TARO will not file bankuptcy, however if i could, i probably would agressively short this stock. I forsee more problems for TARO, probably change of CFO a-coming.
Taro management is in the credibility doghouse, says CIBC 21.11.2005 | 14:48 Yoram Gavison
The Taro Pharmaceutical Industries (Nasdaq: TARO) management has managed yet again to impair its credibility.
That is the bottom line of CIBC World Markets' view of the Israeli drug company in the wake of its keenly disappointing report for the third quarter of 2005. Its results "defy rational explanation", writes CIBC analyst Elliott Wilbur, who has been burned by Taro before.
Wilbur is one of the more seasoned equity analysts in the generic drugs sphere. "A sense that management is out of sync with its business does little for our conviction that 3Q was an isolated event", he wrote.
He slashed his 12-month price target for its stock from $28 to $18, after the share price dived 38% on Thursday and Friday.
He believes Taro's pipeline of drugs awaiting regulatory approval contains no great messages for investors. The increase in prescriptions together with drop in sales indicates, as Taro itself indicated, that prices are eroding and that inventories at customers have been reduced.
The problem that may never have gone away
Or, as Wilbur interprets the opaque announcement, the problems with inventory that crushed Taro's share price before, have resurfaced, or never went away. "The same excess wholesaler inventories that led to a dramatic shortfall in the second quarter of 2004 and the subsequent stock melt down have apparently resurfaced or perhaps were never really cleared out," he writes, gently hinting that Taro has issues with revenue recognition.
He is concerned that the Taro management evidently feels little need to disclose more about the wholesaler issue.
Taro blamed its slow sales on inventory reduction at wholesalers, but 'did little to assuage concerns' that it has a clue on the amount of inventory in the channel. Nor does it seem to have any idea regarding better management of quarterly sales patterns, Wilbur writes.
He gave the company nonetheless a Sector Performer rating, even though $72.5 million third-quarter sales were far below his original estimate of $80.5 million.
Investors have known many a sorrow from Taro, which has time and again fallen short of expectations. The company, which is worth $410 million on Nasdaq - having lost 80% of its value since its peak in December 2003, has failed to warn investors of shoals in its waters on three separate occasions.
May face cash flow crunch
For the third quarter of 2005 it presented a meager 7 earnings per share, compared with Street expectations of 28 cents per share.
Taro manager Shmuel Rosenstein said on Thursday that even after the drop, the company's profitability remains high relative to other generic drug companies. Taro is one of four leading companies making and marketing skin medications in the United States, which is a relatively small niche. But the contracting proportion of skin medications out of its total product portfolio (six of 25) hints that the days of Taro operating in a relatively sheltered backwater market are ending.
As a foreign company listed for trade in the U.S., Taro does not have to publish quarterly cash flow statements. But the drop in profit from operations, the increase in DSO (177 at the end of the third quarter, from 160 at the end of the second quarter) and high level of inventory should be of concern to institutional investors.
They lent it $60 million in June 2003 at 6% dollar interest, without collateral, based solely on the company's pledge to maintain certain financial ratios. One of the most stringent is to preserve a ratio above 2 between operating profit flow and interest and principal costs.
Taro says it's complying with all its financial covenants, but in the future it faces a not-small financial burden. The company's short-term and long-term liabilities total $253 million. In 2006, it is supposed to repay $35 million, then $31 million in 2007 and $28.8 million in 2008. But its average annual cash flow from 2002 to 2004 was just $12 million.
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