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Believing Taro Pharmaceutical’s results requires a leap of faith

Believing Taro Pharmaceutical’s results requires a leap of faith
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First Published: Thu, Dec 03 2009. 10 43 PM IST

Updated: Thu, Dec 03 2009. 10 43 PM IST
Dilip Shanghvi-led Sun Pharmaceutical Industries Ltd has two major corporate issues waiting to be resolved. One is the US Food and Drug Administration (FDA) action against its US subsidiary Caraco Pharmaceutical Laboratories Ltd—this has derailed sales of drugs made by Caraco in the US. The second is the legal dispute with Taro Pharmaceutical Industries Ltd, an Israeli pharmaceutical company it is in the process of acquiring.
Sun had made an open offer to acquire Taro’s shares at $7.75 (Rs358.05 today) a share in June 2008. The promoters of Taro and some institutional investors, notably Templeton Asset Management, backed a demand for a higher price, and called for a special tender offer under Israeli laws. After litigation in lower courts and reconciliation talks between the parties failed, the case will be decided by the Supreme Court of Israel. Its verdict will mark a key turning point in this case.
Graphics: Sandeep Bhatnagar / Mint
Taro recently announced its September quarter results, with sales rising by 4% over the same period a year ago to $90.4 million while its profit declined by 22.4% to $9.7 million. Its performance in the third quarter has worsened compared with the first half of the year, as April-September sales grew by 7% and profit was flat. Taro’s performance was hit by forex-related expenses of $8 million, mainly due to the US dollar weakening against the Canadian dollar, according to the company. However, its cash flows have been improving. Taro’s debt has been coming down as a result. In the April-September period, net cash from operating activities increased by 13.5% to $46.2 million.
An improvement in Taro’s performance was a key reason for its promoters and Templeton asking for a higher price. But Sun Pharma has not bought that argument because its accounts have not been audited. In fact, Taro has not published its annual report after 2005, and is restating its audited results prior to that period too. The uncertainty surrounding its financials makes it difficult for a proper valuation exercise. Sun Pharma scored a moral victory on this ground, as Templeton has changed its stance. It is withdrawing its application for a special tender offer.
Templeton’s grouse is with the forthcoming annual general meeting of Taro, which proposes to exempt non-executive directors of Taro from any personal liability. Sun had blocked a similar proposal earlier. Templeton’s concerns are on the combination of a lack of audited numbers and directors being absolved of personal liability. Though this is a positive development, the final outcome will depend on the Supreme Court’s judgement. Sun Pharma’s equity interest in Taro is around 42%, including warrants exercised on which shares have not been allotted. Sun Pharma will be hoping for a quick resolution to the issue so that it can show Taro’s results in its consolidated financials. Taro’s share price was at around $9 a share on the Nasdaq on Wednesday, down 2%.
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First Published: Thu, Dec 03 2009. 10 43 PM IST