TARO PHARMACEUTICL INDS LTD TAROF
September 06, 2011 - 9:35pm EST by
mitc567
2011 2012
Price: 20.35 EPS $2.43 $2.92
Shares Out. (in M): 44,569 P/E 8.4x 7.0x
Market Cap (in $M): 877 P/FCF 7.6x 6.5x
Net Debt (in $M): 92 EBIT 128 153
TEV ($): 768 TEV/EBIT 6.0x 5.0x

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Description

 

TARO Pharmaceutical Industries (TAROF) is a generic drug manufacturer based out of Israel with its functional headquarters in the United States.  It is controlled by Sun Pharmaceuticals (Sun), a large Indian pharmaceutical company, who owns approximately two thirds of TAROF equity.  An investment in TAROF offers upside of 50% to 100% upon TAROF's relisting on a nationally recognized exchange and the inevitable buyout of the remaining public shares by Sun.   

TAROF manufacturers over 200 different prescription and OTC products in facilities located in the US, Canada and Israel.  Their main area of expertise and specialization is dermatological creams, ointments and gels.  Sun's purchase of a majority of TAROF was held up for a number of years as TAROF's founding families fought Sun over the price Sun was paying for their shares.  During this time period TAROF did not issue audited financials and their stock was delisted and began trading on the pink sheets.

Sun finally was able to resolve their ownership fight in late 2010 with their ownership moving up to 66.3%.  This has lead to TAROF issuing year-end 2010 financials in late June.  Once TAROF issues their quarterly financials they should be caught up to reporting requirements of the major exchanges and become eligible to relist their shares.  TAROF has issued press releases for the first half of 2011 and the results have been strong.  With the costs of fighting Sun and the heavy lifting of recreating historical financials behind them, TAROF's selling general and administrative expenses have fallen markedly.

Sun has a track record of running pharmaceutical operations at much lower costs than TAROF and if the first two quarters of Sun management is any trend, TAROF is going to be a much more profitable business in the future than it was previously.  Sun had accomplished this feat with Caraco, which was another US pharmaceutical company it partially acquired and managed.  Caraco was finally acquired by Sun after it resolved a manufacturing problem that undermined its initial success.

Sun has acquired 13 pharmaceutical companies since 1997 and currently generates about $1.4 billion in annual revenue.  Based on 2010 figures, TAROF is about ¼ the sales and EBITDA of SUN.  While Sun is now consolidating TAROF's financials into their numbers and operating the business, it does not have access to the meaningful free cash flow generated by TAROF. 

VALUATION ANALYSIS

I have included two methods of valuing TAROF shares based on current publicly traded company multiples and a merger and acquisition analysis. 

The public comparables I used are Teva (TEVA), Mylan (MYL), Perrigo (PRGO) and Watson (WPI).  These stocks trade at average and median EBITDA multiples of 10.5 and 9.4 times, respectively.  For EBIT multiples the results are an average of 14.4 times and a median of 13.9 times.  Using the mid points between the average and median multiples yields the following projected price for TAROF stock of between $27 and $31 per share based on 2010 financials and $34 and $42 on 2011 financials, respectively.  The projections below are my own and have the benefit of six months of actual numbers that are well ahead of 2010 results.

 

 

Actual

Projected

Public Comps Valuation

2010

2011

 TAROF EBITDA

 $       106,465

 $       146,613

 Multiple of EBITDA

                10.0

                10.0

 Enterprise Value

        1,064,650

        1,466,131

 Plus:Cash

            88,850

          192,131

 Less:Debt

           (59,420)

           (54,432)

 Common Unit Total Value

 $     1,124,070

 $     1,520,563

 Common Units Outstanding (MM)

            41,248

            44,569

Value per Common Unit

 $           27.25

 $           34.12

     

Public Comps Valuation

2010

2011

 TAROF EBIT

 $         86,465

 $        127,642

 Multiple of EBIT

                14.2

                14.2

 Enterprise Value

        1,223,480

        1,806,136

 Plus:Cash

            88,850

          192,131

 Less:Debt

           (59,420)

           (54,432)

 Common Unit Total Value

 $     1,282,900

 $     1,860,568

 Common Units Outstanding (MM)

            41,248

            44,569

Value per Common Unit

 $           31.10

 $           41.75

 

Using a comparable merger and acquisition analysis yields significantly higher multiples of EBITDA and EBIT.  The transactions I used for comparison are King Pharmaceuticals (KG), IVAX Pharmaceuticals (IVX), Andrx (ADRX), Bradley Pharmaceutical (BDY), Bentley Pharmaceuticals (BNT) and Eon Labs (ELAB).  Average and median EBITDA multiples for these transactions are 19.3 and 19.0, respectively.  Average and median EBIT multiples are 31.2 and 34.7, respectively.  The deals are listed below:

Ticker

 EBITDA Mult

EBIT Mult

Date

KG

               16.14

       18.18

3/1/2011

IVAX

               23.32

       32.44

1/26/2006

ADRX

               23.80

       43.06

11/6/2006

BDY

               15.55

       36.99

2/22/2008

BNT

               21.94

       40.59

7/23/2008

ELAB

               15.03

       15.95

7/27/2005

Average

                19.3

        31.2

 

Median

                19.0

        34.7

 

