Elsewhere in the industry, India-based Ranbaxy (RANBAXY.NS) lost about 20% of its market value Friday on word the FDA would not review new generic drug product applications from one of the Company's facilities amid charges of fraud that involved falsifying shelf life data.

Shares of Home Diagnostics (HDIX) have surged by nearly 50% since I profiled the company in mid-December as a turnaround value play from the ETF Innovators Healthcare Cost Containment Index. A search for compelling values among these companies today led me to generic drug maker Hi-Tech Pharmacal (HITK).

Shares of HITK are down by about 10% in the past five days on light volume and no news headlines, providing a nice chance to accumulate some shares. The Company reported record quarterly revenue for its second fiscal quarter and is expected to earn 41 cents per share for FY09 (which ends in April), which results in a P/E of about 11 based on the current price around $4.60 per share.

India's largest generic drug company by market cap, Sun Pharma (Bombay: 524715) [link to analysis of this market], and Israel-based Taro Pharma (TAROF.PK) have one month to reach agreement on an outstanding tender offer of $7.75 per share by Sun Pharma to acquire its smaller rival or the Israel Supreme Court will decide on the case. In early 2007, Taro agreed to the deal as it was struggling to survive and Sun invested $60M as part of a private placement to resolve Taro's liquidity issues.

In addition to the favorable underlying trends I wrote about previously for the generic drug industry, both presidential candidates are bullish on the industry with the following excerpts taken directly from their websites:

Top 5 Companies by Market Cap

Emerging market guru Mark Mobius continues to gain momentum in his bid to block the sale of Taro Pharmaceuticals (TAROF.PK) to the Indian drug company Sun Pharmaceutical Industries Ltd. Taro delayed its planned shareholder meeting after it became apparent that they couldn’t assure the votes needed to win merger approval. While delay tactics may have worked in the past, new judge Michal Agmon-Gonen, won’t put up with it any longer. She’d fed up and she’s not gonna take it anymore.

Judge Agmon-Gonen schedule a hearing for January 13, 2008. In the event that Taro again postpones its shareholders meeting, the judge said, “If no shareholders meeting is held, the hearing on this date will decide on how Templeton’s (BEN) petition will be heard, without waiting for the results of the shareholders meeting.”

In a new turn of events, Israeli financial institution, Analyst Investment Management, has joined with Brandes Partners, as the latest defectors to join with Templeton’s, in order to block the sale at the company’s general meeting on July 23rd. Another large Israeli institution, Harel, has yet to reveal which way they are leaning, but with the momentum squarely in favor of blocking the move, and it wouldn’t be a surprise if they also voted against the sale.

On Monday, ClickSoftware held its annual shareholders meeting, where it was to propose, among other things, a change in the company's articles of association that would allow it in the future to pass a resolution for the sale or merger by an ordinary majority of shareholders, rather than the statutory 75% of shareholders present at a meeting. ClickSoftware has not explicitly said that it was in talks for such a sale or merger, but one can safely assume that if the management asked for such a change, then a deal could be in the offing.

Lessons of Taro

Apparently I am not the only who doesn't understand, and as proof of this, mutual fund manager Franklin Templeton, which holds 9.5% of the company - at an average cost which I suspect is not less than $12 per share, is seeking a court injunction to block the sale.

Another person who still doesn't get the picture is analyst and accountant Brian Laegeler of the unbiased investment research firm Morningstar, who on the day the sale was announced last week, published a review of Taro in which he claims the company was worthy of a fair value of at least $13, but as much as $20 to a large competitor. Incidentally, I assume that when Franklin Templeton started out on its Taro escapade back in the summer of last year, it probably did so at least partly on the basis of advice from Morningstar, which also rates the mutual fund industry, of which Franklin Templeton is one of the giants.

It was just a few weeks ago that Morningstar analyst Brian Laegeler wrote a piece about how he thinks the company is currently worth $13 a share and has potential to reach $20. Not only he was duped like the rest of us, but Brandes Investment Partners purchased a lot of shares in the $9 range, and of course Franklin Advisors and Templeton Asset Management, which together own 9% of Taro at prices around $13, aren’t exactly doing summersaults.

