Minority shareholders in Taro Pharmaceutical Industries, an Israeli company with U.S. headquarters in Hawthorne, are rejecting an agreement under which Sun Pharmaceutical Industries of India, which already owns two-thirds of Taro, would have bought the remainder of the shares for $39.50 each and taken the company private.
Taro, which makes generic dermatological treatments, and Sun, which is strongest in drugs for heart disease, as well as neurological and psychiatric disorders, have been engaged in a management battle for a number of years. Another deal for Sun”™s purchase of most of Taro was held up for several years as Taro”™s founders contested the price Sun was paying for their stock.
In May 2007, the companies entered into a merger agreement at $7.75 a share and then raised that to $10.25 before Taro rejected the offer. A ruling by the Israeli supreme court in September 2010 gave Sun voting control of Taro, which it maintains to this day. In October 2011, Sun offered $24.50 a share, which was rejected just last month as inadequate. It has now raised the offer to $39.50. At press time, Taro was up 6 cents a share to $39.53.
Minority shareholders own one-third of Taro stock. Any merger must be approved by 75 percent of the shareholders and 50 percent of the minority shareholders.
One of those minority shareholders is Mitchell Sacks of Grand Slam Asset Management in Fort Lee, N.J.
“The board accepted an offer below market price, at such a low valuation of the cash flow of the business, it”™s laughable,” he said. “Two companies that are public that compete with Taro ”“ Glenmark of India and Perrigo of the U.S. ”“ trade at 18 times earnings. So this deal values Taro at 4.8 times earnings, it”™s ridiculously low.” Sacks pointed to some recent mergers involving companies similar to Taro. “One involved Bradley Pharmaceuticals, which sold for fifteen times earnings, another was for a company called Fougera. That deal was announced in May, it”™s a competitor in some things but also has some lower margin businesses; that”™s going for nine times earnings. Then a deal was announced earlier this year in April involving the company Actavis, fourteen times earnings. I haven”™t seen a deal anywhere down here, other transactions are much higher.”
Sacks said Taro accounts for a third of Sun”™s revenues and close to half of its earnings. Taro”™s earnings have improved since Sun, which has a reputation for containing costs, took control.
Sun has stated publicly that it believes Taro”™s improved profitability is unsustainable. Sacks said he believes Sun is trying to talk down the price of the stock so it can buy it for a lower price. Emails to officials at Sun in India and calls to Taro headquarters in Hawthorne were not answered as of press time.
Sacks laid out his reasons why he believes Taro”™s profitability will continue in an open letter to Taro shareholders urging them to reject Sun”™s offer.
“It is our understanding that the formulation and testing of dermatological ointments, creams and gels is much more difficult than the process for pill-based drugs, creating a high barrier to entry. Prescription counts for many of Taro”™s products are quite low by prescription drug standards and typically can only economically support a very limited number of competitors; and even if a competitor decided to enter any of Taro”™s key markets based on today”™s pricing, there is a 32-month average time to receive FDA approval in addition to the time it would take to create the application and conduct testing.”
Another minority shareholder, Brian Sheehy of Iszo Capital in New York, agrees. “The generic dermatological industry is attractive for the long term. It”™s a little oligopoly in an area that is poised to do well for foreseeable future. It”™s a less-competitive niche business, but it has the benefit that generic drugs are the most efficient part of health care delivery,” he said. “And as the health care system realizes it has to save money things will become more genericized.”
Sacks points out that in December, Taro changed its bylaws to indemnify the board from lawsuits by shareholders.
“This set them up to try to buy with a lowball bid,” Sacks argued. He also contended that all this might put Taro in play.
“Perhaps a better course of action would be for Sun to open up the sale process to outside bidders,” Sacks said in his open letter. “We believe that Sun can sell its interest in Taro for significantly more than five times (earnings) to another pharmaceutical manufacturer. Such a process would also allow Taro”™s board to fulfill its fiduciary responsibility to obtain the best price for all shareholders.”