These multiples yield share prices of $50 to $64 on EBITDA multiples and $70 and $95 on EBIT multiples.  Even using the lowest multiples of 15 times EBITDA and 16 times EBIT yields transaction values of values between $35 and $50 per share.  Here are the tables below with actual 2010 and projected 2011 numbers:

 

Comp M&A Transactions

2010

2011

 TAROF EBITDA

 $       106,465

 $       146,613

 Multiple of EBITDA

                19.1

                19.1

 Enterprise Value

        2,033,482

        2,800,310

 Plus:Cash

            88,850

          192,131

 Less:Debt

           (59,420)

           (54,432)

 Common Unit Total Value

 $     2,092,902

 $     2,854,742

 Common Units Outstanding (MM)

            41,248

            44,569

Value per Common Unit

 $           50.74

 $           64.05

     

Comp M&A Transactions

2010

2011

 TAROF EBIT

 $         86,465

 $        127,642

 Multiple of EBIT

                33.0

                33.0

 Enterprise Value

        2,853,345

        4,212,189

 Plus:Cash

            88,850

          192,131

 Less:Debt

           (59,420)

           (54,432)

 Common Unit Total Value

 $    2,912,765

 $    4,266,621

 Common Units Outstanding (MM)

            41,248

            44,569

Value per Common Unit

 $           70.62

 $           95.73

 

LOWEST MULTIPLE TABLE

   

Comp M&A Transactions

2010

2011

 TAROF EBITDA

 $       106,465

 $       146,613

 Lowest Multiple of EBITDA

                15.0

                15.0

 Enterprise Value

        1,596,975

        2,199,196

 Plus:Cash

            88,850

          192,131

 Less:Debt

           (59,420)

           (54,432)

 Common Unit Total Value

 $    1,656,395

 $    2,253,628

 Common Units Outstanding (MM)

            41,248

            44,569

Value per Common Unit

 $           40.16

 $           50.57

     

Comp M&A Transactions

2010

2011

 TAROF EBIT

 $         86,465

 $       127,642

 Lowest Multiple of EBIT

                16.0

                16.0

 Enterprise Value

        1,383,440

        2,042,273

 Plus:Cash

            88,850

          192,131

 Less:Debt

           (59,420)

           (54,432)

 Common Unit Total Value

 $    1,442,860

 $    2,096,705

 Common Units Outstanding (MM)

            41,248

            44,569

Value per Common Unit

 $           34.98

 $           47.04

 

EXPECTED SCENARIO

I believe the improvement in the trading in TAROF's stock price will be a two step function.  The first major step will be TAROF's filing of timely financial statements which will enable TAROF to list on a major exchange.  Once that occurs I would expect the stock to begin trading more in-line with its peer group.  Using a 20% discount to the group's average would yield a multiple of 8 times EBITDA or roughly $30 per share, which is approximately a 50% premium to current trading multiples.  Should any analysts decide to follow the stock that discount would probably shrink over time.

I also believe that at some point in the not too distant future, Sun will want to be able to access the excess cash and cash flows at TAROF.  TAROF is approximately 20% of the overall business of Sun and its results are being closely monitored by the 30 plus analysts that cover Sun in the Indian equity markets.  Sun management spent quite a bit of time on their last call answering questions on TAROF.  Sun currently trades for 28.1 times EBIT and 25.2 times EBITDA.  Any transaction whereby Sun acquires the rest of TAROF's common stock for a lesser multiple is highly accretive to Sun's shareholders.  Sun could choose to do this in a number of ways. 

I believe the mostly likely way would be for Sun to make a cash offer for the remaining TAROF shares.  At 15 times EBITDA that would work out to about $750 million.  Sun could fund most of this purchase with the combined cash from its and TAROF's balance sheets at year end.  Secondly, Sun could choose to use TAROF as a means to listing its shares here through an exchange offer.  This might make more sense than it had in the past due to the increased amount of business Sun is now doing in the US.  I would obviously prefer cash, but Sun has a great track record and it would provide a way for US investors to gain easier access to a successful Indian company.

Catalyst

1. Relisting on a national exhcange
2. Buyout by parent company
3. Continued improved business results
    sort by    

    Description

     

    TARO Pharmaceutical Industries (TAROF) is a generic drug manufacturer based out of Israel with its functional headquarters in the United States.  It is controlled by Sun Pharmaceuticals (Sun), a large Indian pharmaceutical company, who owns approximately two thirds of TAROF equity.  An investment in TAROF offers upside of 50% to 100% upon TAROF's relisting on a nationally recognized exchange and the inevitable buyout of the remaining public shares by Sun.   

    TAROF manufacturers over 200 different prescription and OTC products in facilities located in the US, Canada and Israel.  Their main area of expertise and specialization is dermatological creams, ointments and gels.  Sun's purchase of a majority of TAROF was held up for a number of years as TAROF's founding families fought Sun over the price Sun was paying for their shares.  During this time period TAROF did not issue audited financials and their stock was delisted and began trading on the pink sheets.

