover defenses, lowering the poison pill threshold to 10% of the stock from 15%. "When I found out he had bought our stock after we announced the deal, I realized he had other intentions," says Coury. Undeterred, Icahn continued to snap up shares. By October, Icahn had invested nearly $460 million. Still, Coury pounded the table for the deal, saying it was in the best interest of shareholders. Further, he charged that Icahn was only looking to mint short-term profits.

But the merger was in trouble. First, a large institutional shareholder, UBS Global Asset Management, wrote to Mylan's board saying it, too, was opposed, citing concerns about King's ability to sell Nebivolol. A bigger blow came in October, when King announced it might have to restate financial results (the issue was reserves for product returns).

With the deal wobbling, Icahn decided to turn up the heat. In mid-November, he offered to buy the rest of Mylan for $20 a share, or $4.9 billion. While he insists it was a serious offer, he also admits it was a maneuver to smoke out other potential bidders. Mylan's board rejected the offer. In mid-January, Mylan announced that, because of King's restatements, the merger was unlikely to be completed. A month later the deal was officially killed.

But the battle isn't over. Icahn, who bought his 26 million shares at an average price of $17.49 (Mylan recently traded at $17.65), says his offer to buy the company is still open. But he believes Mylan's best bet would be to merge with or be acquired by another company. "Mylan would be extremely valuable to a large pharma company that wants to be in the generic business and pick up a brand drug with huge potential," says Icahn. And there are firms trolling the industry for deals. In February, Swiss pharma giant Novartis bid $8.4 billion for generic-drug makers Hexal of Germany and the U.S.-based Eon Labs. Analysts say Israel's Teva Pharmaceutical Industries would be a logical buyer.

That's not the outcome Coury hopes for. He'll have to do some fast talking in the next few months to introduce his latest vision for Mylan and to persuade investors he's the guy who should be steering this company. But his ill-conceived bid for King has put Mylan in play--and as we learned in the roaring '80s, Carl Icahn doesn't go away quietly. ■

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