Billionaire Phillip Frost an ‘entrepreneur’s entrepreneur’
For that blind first date, a half-century ago, the young doctor, Phillip Frost, showed up at Patricia Orr’s family house in suburban New York, with an unusual gift: a miniature mushroom garden.
In the 50 years since, Frost, the son of a shoe store owner, has gone on to amass a fortune of $2.4 billion, according to Forbes magazine, becoming the 188th wealthiest man in the United States by developing and selling pharmaceutical companies. Along the way, he and Patricia have become major philanthropists in Miami-Dade County and they’ve signed a pledge to give away at least $1 billion more.
“He’s a relentless guy,” says Miami banker Bill Allen, who’s know him for more than 40 years. “He’s not afraid to take risks. … He knows the intimate details of the chemistry of products, and he’s the kind of guy who can examine 50 deals while eating a sandwich.”
CNBC’s Jim Cramer recently praised Frost’s “incredible track record” for developing companies, calling Frost’s latest endeavor, OPKO Health, a “very risky” investment while noting it could offer huge gains under Obamacare.
But back in 1962, Patricia’s first impression was that Phil Frost was a bit of a nerd, finishing his medical internship with a strong interest in research — including mushrooms. She figured an academic career loomed.
“My mother was very impressed,” recalls Patricia, not so much by the M.D. behind Frost’s name but by the gift, something more serious than the usual flowers or candy. Serious was fine with Patricia, who was living at home while working toward a master’s degree in education at Columbia University. For their first date, they listened to a classical music concert.
Frost’s rise to riches may seem highly distinctive, but in an odd coincidence he has much in common with another prominent Miamian. Frost, 76, and car dealer Norman Braman, 80, both frequently appear on the Forbes list of wealthiest Americans. Both grew up in Philadelphia — Frost the son of a man who sold shoes, Braman son of a barber. Both are Jewish, well-known art collectors and philanthropists.
“He’s an entrepreneur’s entrepreneur,” says Braman. “We have a lot in common, coming from very poor families. But he went to Central High (a public school for exceptional students) and I was not qualified to go there.”
There are other differences. While Braman is voluble and highly visible in the causes he supports, Frost tends to be a reticent, almost shy speaker, given to careful pauses.
Told that a former colleague had called Frost “lucky,” Frost thought for a long moment. He could have cited many national business stories about his business acumen. Instead, he responded crisply: “I’ll be satisfied with lucky. I benefited from chance meetings.”
Frost spent his first years living above the shoe shop within an Italian market in South Philly. His two brothers were 15 and 16 years older. “I was an afterthought.”
The family was religiously observant, and Frost recalls his father singing him songs in Yiddish when he was small. He lived at home while attending the University of Pennsylvania, except for a year abroad in France. He took many science courses, but his major was French literature.
During his last year at Penn, a wart on his elbow led him to a faculty dermatologist, Albert Kligman, who inspired him to think of dermatology as a career. Still, medical school was a daunting expense until, “by a quirk of fate,” he ran into an old high school buddy who told him about a full scholarship for Albert Einstein College of Medicine in New York City that was available for Central High grads. Frost applied and won it, specializing in dermatology and doing research for two years at the National Institutes of Health in Maryland.
In 1965, through “a fortunate set of circumstances,” contacts led him to a job on the faculty at the University of Miami. By this time, he and Patricia had been married for two years. She took a job with the Florida Desegregation Center, helping integrate the public schools in Overtown. She envisioned both settling into an academic life. “I always imagined he’d be a professor.”
But Frost was bubbling with business ideas. “I had a minor invention … it was a disposable instrument for taking biopsies from the skin. It’s still used all over the world, but it was of very little commercial importance. However, it was good enough to sell for a little money.”
Enjoying this taste of business, Frost found UM “constricting” for his entrepreneurial ambitions. In 1970, at age 34, he went to the Mount Sinai Medical Center on Miami Beach as head of the new department of dermatology.
His partner and fellow dermatologist, Nardo Zaias, says Frost was a dedicated doctor but was always looking for ways to make money: “His hobby is business.”
Frost used his money from the biopsy tool to buy a small dental company that used ultrasound to clean teeth — a product he learned about when he bumped into the owner at a party.
Then he met Mike Jaharis, a lawyer who was a New York executive with Abbott, a large drug maker, who was looking for new products. Frost was pitching the teeth cleaner and the biopsy tool. After several meetings, Frost urged Jaharis to join him in building a healthcare company.
“He’s a bright guy [and] a very good sweet-talker,” Jaharis says. “I was sick and tired of the bureaucracy of big companies.”
Their first deal was to take over a struggling drug maker, Key Pharmaceuticals. “I was at the airport on my way to New York, and I ran into a friend of mine from Philadelphia, from Central High School, who was the vice president of marketing for Key,” recalls Frost — another one of those “lucky” meetings.