    Sun finally was able to resolve their ownership fight in late 2010 with their ownership moving up to 66.3%.  This has lead to TAROF issuing year-end 2010 financials in late June.  Once TAROF issues their quarterly financials they should be caught up to reporting requirements of the major exchanges and become eligible to relist their shares.  TAROF has issued press releases for the first half of 2011 and the results have been strong.  With the costs of fighting Sun and the heavy lifting of recreating historical financials behind them, TAROF's selling general and administrative expenses have fallen markedly.

    Sun has a track record of running pharmaceutical operations at much lower costs than TAROF and if the first two quarters of Sun management is any trend, TAROF is going to be a much more profitable business in the future than it was previously.  Sun had accomplished this feat with Caraco, which was another US pharmaceutical company it partially acquired and managed.  Caraco was finally acquired by Sun after it resolved a manufacturing problem that undermined its initial success.

    Sun has acquired 13 pharmaceutical companies since 1997 and currently generates about $1.4 billion in annual revenue.  Based on 2010 figures, TAROF is about ¼ the sales and EBITDA of SUN.  While Sun is now consolidating TAROF's financials into their numbers and operating the business, it does not have access to the meaningful free cash flow generated by TAROF. 

    VALUATION ANALYSIS

    I have included two methods of valuing TAROF shares based on current publicly traded company multiples and a merger and acquisition analysis. 

    The public comparables I used are Teva (TEVA), Mylan (MYL), Perrigo (PRGO) and Watson (WPI).  These stocks trade at average and median EBITDA multiples of 10.5 and 9.4 times, respectively.  For EBIT multiples the results are an average of 14.4 times and a median of 13.9 times.  Using the mid points between the average and median multiples yields the following projected price for TAROF stock of between $27 and $31 per share based on 2010 financials and $34 and $42 on 2011 financials, respectively.  The projections below are my own and have the benefit of six months of actual numbers that are well ahead of 2010 results.

     

     

    Actual

    Projected

    Public Comps Valuation

    2010

    2011

     TAROF EBITDA

     $       106,465

     $       146,613

     Multiple of EBITDA

                    10.0

                    10.0

     Enterprise Value

            1,064,650

            1,466,131

     Plus:Cash

                88,850

              192,131

     Less:Debt

               (59,420)

               (54,432)

     Common Unit Total Value

     $     1,124,070

     $     1,520,563

     Common Units Outstanding (MM)

                41,248

                44,569

    Value per Common Unit

     $           27.25

     $           34.12

         

    Public Comps Valuation

    2010

    2011

     TAROF EBIT

     $         86,465

     $        127,642

     Multiple of EBIT

                    14.2

                    14.2

     Enterprise Value

            1,223,480

            1,806,136

     Plus:Cash

                88,850

              192,131

     Less:Debt

               (59,420)

               (54,432)

     Common Unit Total Value

     $     1,282,900

     $     1,860,568

     Common Units Outstanding (MM)

                41,248

                44,569

    Value per Common Unit

     $           31.10

     $           41.75

     

    Using a comparable merger and acquisition analysis yields significantly higher multiples of EBITDA and EBIT.  The transactions I used for comparison are King Pharmaceuticals (KG), IVAX Pharmaceuticals (IVX), Andrx (ADRX), Bradley Pharmaceutical (BDY), Bentley Pharmaceuticals (BNT) and Eon Labs (ELAB).  Average and median EBITDA multiples for these transactions are 19.3 and 19.0, respectively.  Average and median EBIT multiples are 31.2 and 34.7, respectively.  The deals are listed below:

    Ticker

     EBITDA Mult

    EBIT Mult

    Date

    KG

                   16.14

           18.18

    3/1/2011

    IVAX

                   23.32

           32.44

    1/26/2006

    ADRX

                   23.80

           43.06

    11/6/2006

    BDY

                   15.55

           36.99

    2/22/2008

    BNT

                   21.94

           40.59

    7/23/2008

    ELAB

                   15.03

           15.95

    7/27/2005

    Average

                    19.3

            31.2

     

    Median

                    19.0

            34.7

     

    These multiples yield share prices of $50 to $64 on EBITDA multiples and $70 and $95 on EBIT multiples.  Even using the lowest multiples of 15 times EBITDA and 16 times EBIT yields transaction values of values between $35 and $50 per share.  Here are the tables below with actual 2010 and projected 2011 numbers:

     

    Comp M&A Transactions

    2010

    2011

     TAROF EBITDA

     $       106,465

     $       146,613

     Multiple of EBITDA

                    19.1

                    19.1

     Enterprise Value

            2,033,482

            2,800,310

     Plus:Cash

                88,850

              192,131

     Less:Debt

               (59,420)

               (54,432)

     Common Unit Total Value

     $     2,092,902

     $     2,854,742

     Common Units Outstanding (MM)

                41,248

                44,569

    Value per Common Unit

     $           50.74

     $           64.05

         

    Comp M&A Transactions

    2010

    2011

     TAROF EBIT

     $         86,465

     $        127,642

     Multiple of EBIT

                    33.0

                    33.0

     Enterprise Value

            2,853,345

            4,212,189

     Plus:Cash

                88,850

              192,131

     Less:Debt

               (59,420)

               (54,432)

     Common Unit Total Value

     $    2,912,765

     $    4,266,621

     Common Units Outstanding (MM)

                41,248

                44,569

    Value per Common Unit

     $           70.62

     $           95.73

     

