Thursday, October 25, 2012
Fusilev Sales Trends
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Medicoinvestor posted this interesting Fusilev sales trend chart that correlates actual sales of Fusilev to what is reported in WK. Q3 looks positive based on this trend.
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Sunday, October 21, 2012
Spectrum DD Links
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- Belinostat for Unresectable Hepatocellular Carcinoma -> http://www.ncbi.nlm.nih.gov/pubmed/22915658
- New Phase 2 trial initiated in Sept 2012- Belinostat in combination with Zevalin for Relapsed Aggressive B-Cell Non-Hodgkin Lymphoma -> http://clinicaltrials.gov/show/NCT01686165
- Leucovorin Shortage increases (Oct update) -> https://www.ashp.org/DrugShortages/Current/bulletin.aspx?id=488
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Saturday, October 6, 2012
TARO Shareholders: Salient Questions To Ask the TARO Board Before Casting Your Minority Vote On The SUN-TARO Merger Agreement in the November Proxy
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We are retail shareholders of TARO. We have the following serious concerns and questions regarding the 08/31 filing ("merger agreement"). We believe the fair value of TARO is significantly higher than what is being offered in the merger with SUN. Some of us originally wrote to the TARO Board on 05/20/2012 where we articulated the actions that needed to be taken so TARO trades at Enterprise Value/LTM EBIDTA market multiples closer to its market peers like Perrigo. Those actions were never taken. For instance, using Perrigo's market multiple of approximately 15, TARO's fair value is around $120 per share which is almost 3 times the price being offered under the merger agreement with SUN for which your valuable minority vote is being requested for. The merger agreement requires a majority of the minority vote. Below we raise salient questions regarding the fair value of TARO and methods undertaken by TARO towards this merger agreement.
We ask that you review these carefully and then make a determination on your vote on the merger. For further discussions on this subject register -> here
1. Did the TARO board review and consider the Average LTM EBIDTA multiples that the recent acquisition of peer generic companies happened at?
-> Medicis at about 13 times LTM EBIDTA
->Actavis at 14.8 times LTM EBIDTA
-> Fougera at 8.8 times LTM EBIDTA*
-> The Median valuation multiple was 14 times Ebitda in eight other recent pharmaceuticals takeovers.
TARO at 15 times Q2 annualized EBIDTA would be valued approximately at $120 per share. The current offer of $39.5 translates to approximately 5 times 2012 EBIDTA of approximately 300-320m. The Q2 2012 EBIDTA was 79m.
* Fougera was a private company with little public detail known on its margin, balance sheet and growth.
** Industry analysts are expecting improved TARO performance in Q3.
2. Citi relied on the Discounted Cash Flow (DCF) approach in valuating TARO. Why did Citi or the board not consider "LTM EBIDTA Multiple" approach? Majority of the precedent transactions including TARO peer acquisitions (Actavis, Medicis, etc) used the "LTM EBIDTA Multiple" valuation approach. The DCF approach is based on sales and EBIDTA estimates for the next 5 years. These estimates and the assumptions behind the estimates are based on, are inherently inaccurate and highly untenable. In addition, these estimates are indicated to be sourced from TARO's management.
With TARO management being accountable to the TARO board and its future employment prospects depending on TARO board members, which is full of members from the prospective acquirer SUN, isn't there a conflict of interest? Wouldn't that be reason enough to shun DCF approach? Even if TARO were relying on the DCF approach, shouldn't TARO source these sales estimates and importantly the assumptions behind those estimates from multiple industry analysts that are independent? The appointment of Special Committee with completely independent members is to ensure fairness for the Minority Shareholders. However, if the independent Special Committee relies on subjective and inherently inaccurate forecasts, assumptions, estimates from an interested party(or a party with vested interest- In this case the TARO Management) to arrive at the Fair value, the courts will ensure "fairness test" is revisited.
The Oct 5th filing has the following: "The financial
projections should not be regarded as an indication that any of Taro, the
Special Committee or their respective affiliates, advisors or representatives
considered these internal financial forecasts to be predictive of actual future
events, and these internal financial forecasts should not be relied upon as
such nor should the information contained in these internal forecasts be
considered appropriate for other purposes. "
If this is the case why is TARO board and TARO special committee relying on these highly subjective and untenable forecasts in arriving at the FAIR Value of TARO. Why is the TARO board and Special committee using Discounted Cash flow approach which relies on these unreliable(in your own words) forecasts instead of using the "Multiples of LTM EBIDTA of Comparable market peers(Eg: Perrigo) or Recent Comparable precedent Transactions(Eg: Actavis, Medicis)"
3. From 2008 to 2011, TARO's year-on-year EBIDTA growth rate was ~50% and year-on-year Sales growth rate was ~15%. Yet, TARO's 5 year forecast for growth is a negative 6.7% !