Key was nearly bankrupt and looking for a rescue. In 1972, Frost-Jaharis took it over by exchanging stock in the small dental company. “There was no cash involved.” Frost, planning to continue as a dermatologist, decided he should be chairman of the board. Jaharis, who had the administrative experience, became chief executive, handling day-to-day operations’.
Jaharis says that they quickly realized that Key was in “a very rocky situation.” First, they needed money. They met Allen, the banker, for lunch at the Jockey Club to ask for an immediate $250,000 to meet payroll. “We’re on the hook and we won’t let you down,” Allen recalls the pair telling him. Allen, then working for First National of Miami, provided the loan.
But they still needed to solve the problem of Key’s main product. It treated asthma by combining a bronchodilator and a cough suppressant, which turned out to be “an illogical combination because with asthma you don’t want to suppress a cough — you want the patients to cough up the sputum,” says Frost.
They feared that problem might cause the Food and Drug Administration to take the drug off the market in the United States. “At that time, a drug that was not approved in the United States couldn’t be sold abroad because they didn’t want companies dropping bad drugs on third-world markets,” Frost said.
That would interfere with Key’s sales to Japan, “which was our life’s blood.” Frost said Jaharis — “who had a pretty good nose for opportunity” — learned that the bronchodilator component, theophylline, was the important ingredient for asthma suffers. A small trial in Florida showed theophylline did very well, but only within a narrow “therapeutic window” — too much was toxic, too little had no benefit.
Key decided that the drug worked best as a time-release capsule, which they marketed under the name Theo-Dur. Sales soared and made Key a hugely successful company. “At a certain point, it became the leading drug for asthma in the country,” Frost says.
It’s this tale of Theo-Dur — a drug inherited during the takeover of a nearly bankrupt company — that prompts Zaias, the fellow dermatologist, to say that Frost is “unbelievably clever and very lucky.”
Jaharis said it wasn’t luck at all. “We were working our fannies off to make that company successful.”
All during the Key years, Frost remained a dermatologist, overseeing department operations at Mount Sinai and caring for patients during one or two half-days a week. “I loved taking care of patients, and dermatology was a very important part of my life.” He specialized in “niche areas,” such as treating ichthyosis, severely dry skin, something he had researched since his NIH days. “I had a lot of patients from around the world.”
At least three nights a week, Frost and Jaharis met for dinner at a restaurant to discuss business. Frost usually brought his wife along. She had become principal of West Lab, an innovative public elementary school run in conjunction with the University of Miami, which was to be her job for a quarter-century.
Key kept growing. It formed a partnership with a large Japanese company and gobbled up other pharmaceutical businesses. One deal Frost recalls fondly was with the industry giant, Pfizer, which paid Key to market Theo-Dur under another name. “They put a thousand-man sales force to work on it and took out four-page ads, and we never did anything like that. We came up with a strategy that emphasized the pharmo-kenetics” that doctors would understand. Pfizer “came up with a very ordinary hum-drum marketing approach that did nothing.”
Pfizer’s sales of the drug peaked at about $2 million annually — a fraction of Key’s sales. That was proof to Frost that they could do well against even the biggest competitors.
Frost acknowledges his medical background was a major advantage in assessing pharmaceutical acquisitions, but he was investing in other areas as well, such as banking. He often connected his stakes to people he trusted, such as veteran banker Michael Weintraub. One example: In 1985, he made a quick $5.6 million when Pan American Banks, where Weintraub was vice chairman, was sold to NCNB.
By the mid-1980s Frost, still a practicing dermatologist, was being listed by Forbes magazine as one of the wealthiest 400 in the country.
In 1986, Schering-Plough, a New Jersey pharmaceutical giant, bought Key for about $800 million. Frost, the largest shareholder, received about $100 million from the deal, Jaharis about $90 million.
The next year, Frost merged three small companies into an already existing publicly traded company, a New Jersey chemical firm named IVACO Industries. He redubbed the company IVAX and began developing new drug lines. Ambitious plans to develop new brand name drugs, however, did not work out and Frost saw opportunities in the new world of generics.
“For me, the fun is to build, not to manage,” says Frost. He sums up his business philosophy as searching for “what’s available, what is possible to do. That’s the overriding consideration. There are a lot of things I would have liked to do, but didn’t have the means.”
Frost seized opportunities overseas. “We became a major player all over Latin America and Central and Eastern Europe. It would be 10 to 15 years before any of the [other] large U.S. generic companies would take any interest in expanding outside the United States.”
Frost finally stopped working as a dermatologist in 1990 as IVAX continued to grow and prosper until the mid-1990s, when it was hammered by stiff competition from generic competitors. It lost $160 million in 1996, $233 million in 1997. The stock, riding high at about $50 in the early 1990s, fell to $12.
