Mumbai: Sharply increasing its US presence and continuing its track record of buying troubled companies, Sun Pharmaceutical Industries Ltd said it will buy generic drug maker Taro Pharmaceutical Industries Ltd for $454 million, or Rs1,844 crore.
Some $230 million of the deal is in cash. Rest is Taro’s debt that Sun will assume.
The proposed deal gives Sun Pharma access to manufacturing facilities and presence in key markets such as Canada, Israel, Ireland and the UK.
Sun Pharma’s shares rose 5.03%, or Rs50, to Rs1,064.15 on the Bombay Stock Exchange. They have gained 8.7% this year, valuing Sun at $5.09 billion.
Shares of Taro, which have traded in the US since 1961, have lost 86% of their value during the past three years. They were unchanged at $6.10 when last traded 18 May, valuing the company at $178 million. Taro had a market capitalization of $1.87 billion at the end of 2003.
The fifth-largest overseas acquisition by an Indian company this year is also the first major overseas acquisition for Sun. Its strategy so far has centered around buying distressed assets such as the 1997 acquisition of Caraco Pharmaceuticals for $50 million, which saw a turnaround by 2002.
SSKI Securities’ pharma analyst Nitin Aggarwal estimates that 50% of Sun’s revenues could now be coming from US as Taro adds $300 million and about 100 product approvals. Still, he estimates the payback period for the investment at five years.
Taro, which had sales of $298 million and a profit of $5.7 million in 2005, said in March that it expects to report a substantial loss for 2006, adding that it was in talks with companies on “strategic alternatives,” to stay in business. In 2004 too, the company reported a net loss of $31.5 million.
“We expect to turn the company around in the next 12 to 18 months,” said Dilip Shanghvi, chairman of Sun Pharma, adding that the deal will be accretive to earnings per share in the next 12 to 18 months.
The deal values Taro’s equity at $230 million ($7.75 per share), a 27% premium to its 18 May closing price. Sun plans to use its profits and proceeds from a previous $350 million sale of bonds convertible into shares to fund the purchase. Sun’s offer is subject to the approval of Taro shareholders and regulatory review
“The acquisition complements our international business. It gives us significant scale in the US and importantly it provides us with dermatology products, a business segment that we currently have no presence in at the moment,” says Shanghvi.
“We will bring down costs at Taro by reducing costs in purchasing, bringing in operational efficiencies,” he adds.
The Haifa-headquartered Taro derives 90% of its sales from North America where it has a subsidiary. Taro has manufacturing facilities in Canada and Israel and has invested over $225 million to upgrade these facilities over the last three years.
The Sun deal comes in the midst of a motion filed by two of Taro’s beneficial owners of around 9% shareholding; Franklin Advisers, Inc and Templeton Asset Management Ltd, to prevent Taro from entering into any transaction, which might result in discrimination against minority public shareholders.
Sun Pharma said that the proceedings are “without merit” and added that Taro intends to contest the action vigorously.
The motion is scheduled to be heard on Monday.
Bhuma Shrivastava of Mint and Arijit Ghosh and Ashok Bhattacharjee of Bloomberg also contributed to this story.)