    LOWEST MULTIPLE TABLE

       

    Comp M&A Transactions

    2010

    2011

     TAROF EBITDA

     $       106,465

     $       146,613

     Lowest Multiple of EBITDA

                    15.0

                    15.0

     Enterprise Value

            1,596,975

            2,199,196

     Plus:Cash

                88,850

              192,131

     Less:Debt

               (59,420)

               (54,432)

     Common Unit Total Value

     $    1,656,395

     $    2,253,628

     Common Units Outstanding (MM)

                41,248

                44,569

    Value per Common Unit

     $           40.16

     $           50.57

         

    Comp M&A Transactions

    2010

    2011

     TAROF EBIT

     $         86,465

     $       127,642

     Lowest Multiple of EBIT

                    16.0

                    16.0

     Enterprise Value

            1,383,440

            2,042,273

     Plus:Cash

                88,850

              192,131

     Less:Debt

               (59,420)

               (54,432)

     Common Unit Total Value

     $    1,442,860

     $    2,096,705

     Common Units Outstanding (MM)

                41,248

                44,569

    Value per Common Unit

     $           34.98

     $           47.04

     

    EXPECTED SCENARIO

    I believe the improvement in the trading in TAROF's stock price will be a two step function.  The first major step will be TAROF's filing of timely financial statements which will enable TAROF to list on a major exchange.  Once that occurs I would expect the stock to begin trading more in-line with its peer group.  Using a 20% discount to the group's average would yield a multiple of 8 times EBITDA or roughly $30 per share, which is approximately a 50% premium to current trading multiples.  Should any analysts decide to follow the stock that discount would probably shrink over time.

    I also believe that at some point in the not too distant future, Sun will want to be able to access the excess cash and cash flows at TAROF.  TAROF is approximately 20% of the overall business of Sun and its results are being closely monitored by the 30 plus analysts that cover Sun in the Indian equity markets.  Sun management spent quite a bit of time on their last call answering questions on TAROF.  Sun currently trades for 28.1 times EBIT and 25.2 times EBITDA.  Any transaction whereby Sun acquires the rest of TAROF's common stock for a lesser multiple is highly accretive to Sun's shareholders.  Sun could choose to do this in a number of ways. 

    I believe the mostly likely way would be for Sun to make a cash offer for the remaining TAROF shares.  At 15 times EBITDA that would work out to about $750 million.  Sun could fund most of this purchase with the combined cash from its and TAROF's balance sheets at year end.  Secondly, Sun could choose to use TAROF as a means to listing its shares here through an exchange offer.  This might make more sense than it had in the past due to the increased amount of business Sun is now doing in the US.  I would obviously prefer cash, but Sun has a great track record and it would provide a way for US investors to gain easier access to a successful Indian company.

    Catalyst

    1. Relisting on a national exhcange
    2. Buyout by parent company
    3. Continued improved business results

    Messages


    SubjectQuestions
    Entry09/14/2011 03:59 PM
    Membermadler934
    Hi, thanks for the writeup - I had a few questions on this one:
     
    1) How do you get comfortable with the pipeline?  Is there anything specific (eg # of ANDAs in the pipeline vs . historical levels) that you can look at to gauge where they are right now from a pipeline perspectice?  I have heard from people in the space that TARO's pipeline is a little weak, so I wonder how smart it is to look at the last few quarters given that they might be challenged to grow from there and Sun has said pretty specifically that they need to increase r&d spending to get the pipeline back in the right direction.  
     
    2) I get the valuation discrepancy, but how do you get comfortable that Sun will eventually pay minority shareholders what they deserve to be paid - why should we count on them to do the right thing?
     
    3) do you have a sense of when they might be able to relist and the milestones to getting there?  Is it just filing the 2007-2009 20Fs?

    SubjectOffer / Advice
    Entry10/18/2011 07:07 PM
    Membercgnlm995
    We are owners too and would very much appreciate any guidance on how to proceed with this offer?  It seems quite low vis-a-vis fair value and these guys have fought like h4ll for 4 years to obtain the asset.  It would strike me there is material room for them to improve their offer.

    SubjectRE: Offer / Advice
    Entry10/27/2011 11:05 AM
    Membermitc567
    Offer,
     
    I think the offer is very low and believe that there are major shareholders who agree with that view.  I would expect the independent board members to reject the current offer as inadequate.  Israeli law protects affected minority shareholders by requiring that 50% or greater approve the deal.  If the offer does not materially increase they will not get to 50%.

    SubjectBlowout 4th QTR!
    Entry02/10/2012 08:31 AM
    Membermitc567
    TAROF just reported preliminary 4th quarter numbers that now have the business running at $5.60 annual EPS and $316MM EBITDA.  Utilizing public comp's of 18x P/E multiples and 10.2x EBITDA a fair trading price for TAROF would be $102.20 and $73.38, respectively.  Sun Pharmaceuticals, the 2/3 owner that is trying to buy out shareholders remaining shares trades at a P/E multiple of 30x and an EBITDA multiple of 24.7X. TAROF is about 40% of Sun's business.  The current offer of $24.50 per share for TAROF's shares is not going through with the stock trading in the 30's in anticipation of Sun either dropping the offer or upping it. 