How could TARO's management possibly arrive at the low-ball sales estimates for 2013-2016? The filing says "The financial forecast was presented by Taro management to Citi as of June 14, 2012." No details are provided on the assumptions made to arrive at these sales estimate which seem unbelievably low considering TARO's historical sales and growth rate. Were the 2 NDA's pending FDA approval as well as several ANDA's pending approval factored in to these estimates? Did the "Management case"(the low-ball sales and EBIDTA estimates) have to be vetted with the TARO board for their acceptance before it was sent to Citi?
TARO's new chairman Kal Sundaram (ex-SUN CEO) and SUN founder Mr. Shangvi have stated "TARO's opportunistic drug pricing can not be maintained". This appears to be the speculative basis on which the 2013-2017 estimates are based. Did TARO consult independent industry analysts when coming up with these estimates and the assumptions behind them?
4. Why is there a significant step-up in R&D expense from 2011 to 2012? This is a 60% year-on-year increase in R&D Spend. The step-up is also significant from 2010 base. This has a big impact on EBIDTA and valuation of TARO shares. The timing of this step-up is questionable.
5. Why is there absolutely NO mention of any financial estimates of synergy savings in the Merger agreement? Why is there no consideration for premium?
Some highly anticipated synergies are:
a. Opening up of new markets(India, etc) for TARO's products where SUN already has a presence.
b. Opening up of new markets(Israel etc) for SUN's products .
c. Potential transfer of TARO manufacturing to low cost India and other R&D synergies.
d. General SG&A synergies(the combined company can have one Management, one Sales force, one Legal representation, one Auditor, one Human resources department, one Investor Relations department, etc)
When Valeant purchased 2 other dermatology companies in late 2011 it quickly realized $110m in synergy savings in 1st quarter 2012. Valeant is expecting 225m in synergy savings in the first 6 months of after acquiring Medicis. The Medicis acquisition by Valeant was announced in September.
Our letter dated "05/20" highlighted how unique and valuable the TARO asset would be for any Pharma company and especially an Indian Pharma company. The highlights are listed below:
- TARO is in a limited competition and higher barrier-to-entry generic and OTC business.*
- Taro has a 50% market share in its top 18 products(see IsZo capital letter dated 05/11).
- Past generic M&A transactions were at an average of 14.8 times EBIDTA
- TARO's competitor Perrigo trades at 16 times ttm EBIDTA. Taro's 3 year sales and EBIDTA growth, operating margin, balance sheet and leverage ratio are all superior to Perrigo.
- The valuation of parent Sun's and relative contribution of TARO's to Sun's EBIDTA, would easily value TARO in excess of $100. SUN's generic business is a commoditized business with Several Indian Pharma competitors unlike TARO's business with no competition from ANY Indian Pharma.
- *None of the big Indian generic pharma companies that are significant players in the US generics market, have any meaningful presence in the dermatology and topical market due to the lack of technology. With the acquisition of Taro, Sun Pharma would likely end up to be the only Indian company armed with the technology and manufacturing know-how for dermatology/topical from Taro, with the ability to leverage tremendous cost arbitrage opportunities in manufacturing and R&D from India. Inevitably, this will throw up margin expansion and market-share opportunities for Sun Pharma in the dermatology/topical space both for existing as well as for new products.
6. It has been publicly said by SUN pharma billionaire founder Mr. Shangvi that TARO is overvalued when it was trading around $39. Why wouldn't TARO board open the company for a formal auction process and consider other strategic alternatives? A lot of TARO shareholders believe Perrigo, Valeant or another Indian Pharma would bid for TARO at 15 times LTM EBIDTA ($120 per share). This would have been a win-win-win situation for ALL 3 parties involved: SUN pharma would get $120 per share(SUN's founder has publicly said at $39 TARO is overvalued), TARO's minority shareholders and for a Strategic Acquirer.
7. The Special Committee was evaluating $24.5 offer when during the same period the TARO shares traded hands for many months around $40. Which committee that is expressly set up to maximize the value for ALL shareholders would do this ? As another institutional shareholder correctly pointed, merely going through the motions of creating Special committee will NOT relieve the TARO board from the "fairness test" and absolve the board from its fiduciary duties towards its shareholders. Please read red text in point 2.
We, like Iszo Capital stated in its 09/20 letter , have the same concerns on the proposed voting procedures and its inability to identify interested party from being counted as minority vote.
