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  • A Retail Shareholder's Open Letter To Billionaire Mr. Dilip Shanghvi, Taro Chairman

    Dear Mr. Dilip Shanghvi,

    I am a retail shareholder of Taro for many years. I have been an individual investor in public equities for well over 14 years. In the past I have privately written to you on some of the points I raise here. I look forward to your response to the points raised in this shareholder letter.

    1. Negative leverage and inorganic growth - Please end the negative leverage and use optimal capital structure to grow the business inorganically. Taro now has $1b in cash, almost no debt and the business at a minimum generates >$300m in cash every year. For over 3 years Taro has had significant cash and almost no debt. Is there any justification for company operating in negative leverage mode for this long ? I believe if Taro had used its cash and taken on debt optimally, it would have grown very significantly. One has to look no further than SUN. Sun recently raised debt of $1b and it already carried a debt of $1.1b. Sun has been able to find fairly valued assets in the market over this period. Sun has made about 6 acquisitions including 2 dermatology assets. I strongly encourage Taro to use cash and optimal capital structure and buy 3-4 Phase 2 completed assets each with $1b or more in market potential.(A good example is Sun's in-licensing of MRK3022 for psoriasis, currently undergoing P3). To an independent observer, it appears cash is being set aside for buyback (which coincidentally also increases Sun's ownership in Taro!)

    2. Independent Directors - I request you to listen to the advice of the top Shareholder Proxy advisory firms(here and here) and NOT renominate the current independent directors in 2016. Quite honestly they lost my trust (my article from 2 years ago) and of many other shareholders. They voted for $39.5 "offer". In fact, one would think their resignation may be more appropriate pending results from a thorough investigation of "BBH" shares that voted as minority. Please also provide your detailed response to Bluemountain's allegations on the "BBH" shares that voted as minority. It is indeed surprising that minority shareholders would vote for them considering their telling record to protect value for minority shareholders.

    In addition, the Board is currently 100% composed of nominees from the majority shareholder, Sun. I hope you would agree that at least having 1 nominee from minority shareholder would make the board representative towards its shareholder base and improve corporate governance.

    3. Improved Investor Relations - Please improve investor relation practices to make it on par with your market peers. I have been asking this one for more than 3 years now. This would mean having quarterly earnings call, annual shareholder day, coverage from 4-5 wall-street analyst firms and attending 2-3 investment conferences annually.

    4. Expansion of Taro in EU market. This question has come up repeatedly. 2.5 Years ago EU-Israel signed a treaty that allows Israeli-certified pharma products to be exported to Europe and vice versa. EU with its 500m population and good purchasing power would appear to be a logical market for Taro to exploit. In a call last year, management said they are "evaluating" this opportunity. In the last earnings call in May 2015 Brian Sheehy of Iszo capital asked this question again. Kal Sundaram, CEO said he will answer this question and put the response on web site. So far I have not seen anything on Taro's web site that answers this question.

    5. Information Sharing - Please improve information sharing with all shareholders. For example, I encourage Taro to provide:

    • Brand value in sales of next 5 year pipeline launches
    • Brand value in sales of next 5 year pipeline that are Para 4 and FTF launches
    • Revenue concentration of top 10 products in your 2014 sales- Eg: Prod 1-10% Prod 2 - 5%, etc
    • Currently an NDA is pending FDA approval. Nobody except Taro knows the market (is this $10m or $100m or more?) it is addressing.
    • Note: I am NOT asking for product specific or commercially sensitive info here. Please see Perrigo or Akorn's quarterly investor presentations as they share this kind of information.

    6. Exploration of Potential Sale - This is probably the most important point from a shareholder value perspective. I urge you to look into potential sale of Taro. Valuations are quite robust right now. For example, Gavis, a small niche generic dermatology pharma was recently purchased by India's Lupin at 25.4 times TTM EBITDA (TTM sales-$96m, TTM EBITDA margin-36%, TTM EBITDA- $34.56m)(Illustrative market value of Taro using this TTM EBITDA transaction multiple is $347 per share). This compares to the dissappointing ~9 times EBITDA that taro currently trades at. (Shareholders who need money today have to sell at this valuation.)