    SubjectRE: Blowout 4th QTR!
    Entry02/10/2012 10:06 AM
    Membermiser861
    Even at $34.45 this stock trads for 4.8x run-rate free cash flow.  At $24.50, it's 3.1x free cash flow.  $100 sounds about right now.

    SubjectRE: RE: Blowout 4th QTR!
    Entry02/10/2012 10:25 AM
    Membermitc567
    Let's hope that it gets there.

    SubjectRE: RE: RE: Blowout 4th QTR!
    Entry02/10/2012 01:29 PM
    Memberpakiya1101
    operating performance improvement is amazing. sales up 7% q-over-q, drastic improvement in oper margins and gross margins. plus capex is miniscule. over $4.8 per share in net cash.

    SubjectRE: RE: RE: RE: Blowout 4th QTR!
    Entry02/10/2012 09:42 PM
    Memberstraw1023
    Does anybody have any insight into how Taro has been able to raise prices so much? If it was this easy, why didn't they do it years ago? Note that in q4 y-o-y, volumes were unchanged.
     
    I appreciate that sg&a continues to fall and so op margin expands, but that is small compared to gains in gross margin via price increases without increased COGS.
     
    And from mgmt: "a significant portion of the quarter’s growth in net sales and profits was derived from price increases on select products in the U.S. market and may not be sustainable."
     
    I know that there were reports of certain medicine shortages in the U.S. in Q4 (http://www.whitehouse.gov/the-press-office/2011/10/31/we-can-t-wait-obama-administration-takes-action-reduce-prescription-drug). I assume Taro benefited from this throughout 2011 but especially in q4.
     
    Does anybody have insight into whether Taro benefited more or less than other generic drug companies? What about generic versus branded?
     
     
     

    SubjectDrug Shortage
    Entry02/11/2012 01:20 PM
    Memberstraw1023
    Just this morning, MSNBC/NYTimes has a major story on drug shortages in a cancer drug:
     
     
    Taro focuses mainly on dermatological agents. I did some cursory research, and the AADA has several stories that identify shortages in several dermatological drugs. The AADA identifies lidocaine as one such shortage, and Taro makes a form of this. 
     
    I have no idea the details of how the drug shortage is affecting the q3 and q4 Taro numbers, but it strikes me as very significant given:
     
    1) specific management comments in both q3 and q4 press releases
    2) 44% revenue growth on FLAT volume in q4 (y-o-y).
    3) enormous operating margin expansion, relative to comps and to q1 and q2.
     
    It seems to me that $150mm quarterly revenue and 50% op margins are simply not sustainable and do not deserve multiples. There simply appears to be a $40mm windfall in q4. The anecdotal evidence out there regarding drugs trading at 10x normal prices and management comments support this.
     
    ------
     
    Based on the very real (and multiple-deserving) expense reductions, but without these combined q3 and q4 windfalls of about $70mm in extra revenue and EBIT, Taro was looking at $450mm in revenue and very healthy 30% op margins. 
     
    This gets me to $135mm EBIT, $155mm EBITDA. With $5/shr in net cash, I get to a $45 valuation. I think the comps that received a 20x EBITDA valuation were apples to oranges. 12x sounds much more reasonable.
     
    Btw, I suspect that based on the news reports and anecdotal evidence, the windfall profits will continue into at least H1 of this year. Every quarter they continue adds almost a $1 to my valuation.
     
    ------
     
    In terms of how this is going to play out, I fear that the aggressive letters and valuations being publicly submitted to Sun are going to cause them to back away, and wait for the windfall revenue to go away. I would be (pleasantly) shocked if Sun offers more than $50.
     
    ------
     
    Do the VIC authors who are saying $100/share valuation believe that $150mm revenue per quarter and 50% op margins are sustainable? If so, why would mgmt make these specific comments, which seem to line up with the drug shortage situation going on. The top-line improvement is simply far too much, far too quickly to be sustainable. 
     
    ------
     
    One thing that I would note is that the current situation has played very differently for different generic manufacturers. Teva and Hospira seem to be causing some of the shortages with closed facilities, etc. While Taro seems to have uniquely benefited. 

    SubjectRE: Drug Shortage
    Entry02/13/2012 01:33 PM
    Memberyellowhouse
    i think the sustainability of price increases is a very good point to consider. here is a link that lists drug shortages that have been voluntarily provided to the fda: http://www.fda.gov/Drugs/DrugSafety/DrugShortages/ucm050792.htm
     
     
    drugs that are on this list and produced by taro include:
     

    Efudex – Fluorouracil cream

    Vaseretic – Hydrochlorothiazide

    Zofran – Ondansetron hydrochloride

    Dilantin – Phenytoin Sodium

     

    i would be curious to see how much prices have risen for these and other drugs. i've passed along to some pharma friends. any discussion would be greatly appreciated.

