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AMERICAN HOME PRODUCTS $7 A SHARE ACQUISITION OF VLI CORP.

Executive Summary

AMERICAN HOME PRODUCTS $7 A SHARE ACQUISITION OF VLI CORP., announced Aug. 31, is nearly five times the Today Contraceptive Sponge manufacturer's 1986 sales. VLI reported revenues of approximately $17 mil. at year end, with about 12 mil. shares outstanding. The company has yet to show a profit; in 1986, VLI reported a net loss of $4.9 mil. American Home Products is banking that its marketing and distribution resources can stimulate further growth of the Today brand. Also, the acquisition will give the firm, in the near future, its first entry into the rapidly growing U.S. condom market. Earlier this year, VLI Chairman Robert Elliott estimated the sponge's share of the U.S. OTC female contraceptive market at roughly 30%. American Home has some experience in this market: through its Whitehall division, the company sells Semicid, a vaginal contraceptive insert that uses the same active ingredient, nonoxynol-9. The Today sponge may also have synergies with Wyeth's line of oral contraceptives. The newly formed Wyeth-Ayerst division may choose to detail Today sponge to the physician market as an alternative to the diaphragm for patients starting or coming off oral contraceptives. In addition to the Today Sponge, which accounts for nearly all of the company's revenues, VLI also markets the Today Personal Lubricant, a $475,000 product in 1986. Also, last year VLI entered into an agreement with the British firm Unipath, a subsidiary of Unilever, to market its Clearblue home pregnancy test kit in the U.S. Most recently, VLI has been finalizing an agreement to market a line of condoms under the Today brand, the company said. Unanimously approved by the VLI board, the merger is subject to the reinstatement of a recently expired patent on the contraceptive sponge, approval by VLI shareholders, a waiting period under the Hart-Scott-Rodino Act, and the absence of a material adverse change in the business of VLI. "If all conditions are satisfied, the transaction is anticipated to occur prior to the end of 1987," the companies stated in a joint press release. The conditions also include an option for American Home to purchase up 3 mil. shares of newly issued VLI stock for $7 per share. In November 1986, VLI confirmed that it was engaged in preliminary discussions with another company, rumored to be American Home Products, that was interested in acquiring VLI. A week later, VLI announced that the talks had stalled, due to the concerns over potential product liability costs related to the Today sponge. The negotiations followed the departure of Chairman and founder Bruce Vorhauer, PhD, the previous summer ("The Pink Sheet" Aug. 18, In Brief). Vorhauer had relinquished his CEO responsibilities to Elliott in May 1985.

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