    The recent frenzied consolidation in the US generic pharma industry implies assets like Taro are now even more scarce and unique than before. Taro, with its multi-decade history of developing topical/derm generics, operational excellence under new management, 1400 highly skilled employees mostly in Israel, manufacturing know-how for topicals, FDA approved plants in 2 continents, 100's of patents, 235+ filed ANDA on complex generics, stands as an unique asset in this industry.
    If a small company with little operational history ( Gavis launched its 1st product as recently as 2009 ) can command such a multiple, wouldn't there be buyers to offer similar multiple for the established market leader in the same sector: Taro ? Sun as a 70% shareholder could take away as much as $10b in such a potential sale. If Sun does not want to sell even at such high EBITDA multiples, then it behooves you to see how you can narrow this huge valuation gap for the benefit of all of Taro's shareholders.

    (BTW, here is what Mylan Board had to say on valuation multiples in generic pharma.)

    Mr. Shanghvi, I respect your entrepeneurial achievements at Sun considering the humble beginnings. It is remarkable that you are positioning Sun not only as supplier of generic medicines to the whole world but also bringing in new drugs for unmet medical needs. But I do hope you are mindful of the significant contribution of TARO in SUN 's unprecedent expansion (and coincidentally, your net worth) in recent years; TARO has been a significant part of SUN's EBITDA for the last 4 years and Taro's cash boosts Sun's Balance sheet . In many ways acquiring controlling stake in TARO has been game changing for SUN. Sun has been able to make a series of acquisitions over the last 4 years: Ranbaxy, Dusa, URL Pharma, Merck's Phase 3 Derma asset for Psoriassis, Pharmalucence, GSK's Opiate Business and SUN continues to be on prowl for another $7b acquisition.

    At Taro, I give you FULL credit for the share price increase from the time you became Taro's Chairman in Feb 2013 i,e from ~$55 to $140 per share. But I think it is hypocritical for your management team to claim any credit for the share price increase from $14 to $55 considering the actions of 2011 and 2012. And I hope you agree with me.

    This is the same management that not too long ago said (link)

    If the merger is completed, Taro's shareholders, other than Sun Pharma and any of its affiliates and Taro and any of its subsidiaries, will receive $39.50 in cash. As of October 4, 2012, the closing per share price of the ordinary shares on the New York Stock Exchange was $46.15. Shareholders of Taro selling ordinary shares in the market may be able to obtain a per share price that is higher than the merger consideration for some or all of their ordinary shares.

    Our board of directors has determined that the merger is advisable and fair to, and in the best interests of, Taro and its shareholders, approved the merger agreement, the merger and the other transactions contemplated by the merger agreement and determined to recommend to the shareholders of Taro the approval of the merger agreement, the merger and the other transactions contemplated by the merger agreement

    Finally Mr. Shanghvi, morally, you owe a response to shareholders for all the points raised in this shareholder letter. Your role as Taro chairman demands that you consistently do the right thing for ALL of Taro shareholders and communicate openly on all the above matters that you will do the right thing. The role requires you to be aware of and supress any egoistic tendencies (as in increasing ownership at Taro at any cost) that arise and be empathetic and consistently do duty towards ALL of Taro's shareholders. In the end, I like to leave with 2 relevant quotes:

    "Ethics are not necessarily to do with being law-abiding. I am very interested in the moral path, doing the right thing". - Kate atkinson

    "Next to doing the right thing, the most important thing is to let people know you are doing the right thing". - John D. Rockefeller

    PS: Below under comments section you can find valuable quotes on role of Directors from Warren Buffet


    A Long term retail shareholder

    Aug 01 10:16 PM | Link | 35 Comments
  • Funds Significantly Increase Shareholdings In Taro

    As Taro continues to deliver on adding shareholder value, funds have significantly increased their stake. After >120% increase in share price from last year, Taro in June 2014 announced significant price hikes; To read more, please click here

    Tags: TARO, PRGO, VRX, AGN, long ideas
    Aug 19 2:23 AM | Link | Comment!
  • TARO Pharma Receives ANDA Approval For Clobetasol Propionate

    TARO received ANDA Approval for Clobetasol Propionate on July 2nd as can be seen from the FDA's web site. There are only 2 generic suppliers for this product currently in USA. Actavis and TARO. Actavis had 6 month exclusivity which started in January 2012. Investors would recall that Actavis, a comparable peer of TARO, competes in a number of products with TARO. The product listing of TARO and Actavis can be found. Actavis was acquired by Watson in April 2012 at 14.8 TTM EBIDTA.

    The Worldwide 2010 sales for Clobetasol Propionate was ~$240m

    Combined USA annual brand sales of Clobex® Shampoo and Clobex® Topical Lotion totaled $89.9 million for the 12 months ending September 30, 2011, according to IMS Health.

    This is another product that we expect would materially add to the future earnings of TARO.

    Disclosure: I am long TARO.

    Jul 29 7:05 AM | Link | Comment!
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