     


    SubjectIszo Capital's new letter to Taro says it all.
    Entry02/15/2012 02:37 PM
    Membermitc567
    IsZo Capital Writes to Special Committee of Taro Pharmaceutical Demanding the Immediate Rejection of Sun's Buyout Offer
    Taro Pharmaceutical Industries Ltd
    TAROF  | 2/15/2012 2:08:00 PM
    IsZo Capital Writes to Special Committee of Taro Pharmaceutical Demanding the Immediate Rejection of Sun's Buyout Offer

     

     

    NEW YORK, Feb. 15, 2012 /PRNewswire/ -- IsZo Capital LP, one of the largest minority shareholders of Taro Pharmaceutical Industries Ltd. (OTC: TAROF), announced today that it delivered the following letter to the Special Committee of the Board of Directors of Taro demanding that it immediately reject the proposal made by Sun Pharmaceutical Industries Ltd. (BSE:SUNPHARMA) on October 18, 2011 to acquire the remaining outstanding shares of Taro for $24.5 per share.

    February 15, 2012

    Board of Directors of Taro Pharmaceutical Industries Ltd. Euro Park (Italy Building) Yakum Business Park, Yakum 60972, Israel

    Attention:

    Dilip Shanghvi, Chairman of the Board

     

    Dan Biran, Chairman of the Audit Committee

     

    Professor Dov Pekelman, Chairman of the Special Committee

     

    Evaluating Sun Acquisition Proposal

       
       

    Re: 

    Taro's 2011 Fourth Quarter Financial Performance;

     

    IsZo Capital letters dated November 29, 2011, December 13, 2011

     

    and December 23, 2011

    Dear Members of the Board, Audit Committee and Special Committee:

    As Taro Pharmaceutical Industries Ltd. ("Taro") and Sun Pharmaceutical Industries Ltd. ("Sun") start to look more like the same company, it becomes clear that shareholders of both companies are similarly situated.  For example, both Taro and Sun shareholders face the same risk in being positioned as minority shareholders susceptible to the agenda of Dilip Shanghvi, Chairman and controlling shareholder of Sun. Although Dilip Shanghvi has promised to be a steward of minority shareholder value to Taro shareholders (in Sun's Schedule 13D with respect to Taro and numerous amendments thereto filed with the U.S. Securities and Exchange Commission), there is nothing preventing him from attempting to use his power as controlling shareholder to transfer wealth from Sun and Taro minority shareholders to himself.  For example, both shareholders of Taro and Sun should be concerned that Dilip Shanghvi personally invests in "...pharma entities...both listed and unlisted, in India and outside India," according to Sun's recent investor conference call.  At the very least, this raises potential troubling questions of conflict of interest and loyalty.  Thus, both Sun and Taro minority shareholders, including IsZo Capital, are behooved to remain vigilant in monitoring events at both companies, to ensure their respective boards of directors act to maximize value for all shareholders and do not succumb to Dilip Shanghvi's personal investing agenda.

    The recently released quarterly results for Sun and Taro confirm that the two companies are in effect the same economic entity.  Taro now contributes 35% to Sun's consolidated sales, 42% of EBITDA, and an astounding 48% of profit.   Therefore, based on Sun's market cap of USD $11.59 billion as of February 14, 2012, Taro should be valued between $109.30 to $125.03 per share depending on whether one uses EBITDA or profits to allocate the value of Sun.  In addition, Taro has roughly $5 per share in net cash giving a total value to Taro of $114.30 to $130.03 per share. 

    Given these facts, is there any reasonable way to justify the $24.50 offer that Sun has made to Taro shareholders?  IsZo Capital doesn't believe so, although some may try to make an argument.

    1.  For example, recently Taro's CEO stated that some of the company's "growth in sales and profits was derived from price increases... that might not be sustainable."

    Pricing power is obviously a sign of strength, not of weakness.  But if one was to worry about sustainability, what type of pricing power is most unsustainable for generic drug companies? 

    Para IV filings would be the most obvious, where the generic company is limited to 6 months of exclusivity.  Are Para IV filings important to Sun or Taro?   Sun is a major player in Para IV filings; Taro is not.

    Conclusion: Short term Para IV revenue, pricing, and profits would be most likely to inflate Sun's financials rather than Taro's. 

    2.  The FDA shortage list is the other area where a generic drug company might show unsustainable pricing power.  Does any of Taro or Sun's drugs show up on this list?  Yes, Sun has drugs on this list. Taro does not. 

    Which classes of drugs in the US are most affected?   The answer is drug shortages are mostly affecting oncologic, anti-infective, and anesthetic drugs, particularly IV formulations.  Are these important areas for Sun or Taro? Again, Sun is the answer here.

    Conclusion: The major drug shortages in the US are primarily in oncology, anti-infective, and anesthetics, all areas that would affect Sun more than Taro.

    3.  So what explains some of the improved performance by Taro and is this sustainable?

    Because of problems with contamination and poor quality control, particularly with IV formulations, the FDA has greatly increased its scrutiny of all manufacturers of drugs.  This has broadly affected the generic drug industry and greatly increased the cost to manufacture and comply with more stringent regulations.  Due to this increased scrutiny and cost, many generic drug companies have decreased the number of marketed products to focus on their most profitable drugs.  This is affecting most, if not all, players in the generic drug space and is likely to continue for the foreseeable future.  Our research shows that on a few products, Taro has seen greater pricing power due to the withdrawal of competition.

    Conclusion:  Taro's increasing pricing power on a few products is due to the withdrawal of competition and this trend is not likely to reverse for the foreseeable future.

    4.  Are there components of Sun's business that warrant a premium valuation relative to Taro?  Doesn't Sun deserve a higher multiple than Taro because of its exposure to India?