8. The Oct 5th filing has the following paragraphs:
"After careful consideration, the special committee of our board of directors composed entirely of independent directors (which we refer to as the “Special Committee”) determined that the merger agreement, the merger and the other transactions contemplated by the merger agreement are advisable and fair to, and in the best interests of, the unaffiliated shareholders of Taro and Taro’s audit committee determined that the merger agreement, the merger and the other transactions contemplated by the merger agreement are advisable and fair to, and in the best interests of, Taro and its shareholders"
"Further, and for the same reasons, the financial projections should not be construed as commentary by Taro’s management as to how management expects Taro’s actual results to compare to research analysts’ estimates. The financial projections should not be regarded as an indication that any of Taro, the Special Committee or their respective affiliates, advisors or representatives considered these internal financial forecasts to be predictive of actual future events, and these internal financial forecasts should not be relied upon as such nor should the information contained in these internal forecasts be considered appropriate for other purposes. None of Taro, the Special Committee or their respective affiliates, representatives or agents undertakes any obligation to update or otherwise to revise the financial projections to reflect circumstances existing or arising after the date such projections were generated or to reflect the occurrence of future events, even if any or all of the underlying estimates and assumptions are shown to be in error. None of Taro, the Special Committee or its affiliates, advisors, officers, directors or representatives has made or makes any representation to any shareholder or other person regarding Taro’s ultimate performance compared to the information contained in these financial projections or that the forecasted results will be achieved.
The financial projections were based on then current market conditions, adjusted to take into account the likelihood and potential impact of competition on Taro's existing products as well as the projected impact of new products expected to be introduced by Taro. The financial projections also assume that fixed costs will increase at 3% per year and that variable costs will vary with net sales."
"The financial forecast was presented by Taro management to Citi as of June 14, 2012. Taro management has not undertaken to update the forecast since this date."
Shouldn't the special
Committee or Board revisit these estimates before recommending shareholders to vote on the grossly inadequate $39.5 offer ? Isn't it the fiduciary duty of
the board to see if anything material has changed since June 14th that would
affect the valuation before making a recommendation? Instead, the TARO shareholders are being
recommended by the Special committee in this preliminary proxy statement to
vote for $39.5 merger while at the same time acknowledging that the market price of TARO is $46 ? So should TARO shareholders assume nothing materially has changed from June 14th Management forecast ?
9. As pointed out by ISZO capital, in its letter on 09/20, Citi's conflict of interest should bar them from being considered independent financial advisor. If Citi is going to be paid $5.7 million ONLY upon consummation of merger, how can Citi be considered independent?
Highly questionable estimates provided by Management
FY 2010-11A and FY 2012-2016E
| $mm (1)(2) | 2010A | 2011A | 2012E | 2013E | 2014E | 2015E | 2016E | |||||||||||||||||||||
| Income Statement | ||||||||||||||||||||||||||||
| Net sales | 392.5 | 505.7 | 573.6 | 535.4 | 514.3 | 491.6 | 498.2 | |||||||||||||||||||||
| COGS | (145.0 | ) | (162.1 | ) | (165.8 | ) | (162.1 | ) | (159.6 | ) | (158.4 | ) | (161.8 | ) | ||||||||||||||
| SG&A | (103.2 | ) | (89.2 | ) | (87.5 | ) | (88.0 | ) | (88.6 | ) | (89.6 | ) | (92.0 | ) | ||||||||||||||
| R&D | (36.4 | ) | (30.9 | ) | (53.0 | ) | (53.5 | ) | (51.4 | ) | (49.2 | ) | (49.8 | ) | ||||||||||||||
| Impairment | (2.6 | ) | (0.8 | ) | -- | -- | -- | -- | -- | |||||||||||||||||||
| EBITDA (3) | 105.3 | 222.7 | 267.3 | 231.8 | 214.7 | 194.4 | 194.5 | |||||||||||||||||||||
| Depreciation & amortization | (18.8 | ) | (18.7 | ) | (20.0 | ) | (20.0 | ) | (22.0 | ) | (22.0 | ) | (22.0 | ) | ||||||||||||||
| Operating income | 86.5 | 204.0 | 247.3 | 211.8 | 192.7 | 172.4 | 172.5 | |||||||||||||||||||||
| Foreign exchange | (5.3 | ) | 6.9 | (0.2 | ) | -- | -- | -- | -- | |||||||||||||||||||
| Interest expense | (6.6 | ) | (3.2 | ) | (0.1 | ) | (1.8 | ) | (1.1 | ) | (0.4 | ) | (0.3 | ) | ||||||||||||||
| Interest income | 0.8 | 0.6 | 0.9 | 3.9 | 3.8 | 3.6 | 3.6 | |||||||||||||||||||||
| Profit before tax | 75.4 | 208.3 | 247.9 | 213.9 | 195.5 | 175.7 | 175.8 | |||||||||||||||||||||
| Tax expense | (10.5 | ) | (24.6 | ) | (47.3 | ) | (38.1 | ) | (33.1 | ) | (27.8 | ) | (27.8 | ) | ||||||||||||||
| Net income | 64.9 | 183.7 | 200.6 | 175.8 | 162.3 | 147.9 | 148.0 |
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