A Compulsive Buyer Or A Master Builder?

Veterinary products, industrial chemicals, pharmaceuticals for everything from hypertension to Alzheimer's disease, and now, Johnson Products Co. Will the combination produce the "world class health-care products company" that Ivax Corp.'s chairman promises?

Since 1987, dermatologist Dr. Philip Frost has cobbled together more than 15 acquisitions, boosting sales of his Miami-based Ivax by 250%, to $451 million. The latest addition: Johnson Products, a maker of personal-care products for African Americans, which Ivax said on June 14 it would buy in a stock deal valued at up to $73 million. Shares of Johnson Products surged $5 5/8, to $24 5/8, on the announcement.

It's not clear whether the rapidity and diversity of acquisitions reflects Frost's love of the deal or a more coherent strategy. As recently as June 7, Ivax put up $58 million to acquire an Elf Aquitaine chemical subsidiary. The Johnson acquisition prompted one former short seller to chide: "Phil's a deal-a-week man."

Certainly, though, the dealmaking has brought results: Ivax' net income last year reached $44.6 million, up from a 1988 loss of $3 million. And Frost says the strategy is clear enough: Build the core pharmaceutical business by selling generic pharmaceuticals, making hard-to-copy generics from products coming off patent, and developing proprietary products. Meanwhile, his aim is to turn the four ancillary businesses--medical diagnostics, skin care and cosmetics, chemicals, and veterinary products--into at least $100 million-a-year units.

NATURAL TIE-INS. Originally, Ivax acquired those businesses as cash generators and financial chess pieces that could be sold or spun off if the pharmaceutical company needed capital. "I like to have a lot of options," Frost says of the diversification. Now, he says the core unit is generating enough cash to sustain its growth and investment needs--thanks mostly to the success of the first generic version of the hypertension drug verapamil SR.

That means more capital for acquisitions of companies such as Johnson Products. Since 1990, Johnson has rebounded from years of profit stagnation with cost-cutting and agressive marketing. Sales have grown at a 12.6% compound annual rate since 1989. Pretax earnings before extraordinary items totaled $5.7 million last year, from a $2.5 million loss in 1988. But extending its growth with aggressive marketing takes cash. "It's difficult, to say the least, as a $42 million company to make big investments on a global basis," says Johnson's Chief Financial Officer Thomas P. Polke.

Ivax, for its part, sees natural tie-ins between Johnson and its Flori-Roberts Inc. unit, a maker of cosmetics for black women. Johnson, moreover, has unused manufacturing capacity, and Frost sees Johnson and Flori as additional outlets for products developed by Ivax' research teams. "The acquisition of Johnson Products will allow Ivax to dominate a niche business," says PaineWebber Group Inc. analyst Ronald Nordmann, who applauds the Johnson deal.

Others see more than synergy at work. The Johnson acquisition, says a former short seller, represents Ivax' ability to "buy" earnings by trading its highly valued shares for stock with lower multiples. On June 14, Ivax shares traded at 29 times earnings of the previous 12 months; Johnson's price-earnings ratio after the announced bid was just 12.4. The result, he says, is a conglomerate with an artificially inflated stock price. And with other drugmakers bound to develop their own generic version of verapamil SR, and other proprietary products years away from possible approval, the outlook doesn't support a market capitalization of $1.7 billion.

SHREWD BUSINESSMAN. Frost deflects such criticism in his typical soft-spoken style. He contends that there's plenty in Ivax' drug-development pipeline. He notes, moreover, that many big-name pharmaceutical companies have profitable ancillary business. "None of this is for the purpose of building the stock price," he says. "We're busy building the company."

Frost has done it before. The doctor rescued Miami-based Key Pharmaceuticals from near-bankruptcy and sold it to Schering-Plough Corp. for $836 million in 1986. That deal made him $150 million richer and burnished his reputation as a qhrewd businessman. "He sees value where others don't even look," says health-care-industry consultant John Wilkerson.

Although some investors may be hoping for another Key in Ivax, Frost says the companies are very different. The plans this time, he says, are far grander. Already, the stakes are much bigger.

A HUNGER
      FOR DEALS
      DECEMBER, 1987 Ivax is formed by three companies acquired by Chairman Phillip 
      Frost, a Florida dermatologist
      DECEMBER, 1990 Acquires Harris Pharmaceuticals, a British maker of generic 
      drugs, for $73 million 
      DECEMBER, 1991 Buys Goldline, a generic-drug distributor, for $46.2 million
      JULY, 1992 Pays $20 million for Flori-Roberts, No. 1 company in cosmetics for 
      black women 
      SEPTEMBER, 1992 Pays $21 million for LuChem Pharmaceuticals 
      NOVEMBER, 1992 Acquires Medeva's Kerfoot generic-drug division for $36.8 million
      JUNE, 1993 Announces deal to buy Johnson Products for $73 million in stock
      DATA: COMPANY REPORTS