    IsZo has looked carefully at these questions and cannot find any reason why the rest of Sun's businesses, excluding Taro, deserve to trade at a premium valuation relative to Taro.  Taro's business accounts for close to half of Sun's profit; and the minority share structure of Taro is the same as the minority structure of Sun's shares. Sun's market share in the domestic Indian market is small; Sun's revenue in the Indian rupiah is much smaller than its US dollar revenue reflected in the majority of its sales, earnings, and cash flows.  Sun's US revenue outside of Taro is primarily driven by Para IV filings which are well known to be unstable short term revenue and profit sources and, therefore, of lesser sustainability.  In addition, a substantial part of Sun is in the lower margin API business.

    By contrast, Taro's dermatology focus on creams and ointments is a higher margin business and more sustainable than any of Sun's other businesses. Generic drugs such as oral and IV formulations that only require simple in vivo area under the curve studies have much lower barriers to entry than drugs that are absorbed through the skin. Thus, if anything, Taro deserves a premium valuation to the other divisions of Sun.

    Conclusion:  Taro's business on a long term basis is of higher quality than the rest of Sun's businesses.  Rather than a discount, Taro warrants a premium valuation relative to other parts of Sun.

    After reviewing recent Taro as well as Sun results, IsZo Capital reminds the Special Committee that Sun's offer price was grossly inadequate when Sun's offer was first announced in October 2011 and it is even more so now that Taro's strong and sustainable 2011 fourth quarter financial results have been announced. Accordingly, IsZo Capital urges the Special Committee once again to safeguard the interests of all Taro shareholders and reject Sun's grossly inadequate offer.

    IsZo Capital also reminds the Board of Directors and management of Taro that, consistent with value-maximizing strategies previously advocated by Sun before Sun became Taro's controlling shareholder, we believe that the Board and management should be moving to re-list Taro's shares on a national securities exchange in the United States and to evaluate the listing of Taro's shares side by side with Sun's shares on the Bombay stock exchange.  As explained during Sun's recent investor conference call, even Dilip Shanghvi understands that Taro's pink sheet traded stock is not an accurate reflection of Taro's value.  During that call he acknowledged "...it's not a listed security and the valuation changes in terms of pricing, it's also a function of transactions, which are relatively small."  Indeed, it is well known in the financial industry that securities that have been delisted and orphaned by sell-side analysts, especially where management doesn't hold conference calls, trade at enormous discounts to listed, non-orphaned stocks where management communicates with shareholders and the market.

    Conclusion:  The only security that reflects Taro's enormous value is Sun's stock which is actively trading on the Bombay Stock Exchange.  Since Taro is clearly a better business than the rest of Sun's divisions, and contributes nearly half of the economics to Sun, it is impossible to justify the $24.50 offer from Sun.  The only conclusion the Special Committee can reach is that the Sun offer is grossly inadequate and should be rejected immediately.

    Sincerely,

    /s/ Brian Sheehy Brian Sheehy Managing Partner IsZo Capital


    SubjectRE: Iszo Capital's new letter to Taro says it all.
    Entry02/15/2012 03:20 PM
    Memberstraw1023
    Thank you for sharing. This letter addressed and gave definitive responses to all my questions and concerns. I am not convinced, but I understand the $100 case now.

    SubjectRE: Sun Pharma says won't revise taro offer price
    Entry03/20/2012 10:36 AM
    Membermitc567
    Non event n Sun's current refusal to up offer.  The news about listing on the NYSE is a huge positive on a number of levels.
     
    1.  Part of dissident view is that TAROF offer of a premium to currrently traded price was not a real trading level since it only traded on the pink sheets, which precludes many investors from owning the shares.
    2.  With a market cap over $1.5 billion, a NYSE stock with these economics should trade at much higher levels, which would give Sun a real trading level to use as a valuation to put a real offer on the table.
    3.  This could be a signal that the directors are actually going to do what is right from a fiduciary responsibility perspective.  This means that they won't accept the lowball offer that is on the table.
     
    I view this as a major positive.

    SubjectPublic Comp's
    Entry03/20/2012 11:53 AM
    Membermitc567
    Now that TAROF will be NYSE listed I would expect it to trade more in line with the public comp's.  Current average P/E ratio according to Bloomberg is 23.77 on an LTM basis.  LTM EPS for TAROF is $4.12 which would translate into a share price of $97.93.  Even if you want to discount the share price for being a minority shareholder with a lowball offer on the table, the resulting share price should be a lot higher.

    SubjectRE: RE: Public Comp's
    Entry03/20/2012 03:15 PM
    Membermitc567
    Urban,
     
    As I understand Israeli Company Law the acquiror needs a majority of the minority shareholders to approve the transaction.  This was confirmed by a call I received from an Israeli shareholder of TARO.  I also believe that the Israeli courts could be petitioned to disallow the acquisition if shareholders can show that the "deal" is unfair.  Here is a link to use to make your own decision on the rules:
     
     

    SubjectRE: RE: RE: RE: Down 3.7% on a strong up day?
    Entry07/19/2012 08:00 AM
    Memberhbomb5
     
    May be the latest letter from Guardian Point did the trick.  Curious to see how this trades going forward. GLTA

    SubjectBenefits Of SUN's TARO Acquisition
    Entry07/31/2012 01:44 AM
    Memberhbomb5
    Clearly, SUN's acquisition of TARO has helped them step in right direction compared to the competition.  
     