Frost sought to right the ship by making a huge deal, agreeing to pay $1.6 billion for Bergen Brunswig, a pharmaceutical wholesaler, to “pick up an extra layer of profit” by distributing IVAX’s own drugs. “What we didn’t anticipate was that the drug chains would dump us because they were threatened,” fearing that an IVAX wholesaler would provide the same low prices to independent pharmacies, heightening competition for the chains.
Frost backed out of the deal.
Losses kept mounting. Frost led a major restructuring, with layoffs, plant closings and the sale of unprofitable subsidiaries while forging ahead with lengthy FDA battles to get approval for the first generic time-release drug and the first generic inhaler.
IVAX profitability soared. In 2005, the Jerusalem-based Teva Pharmaceutical Industries brought IVAX for $7.4 billion. Frost’s take was about $1.1 billion.
At 69, Frost didn’t even consider retiring. He says he’s constantly being sent investment opportunities, and he jumps at what he likes. Frost and close associates now own the second largest billboard company in China. He’s also become the largest shareholder in Vector Group, a Miami company that makes several brands of cigarettes. (He says the company also has other products.)
His main undertakings are as chairman of Ladenburg Thalmann, an investment bank, and chief executive of OPKO Health, a pharmaceutical company that started specializing in ophthalmology research drugs. When they didn’t pan out, he broadened into buying other pharmaceutical companies, including ones in Chile and Spain. OPKO’s main long-term hope is a system that could provide early detection of Alzheimer’s and other diseases.
Short term, OPKO plans next year to market what it says is a more accurate prostate test that is likely to save huge sums on unnecessary biopsies. On CNBC’s Mad Money, Cramer talked about how this test was a great example of slashing healthcare costs envisioned by the Affordable Care Act.
Through all this, Frost goes daily to his 15th floor office overlooking the bay and Miami Beach. He built the structure at 4400 Biscayne Blvd. when he led Key Pharmaceuticals, then bought it back and sold it to IVAX. When he sold IVAX, Frost again repurchased the building, this time for $18 million, according to county property records.
The building now houses OPKO and Ladenburg Thalmann, but large IVAX signs are still atop the structure. Frost says they’re expensive to take down. “Besides, it’s become known as the IVAX building,” although the company has ceased to exist.
He does spend money happily on other pursuits. Some years ago, he bought a jet with gold-plated bathroom fixtures that once belonged to casino magnate Steve Wynn. That’s been replaced by a larger Airbus ACJ319, which sells for about $60 million.
For years, the Frosts lived in homes on San Marino and Hibiscus islands, where they filled the walls with American Abstract paintings from the 1930s and 1940s until they had “no more room on the walls,” says Patricia.
That art produces one of those classic stories of how much chance meetings and personal contacts matter to Frost. About the time they decided they wanted to change their art collection and find a new home for the American Abstracts, Frost happened to meet a professor of dermatology whose son was married to a woman who worked at the Smithsonian in Washington. Frost told the professor they were interested in giving away more than 100 paintings. The Smithsonian called quickly.
“The following week we had a deal,” he says. Patricia has served on the Smithsonian board, alongside the U.S. vice president and congressional leaders.
They moved to Star Island in 2001, combining two adjoining sites, including one previously owned by Leona Helmsley, to make a sprawling six-acre estate with a six-bedroom, eight-bath classic-style manse for a total estimated value of $52 million.
Jaharis, his partner from the Key days, says they’ve created “more like a museum than a house,” bringing over 50 Italian craftsmen for two years to install the marble on the property. Frost says that 50 might be an exaggeration, and they were installing several types of Italian stones. The art in the house, he says, consists of “European masters.”
Also on the property: a large greenhouse that contains more than 100 types of palms gathered from around the world. “He spends a lot of time in that garden,” says Richard Pfenniger, a longtime Frost executive. Frost says he gets there almost daily, often weeding on his hands and knees.
The Frosts also own a $7 million apartment overlooking Central Park in Manhattan and “a flat” in London. Patricia Frost also travels frequently to meetings of the Florida Board of Governors that oversees the state’s university system.
A registered Democrat, public records indicate Frost gave $200,000 to groups supporting Republicans in the 2012 election. “It was a lot more than that,” Frost says, but won’t reveal the amount. And what did he think of the outcome? “I can only hope for the best.”
Art of giving
The art museum at Florida International University is named after the Frosts, thanks to a $2 million donation. So is the UM Music School, after a $33 million donation. And they’ve pledged $35 million for the new Miami Museum of Science, which will also bear their name when it’s finished.
“He has no children,” says Jaharis, his longtime Key colleague and still a close friend. “What are you going to do? You can’t take it with you.”
In April 2011, the Frosts signed a pledge, initiated by Warren Buffett and Bill Gates, to give away at least half their fortune.
“We need to step it up,” Frost said recently, during an interview in his Star Island greenhouse. He said they plan to focus on education, on both state and international levels.
Patricia, an educator for three decades, added: “We both have some ideas.”