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Taro buy signals a new dawn for Sun owner Shanghvi

P B Jayakumar  |  Mumbai 

Sun plans to hike Taro production and investments in research and development in Israel and Canada

Yona Yahav, the mayor of Israel’s third-largest city, Haifa, is an influential person in Israel. In mid-July 2008, he wrote a detailed letter to Israel’s Minister of Industry, Trade and Labour, Eli Yishai, detailing how an Indian company called Sun Pharmaceutical Industries is trying to take over one of Haifa’s business jewels — Taro Pharmaceuticals — and, more importantly, could cost 650 jobs in Israel.

His move was part of a strategy by Taro management to enlist Yahav to muster support for the Israeli drugmaker in its attempts to thwart a hostile takeover. “Reading the details of the agreement signed can lead to the conclusion that Sun plans to close production in Israel after the sale, and transfer it to India,” he wrote to the minister in his letter.

However, Yahav decided to remain impartial and not interfere in the battle between Sun and Taro. Sensing the damage, Sun Pharma Chairman & Managing Director Dilip Shanghvi immediately wrote to the Haifa mayor to pledge a commitment to Taro and employees in Israel if his company should take over the company.

Dilip ShanghviShanghvi explained that Sun’s chemistry skills could create value for Taro and contribute to the economy of Israel, particularly Haifa, where the company is headquartered. “That incident in the Taro takeover battle shows Shanghvi’s shrewd business intelligence, immense perseverance to reach his goals and how he made correct moves at the right time as in a game of chess,” said an industry analyst.

Shanghvi’s three-year wait and legal battles, costing thousands of dollars, on the Taro acquisition were viewed by many of his critics and shareholders as futile and a waste of Sun’s resources. Some of them felt Sun should exit Taro by selling its 36 per cent stake at a good premium. The pink-sheet listed Taro’s share prices shot up to over $10 a share, much above the investment price of $7.75.

But, Shanghvi was always confident that he would be able to get Taro. “The district court has ruled in our favour and I am confident that we will get a favourable judgement from the Supreme Court,” Shanghvi had said in an earlier interview with Business Standard. His stand was vindicated last month when Israel’s Supreme Court ruled in Sun’s favour and eventually the Taro management had to surrender its shares.

Shanghvi can now smile at his detractors, as he gained a controlling stake in the company for below $200 million, less than half the 2007 deal size of $454 million for full stake in Taro. Sun also got a healthier Taro, which claims to have posted 14 consecutive quarters of profitability and net debt of less than $25 million.

The September-quarter results of Sun Pharma will include Taro’s quarter results, indicates Uday Baldota, Sun Pharma’s spokesperson. In 2009, Taro had reported revenues of $360 million, with a profit of $51.9 million.

Taro specialises in over-the-counter drugs, ointments, creams and lotions, mainly in the dermatology and pediatric segments. It is a right synergistic fit for Sun Pharma, a company that specialises in manufacturing highly complex and difficult-to-make specialty drugs. Taro has more than 100 drug marketing applications across 50-60 products that are pending approval in the US. It has manufacturing units in Canada, the US, UK, Ireland and Israel, which will support Sun’s global drug supplies from its 19 manufacturing locations worldwide. It also provides a major entry into Europe.

But, Shanghvi’s challenges related to Taro are not over. Integration may face many problems. The Israeli company is yet to publish audited results for 2007, 2008 and 2009. The prime challenge before him will be to clean up the books and make Taro a profitable entity, similar to Sun’s culture and standards of profitability and over 26 per cent average annual growth rate in sales.

It also remains to be seen how Taro employees in Israel and Canadian manufacturing facilities view Sun Pharma and the new board. It will be a big task for Shanghvi and his team to win the confidence of employees. “Current employees are an important part of our future plans for Taro and we are committed to productive relations with Taro’s employees, and maintaining and enhancing Taro’s facilities in Israel as well as Canada,” he said.

Sun’s plans are to significantly increase volume of production from Taro and investments in research & development in Israel and Canada, especially in delivery systems and complex chemistry. “With the scientific talent within Taro, we look forward to increasing the number of product filings of higher complexity. Our intent is to help Taro benefit from Sun’s resources and international presence in order to bring a better future to all of Taro’s shareholders as well as its employees,” says Shanghvi.

There are issues already. Taro’s main manufacturing facility in Canada, which accounts for two-third of its global production, is under the US Food & Drug Administration (FDA) scanner for poor manufacturing standards. If Taro fails to address issues raised by the drug regulator, it may face a ban on several products in the US market. About 90 per cent of Taro’s sales are in the US.

Sun’s US subsidiary Caraco also faces regulatory issues and it may take more than a year to extricate it from its troubles and restart production. Recently, Sun Pharma’s Cranbury facility in the US received a warning letter and this may upset its plans to launch controlled-substance products in the US market.

Sun’s US business, which contributes 30 per cent of turnover, grew at an average 33 per cent for the last five years. It will be a challenge for Sun to maintain this growth in future. The company is also facing a law suit from Swiss drugmaker Nycomed & Wyeth for launching gastro-intestinal drug pantaprazole at risk.

But for the time being, Dilip Shanghvi’s Sun is shining, with Taro under its belt.

First Published: Tue, October 19 2010. 00:44 IST