     
    "Apart from four or five branded generics in its US portfolio, courtesy its subsidiary Taro (acquired in 2007), Sun Pharmaceuticals wants to stand out from the crowd by focusing on technology differentiation (like sustained release or extended release systems) and complex products (like the formulation of controlled substances). Its portfolio includes technologies like bio-degradable injections/implants (helps reduce patient trauma and pain), gastro-retentive devices (for retention in the stomach beyond eight hours) and dry powder inhalers (aids delivery of drugs to the lungs). “We select drugs that are difficult to make and use our drug-delivery platforms to ensure our margins stay protected even with the entry of other generic players,” says the company spokesperson. Sun is believed to have one of the highest profit margins among Indian pharma so far as the US business is concerned. Overall profit margins (at the company level) are in excess of 40%, but a break-up by geography is not available"
     
    Shanghvi clearly trys to downplay this in the interview below:
     

    SubjectCautionary language
    Entry08/06/2012 06:54 PM
    Membermiser861
    Q2 2012   "However, we remain cautious of the increasing competition and consequential erosion of volume on some of our major products and the challenge in maintaining current performance."
    Q1 2012   "As we have stated in the past, a portion of our revenue and profit growth is the result of pricing opportunities, the sustainability of which is uncertain."
    Q4 2011   "...however, a significant portion of the quarter’s growth in net sales and profits was derived from price increases on select products in the U.S. market and may not be sustainable.”
    Q3 2011   "However, a portion of this revenue growth is attributable to our ability to capitalize on current market opportunities which may not be sustainable."
    Q2 2011   "...new entrants into the therapeutic space occupied by Taro are likely to have some negative impact on sales and/or pricing in future quarters."
    Q1 2011   "While continual progress is being made, our focus is to ensure that this improvement is sustainable."
    Q4 2010   "Though progress is being made by Taro, we continue to focus on the challenges ahead of helping Taro improve its performance on a sustainable basis."
    9/21/10   Control of Taro is passed from the Levitts to Sun, prior to this no cautionary language was affixed to the earnings reports.
     
    I would note that according to IMS, volumes were flat versus the 3/31/12 quarter despite a 10% sequential increase in average prices.  I would also note that pricing for their top 20 products is in-line with the competition.

    SubjectTaro earnings and thoughts
    Entry08/07/2012 08:16 AM
    Membermitc567
    Taro's had a record quarter of 42.6% sales and 115% EBITDA growth.  Despite Sun's warnings that this will not continue, there is no indication that sales and profitability will soften.  There is a  strong reason for this:  There is currently a 3 year wait for ANDA approvals at the FDA.  With most of Taro's market being too small to make it worthwhile for new entrants, their main revenue streams come from generic drugs with an oligopolistic competitive structure.  As can be seen, their competitors are happy to have Taro raise price since they to can benefit from the new pricing structure without causing much backlash from markets that are too small to care.
     
    Sun had Taro pay down payables by over $40MM this quarter, or cash generation would have looked even better.  There is chatter that Sun is looking to buy Stada which trades at approximately 12 times EBITDA.  To do so it would help to use Taro's nearly $400 MM (adjusted for unneeded payables reduction) to pay for it.  If they do buy Stada at a premium to its trading multiple, it becomes harder for Sun to buy Taro at a discount multiple since Stada business hasn't grown much in 5 years while Taro has been growing quite nicely.
     
    I don't expect a special dividend since I don't think that it helps Sun accomplish its goal of owning 100% of Taro.  I still believe that they will come to shareholders with a fairer offer now that the former chairman of Teva is chairman of Sun.

    SubjectSun Pharma offer to take Taro private $39.50
    Entry08/13/2012 01:01 PM
    Membermitc567
    This is the second time Sun has tried to lowball shareholders.  The Taro board has accepted the offer, however Israeli requires that more than 50% of the minority shareholders approve the deal.  I don't believe that will happen and Sun will have to negotiate with us.

    SubjectNY Times Story on Skin Creams
    Entry08/14/2012 07:15 PM
    Memberstraw1023
    Interesting timing on this story:
     

    SubjectTaro Numbers for Dec 2012 Quarter
    Entry02/05/2013 10:37 AM
    Membermitc567
    Here are the numbers which meaningfully exceed management's projections in the citi fairness opinion.
     
    Taro Pharmaceuticals          
    Income Statement (in USD$ 1,000's)          
      Actual 6 Months Ended Mgt's Predicted 6 Months Ended Mgt's Projected Decline in Taro's 2nd Half Actual 6 Months Ended Mgt's % Underestimate of Second Half
      6/30/2012 12/31/2012 12/31/2012 12/31/2012 12/31/2012
               
     Sales   $         304,293  $         269,307 -11%  $         346,669 -29%
     Net Income attributable to Taro shareholders   $         110,163  $           90,437 -18%  $         154,201 -71%
     EPS   $              2.48  $              2.01 -19%  $              3.45 -71%
    EBITDA  $         154,349  $         112,951 -27%  $         195,397 -73%
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