Sun Pharma: Pyrrhic victory?

The battle for Taro has been won, but the extent of the damage will be seen in times to come.

Sun Pharmaceuticals seems to have won the battle to acquire Israel-based Taro as Israel’s apex court ruled in its favour. The acquisition means that the company will be able to extend its geographical and product presence. It will get access to the dermatology market in the US (accounting for around 70 per cent of Taro’s revenues) and the company’s experience in the branded generics segment, especially in pediatrics. Sun Pharma will also cash in on Taro’s strong presence in the UK and Irish markets.

The open offer to buy Taro’s shares is made at $7.75 per share, while the current stock price on the New York Stock Exchange (NYSE) is $11.40. Hence, Sun might not be able to garner a significant quantity of shares from the market, reckoned analysts. An extra cash outflow of around Rs 210 crore is likely towards consolidation and integration. The company has, till date, invested around $105 million to acquire a 36 per cent stake in Taro.

While this sounds optimistic, certain concerns persist about Sun Pharma and Taro. Taro’s audited results were available only till CY06, point analysts,which is not a favourable sign. The management has put out press releases only to report unaudited and estimated results, say analysts. Operating profit margins have recovered to around 18 per cent in 2009 from the negative level. However, sales and net earnings have stagnated at around $330 million (Rs 1,500 crore) and $44 million (Rs 195 crore), respectively, for the past two years. Clarity on Taro’s actual financial position will be a strong factor for the company’s fortunes on the stock exchanges.

Moreover, Sun Pharma’s woes in the US with regulators and its operations have been a bigger concern than the acquisition of Taro after a protracted battle. Only Taro’s numbers will tell whether the wait was worthwhile, or it was a mere pyrrhic victory.