Taro acquisition to open new horizons for Sun

Sun Pharma's Rs 2,237 crore acquisition of the Israel-based generics player Taro Pharmaceutical for an enterprise value of $454 million is its biggest so far and will significantly increase its turnover, taking it to nearly Rs 3,500 crore.

The firm is shelling out nearly ten times the amount that it did for the US-based Caraco, which was bought over six years between 1997 and 2003 at a cost of $50 million. Its other buys have been much smaller: the company paid around $23.5 million for Able Labs and even less for Valeant.

Much like its previous targets, the buyout helps Sun Pharma penetrate a new segment: dermatology. Taro has a strong presence in the segment, which accounts for more than 50 per cent of its revenues.

When Sun acquired Tamil Nadu Dadha Pharma it gained entry into the oncology space, with Milmet Labs it was able to foray into ophthalmology and with Valeant it diversified into controlled substances.

Said Nitin Agarwal, who tracks pharmaceuticals at SSKI Securities, "It's not easy to buy companies that have speciality products and with Sun Pharma also being a niche player, Taro is a good fit."

Chairman and Managing Director Dilip Shanghvi said, Taro will help Sun Pharma tap into the former's customer base in Canada, Europe and the US. Almost 90 per cent of Taro's revenue accrues from the US.

"We should be able to sell Caraco's products to a different set of customers in these markets and this should help us become a stronger player in the US," he said.

Besides, Shanghvi said, Taro's manufacturing sites in Israel and Canada would complement Sun's production bases in India, Hungary and the US.

An added benefit, as Nitin Agarwal said, was that Taro had spent $225 million over the last three years expanding its manufacturing facilities at both locations.

While Taro US has more than 100 abbreviated new drug application (ANDA) approvals and 26 awaiting approval, Shanghvi said there could be some overlaps.

He said that given Taro's investments in R&D - estimated at around $190 million - the combined entity should be in a position to file a larger number of products.

Similar to Sun's earlier acquisitions, Taro too was not in great financial shape, having posted losses in CY2006 on reported sales of $300 million, though it had turned in a profit of $5.7 million in CY2005.

Shanghvi is confident that the deal would be earnings accretive within 12-18 months and is targeting a payback period of about five-and-a-half years.

He said the immediate cash outflow for Taro may be less than $454 million if Sun is able to roll over even a part of the debt of $224 million on Taro's books.

It took Sun more than five years to make Caraco profitable and Valeant's Hungary unit is still unprofitable, though the US unit has turned the corner.

Sun's turnover has grown steadily at around 23 per cent annually over the last six years - from Rs 5,00 crore in 1999-2000, revenues have jumped more than four-fold to Rs 2,237 in 2006-07.

The major contributor to this growth has been the US generics market and the turnaround of its subsidiary Caraco Pharma: in 2005-06, almost 21 per cent of consolidated sales came from Caraco, while domestic formulations accounted for 55 per cent.

Sun's focus on high-margin chronic-care therapies has paid off and has resulted in stable operating margins "" psychiatry and neurology account for 30 per cent of sales and most of these products are not under price control. Thus, operating margins have been hovering around the 30 per cent mark.