The Hindu Business Line : Sun Pharma buys Israel co for $454 m

Sun Pharmaceuticals, a Mumbai-based drug-maker, has signed an agreement to acquire Israel's generic manufacturer Taro Pharma for $454 million (approximately Rs 1,837 crore), making it the second largest overseas acquisition by an Indian drug company.

Taro Pharma's generic profile was the clincher, indicated Sun Pharma's Chairman and Managing Director, Mr Dilip Shanghvi.

And this, despite litigation by minority shareholders looming over the transaction and Taro's projection on posting a "substantial loss" for 2006.

Mr Shanghvi is optimistic that the acquired company has an upside and can be made profitable through improved sales, product filings and efficiencies.

There is some amount of uncertainty over the transaction, Mr Shanghvi told Business Line, with minority shareholders Franklin Advisers and Templeton alleging discrimination against minority shareholders.

They claim that there is a special deal with the majority shareholders, which is not the case, he said.

The minority shareholders hold a combined nine per cent in Taro. Last week they filed a request with the Tel-Aviv District Court seeking a temporary injunction against the transaction. Whether the temporary injunction is vacated or granted, any further litigation would in effect have to be borne out of Sun Pharma's kitty, he indicated.

Sun Pharma came on Taro's radar after an "extensive process" of evaluation, he said.

If the price for the acquisition is less, there should have been others in the fray too, he added. The deal allows Sun Pharma to scale up its generics business in the US, as Taro has more than 100 ANDA (abbreviated new drug application) drug approvals in the US.

North America accounts for about 90 per cent of Taro's sales.

The company has subsidiaries, manufacturing facilities and products across the US, Israel and Canada.

Sun Pharma will fund this acquisition through internal accruals and proceeds from its $350-million FCCB.

The deal values Taro's equity at $230 million.

Sun Pharma will also refinance $224 million in net debt of Taro.

In addition, to provide immediate liquidity for Taro, the company will provide interim financing to the extent of $45 million.

The Taro acquisition would bring into Sun Pharma's fold products in dermatology or skin-care, paediatrics, cardiovascular or heart-related medicines, neuropsychiatry and anti-inflammatory products.

The deal also brings with it about 1,100 people from Israel, the US and Canada.

Taro recently reported 2005 sales of $298 million and profits of $5.7 million.

Its financial statements for 2003 and 2004 were required to be restated by the audit committee of its board of directors in view of errors in estimating the chargebacks from wholesalers and the actual inventory in the drug distribution chain.

Taro has invested over $190 million in research, which amounts to 12-16 per cent of sales.

On Monday on the BSE, the Sun Pharma scrip closed at Rs 1,064.15, up 5.03 per cent.

`Litigation has no merit'

The litigation has no merit, said Sun Pharma's chief, Mr Dilip Shanghvi, of the two minority shareholders seeking a temporary injunction from the Tel-Aviv District Court.

Franklin Advisers and Templeton Assets Management Ltd moved court as they felt the transaction may discriminate against minority shareholders.

With the motion scheduled to be heard on Monday, the Sun Pharma-Taro deal seems to hinge on the closure of this legal development. Mr Shanghvi expects to close the deal in about three months.

The transaction brings short-term pains, though it is a good long-term buy, said an analyst.

However, he worries that Sun Pharma might be arm-twisted by minority shareholders into eventually hiking the transaction price.

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