Will Franklin Resources be able to come in and save the day? Three weeks ago, they filed a motion in Israel seeking appointment of a special interim manager to review Taro’s efforts in identifying strategic alternatives. Over the weekend, they filed for an injunction to prevent Taro from entering into any deals. The motion is to be heard in the next day or two.

But one thing cannot be taken from Taro, and that is its experience in the pharmacology field and its potential. Anyone who has visited the company's plants in Toronto and Haifa Bay, as I have, will be able to confirm that the infrastructure exists.

Setting aside for a moment the company's management in the U.S., Taro has managed to produce generic drugs which are both difficult to manufacture and which belong to fields where there is little competition. To put it another way, Taro has developed a medical niche with a potential that is sky high, and were it not for its odd management, the company's stock would almost certainly be at a much higher level than it is today. The company focuses on the manufacture of oils and generic ointments of the kind which the U.S. Food and Drug Administration [FDA] do easily approve since the FDA does not know the effect of these compounds, which are applied to the skin but then absorbed into the bloodstream.

As Brandes' reputation speaks for itself, Guru Focus wonders whether it would be worth buying Taro at $7 a share. I find difficult to believe that Brandes' managers did not make a few inquiries before investing $28 million in Taro shares, and anyone familiar with Taro and its management would have been wary of investing such a sum at that price. I actually have an explanation for their decision - they probably invested under the their "100 year philosophy," because the company's management will eventually be replaced at some point, won't it?

Disclosure: The author invests in various equities and may have a personal holding in the stock of companies named.

Both Merrill Lynch and the managements of other financial institutions that hold stocks in this company should have learned from what happened with Savient Pharmaceuticals Inc. (SVNTE), and acted accordingly. This was the only way to rehabilitate Taro for the benefit of its shareholders. What did they did do at Savient? They replaced the management that had been making a mockery of shareholders for 20 years. Since then, Savient has soared by more than 300%. You’ve seen what the rumors did to Taro, but the big difference is that Savient made its climb after the management had been replaced while Taro climbed before any such changes have been made. So the short surge we saw last week was doomed to failure from the outset.

The Levitt family has been sitting in Taro a lot longer Simcha Fass was at Savient, and it has not excelled at giving shareholders satisfaction (to put it mildly). Did anyone really believe the company would meet the listing requirements of the Nasdaq? Although the listing committee could reconsider its decision, I find it difficult to believe that it will do so. Let’s say that the auditors, Ernst &Young, had their work cut out for them at Taro right from the beginning, and with things as they are now, it really looks like they’re walking a tightrope.

After long thought, I want to put the facts on the table. If it weren’t for Merrill Lynch, no one would have heard of Taro, and no one would care about it. For years, Taro’s share hovered unchanged at $6-7, until Merrill Lynch came and saw “visions of Teva Pharmaceutical Industries Ltd. (Nasdaq: TEVA) in Taro”. Merrill Lynch began coverage of the company with a “Strong buy” recommendation, and the share rose to $34 at the end of 2004. True, those were good times for the company’s business, but in view of the subsequent serious developments, I wonder if those were really good times, or if there were “creative times”.

This large rise in the short position on Taro came right in the middle of the war, and perhaps the short traders were betting on missiles hitting the company’s manufacturing facilities near Haifa. Any such missile attacks would quite definitely have harmed Taro’s current business. But instead of a Katushya, the short traders got a rocket from mutual fund manager Franklin Resources Inc. (NYSE:BEN) (Franklin Templeton), which ignited the stock, and now they’re scrambling to close this short position, sending the stock even higher. I, as it happens, am continuing to hold the stock because of the original reason that led me to enter it earlier this year: the prospect of a business revival rather than a potential acquisition.

TAROF.PK 2-month Chart

Before I go any further on this, I would just like add that another person who should be worrying about Franklin Templeton is Check Point (Nasdaq: CHKP) CEO Gil Shwed. Franklin Templeton is Check Point’s largest investor and in recent months it significantly increased its investment by six million shares to 33.7 million in all, a 14.2% stake, even larger than that held by Shwed himself. Notwithstanding the vast difference between the management of Taro and Check Point, both companies have recently hit an annual low that Franklin Templeton managers will find worrying.