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BAKER/CUMMINS DERMATOLOGICALS ARE FROSTING ON THE CAKE FOR FOUNDERS OF KEY PHARMACEUTICALS IN SCHERING MERGER; FROST & JAHARIS TO SERVE AS CONSULTANTS

Executive Summary

Key Pharmaceuticals Chairman Phillip Frost, MD, could end up acquiring the company's Baker/Cummins OTC dermatological product line when Key merges with Schering-Plough, according to a recent joint proxy statement/prospectus issued by the two firms and filed with the Securities & Exchange Commission. "Key and Schering-Plough understand that Dr. Frost has expressed an interest in possibly acquiring Key's dermatological business following the merger," the companies said. "Although there were some general discussions with respect to this matter during the early stages of the merger negotiations, at no time was an agreement, arrangement or understanding reached between the parties." Key noted in its annual report for 1985 that Baker-Cummins division sales increased almost 20% during the year to $5.6 mil. The possible spin-off of Baker-Cummins would have no effect on the proposed pooling of interests merger of Key with Schering-Plough. At the completion of the merger, both Frost and President an CEO Michael Jaharis will be required to relinquish their executive positions, leaving Key's principal management responsibility to Exec VP Daniel Bell. Baker/Cummins products include the P&S line of dandruff and psoriasis treatments, Complex 15 moisturizing cream, Ultra Mide 25 urea for extra dry skin and the X-Seb line of dandruff shampoos. The proxy statement prospectus notes that the two Key executives have entered into a stock option and consulting agreement whereby each will vote his shares in favor of the merger proposal and then provide consulting services to Schering for five years at an annual compensation rate of $500,000. Frost and Jaharis, who own 6.4 mil. (17.9%) and 5.2 mil. (14.7%) shares of Key stock, respectively, have each granted Schering an option to acquire their stock for either $17 a share or .265625 of a share of Schering-Plough stock. Other Key stockholders will see their shares converted into .265625 of a share of Schering stock at the time of merger ("The Pink Sheet," March 10, &. 11). Schering stock closed at 77-1/4 on June 13, making the total value of the deal $734.6 mil. Under the option agreement, the filing explains, neither Frost nor Jaharis for two years may "be employed by or participate in any business that manufactures, markets or sells any pharmaceutical products whose principal active ingredients are the same as those used in Key's major products or that are designed specifically to compete directly with Key's existing dermatological products." In addition to Frost and Jaharis, a group of eight other Key directors collectively owning 1.1 mil. shares, or 3.2% of the company, have agreed to vote their shares in favor of the merger proposal at the June 26 shareholders meeting. With Key's officers and directors owning a combined 36% of the 35.8 mil. outstanding shares, all that is needed for the merger is an affirmative vote by 5.1 mil. shares, or just over 14%. The proxy statement/prospectus notes that in order to satisfy antitrust issues raised by the U.S. government, Key and Schering entered into an agreement to sell the metered dose inhaler product AeroBid to Forest Labs for $6 mil. ("The Pink Sheet," June 9, "In Brief"). The product had sales approaching $1 mil. during the first four months of 1986. Recently, the companies reported that pending the completion of the AeroBid sale, the Justice Dept. "does not intend to raise any objection to the proposed merger."
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