Israel-Medical-Healthcare

[genisi]

Shlomo Greenberg on the never ending story of TARO

Taro - one for the speculators
May 8, 2007
http://www.globes.co.il/serveen/globes/docview.asp?did=1000209752&fid=1052

A long overdue management shake-up could be all that is needed to get this troubled yet promising company back on track.

Recently I mentioned Taro Pharmaceutical Industries Ltd. (Pink Sheets: TAROF.PK) in one of my reviews. It is true that the company has driven its shareholders to distraction in recent years and that it has controlling shareholders that hold investors hostage, and that these even managed to fool Merrill Lynch. But one thing cannot be taken from Taro, and that is its experience in 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 US, 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 US Food and Drug Administration (FDA) do easily approve since the FDA does not know what effect these compounds, which are applied to the skin but then absorbed into the bloodstream, have.

Either way, after what I went through with Savient Pharmaceuticals Inc. (Nasdaq: SVNT), it would be well worth ignoring the atmosphere surrounding the company on Wall Street, and focusing instead on the direction it could take on Main Street. I would not have wasted time on Taro were it not for the many readers who have pressed me for an answer to the question - why can't the change that took place at Savient happen at Taro too?

I gave the matter some thought and concluded that indeed, why not? After all, both Taro and Savient are veteran companies with knowledge and experience in niches with tremendous potential, and both of them have suffered (and in Taro's case, still suffers) from bad management.

There are those who claim that the difference lies in the fact that Savient did not have the large shareholders that Taro has, but this is not entirely correct. Shaking up the management at Taro will be harder but it can still be done with the help of a serious "leader" that will begin moving aside the current management. It is clear to me that this process has already been set in motion with the entry to the company of leading parties at interest. Those shareholders that continue to hang on to the company surely understand that they will be unable to restore it to its past glory, and they would be doing themselves a favor if they found a lead buyer or partner that could take the stock up to $20-30. These shareholders are recklessly playing with their own futures and those of ordinary shareholders, since the current period represents a time window in the medical generic field that will not last indefinitely, so now would be the right time to take a deep breath and vacate the driver's seat.

Naturally, I am not alone in thinking this. Last week I saw a recommendation for Taro by analyst Brian Laegeler of Morningstar.com, without doubt one of the more important and well-known sites in the financial world. Let me assure you that, following Laegeler's review, a good many institutions, which constitute Morningstar's main audience, will now be taking note of the company and its stock. This doesn't mean anything, certainly not with regard to the immediate future, since institutions do not rush to invest in Pink Sheets-listed companies, not least one that fooled Merrill Lynch's analysts, but all it will take is a few such institutions that agree with Laegeler's opinion that the stock is worth $20 to ensure that it actually does get there.

In 2006, after the crisis reached its peak, Taro restructured and according to its 20-F filing with the US Securities and Exchange Commission (SEC), the company believes that it will emerge from the crisis in 2007. It also recently appointed a new CFO.

Laegeler is an analyst who follows companies in the pharmacological industry such as Mylan Laboratories Inc. (NYSE: MYL) and others. In his review of Taro published on May 2, he recommends buying the stock at the current price of $6.80, and according to his model, its current value stands at $13. Laegeler notes that this is a very speculative investment, but one with great potential. Only 7% is held by institutions and virtually all the rest is held by two funds managed by Franklin Resources Inc. He does not comment on the recent purchase of three million shares by Brandes Investment Partners.

Taro is currently developing an anti-cancer drug called T-2000, which Laegeler thinks could be a real success but even if it fails, he believes that 2006 was good year for the company, and that it will see sharp growth in 2008. So if that's the case why is the stock in such a lousy state? (it is currently trading at $6). There are several reasons for this. First there is the crisis that the company has been going through. Then there is the location - the intention being to Canada rather than Israel.

Laegeler claims that "two thirds of Taro's US products originate from Canadian factories, and its manufacturing cost advantage has dissipated with the appreciation of the Canadian dollar. It is a small company that channels 40% of its sales through powerful wholesalers. Its principal customers have demanded unfavorable terms that have led to cash-flow problems and a recent revenue restatement." Lastly there are the families who are not interested in selling, which has deterred many investors from touching the stock, me included.

Laegeler concludes by saying that he believes that Taro's shareholders will benefit from an acquisition by a large generic company which could merge it with its own businesses. His decision to view the stock as one that could be worth as much as $20 follows Taro's restructuring process which is now almost complete. Laegeler feels that Taro's main competitors are Teva Pharmaceutical Industries Ltd. (Nasdaq: TEVA; TASE: TEVA), Perrigo Company (Nasdaq:PRGO; TASE:PRGO), Novartis AG (NYSE: NVS), and the German company Altana Pharmaceuticals (now part of the Nycomed Group).

When Laegeler wrote his review, the stock stood at $9-9.15, and today it is at slightly over $6. Brandes purchased its shares for an average price per share of $9 and higher. So it is worthwhile entering Taro? It certainly would be for speculators, since people like these entered at even higher prices. My advice to the average investor is wait for the company's 2006 financials and its guidance, and then decide. Perhaps someone will have managed to persuade the current management to step aside by then.