Thursday, August 14, 2014

Stocks DD Cites and Opines: Funds significantly increase holdings in Taro

Read, understand and consent to the blog's DISCLAIMER here before proceeding to read the article
Disclosure: Long Taro.

Here is Q2 Whale wisdom 13F filings- link

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; This, in my opinion, is a signal that the board is continuing its intent on building value for ALL shareholders (as it should be; all shareholders are the owners). Taro's cash at the end of Q2 was ~$650m, expected to grow significantly in the 2nd half. In SUN's Aug 13th earnings call, Mr Shanghvi responding to an analyst question on the use of Taro's $650m cash said "Taro continues to look at potential acquisition opportunities. But we will remain disciplined about acquisition like we have been in SUN also. It needs to make long term business sense in terms of yield expectation post-synergy". This can be listened to between 27-30 min into the call. (I like Taro to lower risk profile and grow inorganically. I would like them look at specialty assets beyond just Derma, for example, an Opthalmology asset like Opthotech.) 

Notable Q2 Institutional shareholding change - Top 10 shareholders hold greater than 4 million shares (30%) out of 13.33 million minority/float shares
  • Consonance founder Mr. Blutt, a physician-businessman was a board member and part of the Corp Governance committee at Questcor. 
  • Perceptive Advisors in a dissidence vote successfully changed the entire Board at Penwest Pharma in 2010
  • While Bluemountain reduced its holdings, we have seen  Schroder, Consonance, Perceptive, Hotchkis, Renaissance and Acadian all buy into Taro. Together the top 10 hold greater than 4 million shares (30%) out of 13.33 million minority/float shares. This is a significant development as Israel provides minority shareholders significant voice and protections including a vote on the 2 independent director seats. There is a suit by Blue mountain and Iszo capital in Israel challenging the last proxy vote for independent director election. Please note that the margin of defeat for minority nominees wasn't wide. Here is Bluemountain's request for investigation of the proxy vote. Note that ALL current members of the Board are nominees from majority.
  • Consonance capital's founder Mitchell Blutt is a physician businessman with significant investment and medical experience and had served on the board and the corporate governance committee of Questcor. As a shareholder, I would like to see such experienced minds contribute ideas (even if, passively) and help take our company to new heights.
  • Joseph Edelman leads Perceptive Advisors and since 1999 the fund has returned an annualized 30.2%. Last year, the fund returned about 48%. Edelman works with six biotech analysts
  • In addition, other green shoots can be seen in the Q2 13F filings. Taro is finally starting to be noticed by the most ubiquitous mutual funds of America namely the Dimensional fund advisors, Janus Capital, etc. This is great for the long term as these big mutual funds make the market in most of the listed stocks in blue chip companies. 
Valuation notes: 
Credit Suisse's Mumbai-based analyst recently in coming up with $150 price target has made the following assumptions:
  1. Taken into account only half of the $300m expected EBITDA increase due to the June price hikes. 
  2. Used 9 times EBITDA in valuing Taro (The Agila transaction that closed in Dec 2013 happened at 18.6 times EBITDA)
  3. ROW market potential and Novexatin ($6b Onychomycosis NDA opportunity) have no mention in the report.

ISZO CAPITAL MANAGEMENT LP1,104,168$ 154,849,00080.27%73.74%140
HOTCHKIS & WILEY CAPITAL MANAGEMENT LLC510,952$ 71,656,0000.25%0.19%8955,700
CONSONANCE CAPITAL MANAGEMENT LP378,372$ 53,063,0007.89%4.55%3103,140
RENAISSANCE TECHNOLOGIES LLC371,200$ 52,057,0000.12%0.07%182102,800
SCHRODER INVESTMENT MANAGEMENT GROUP310,800$ 43,586,5920.05%0.00303310,800
PERCEPTIVE ADVISORS LLC301,333$ 42,260,0004.15%1.13%6204,322
GREYWOLF CAPITAL MANAGEMENT LP277,936$ 38,978,0005.77%6.29%63,751
RAGING CAPITAL MANAGEMENT, LLC253,236$ 35,514,0003.78%5.08%96,378
BLUEMOUNTAIN CAPITAL MANAGEMENT, LLC192,389$ 26,981,0000.46%0.86%59285,999
ACADIAN ASSET MANAGEMENT LLC178,791$ 25,071,0000.12%0.02%183139,691
KENNEDY CAPITAL MANAGEMENT, INC.100,711$ 14,124,0000.26%0.21%111639
MOAB CAPITAL PARTNERS LLC93,133$ 13,061,0006.27%4.54%5300
MORGAN STANLEY58,267$ 8,171,0000.00%0.00%221518,382
JANUS CAPITAL MANAGEMENT LLC56,806$ 7,966,0000.01%0.00%72041,455

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Wednesday, August 13, 2014

Stocks DD Cites: Bill Ackman's letter to investors

Has some correct thoughts on shareholder activism.

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Tuesday, June 24, 2014

Stocks DD Cites : Valeant's Rebuttal to Allergan's Rebuttal

Read, understand and consent to the blog's DISCLAIMER here before proceeding to read the article

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Wednesday, May 28, 2014

Stocks DD Opines: Taro's solid performance continues: Why Taro is a good Long-term buy

Read, understand and consent to the blog's DISCLAIMER here before proceeding to read the article
Full Disclosure: I am Long Taro.

Taro yesterday reported stellar results as usual. Taro has witnessed some competition in some products. While quarter to quarter fluctuations are expected, the long term story of this ~190+ products low-competition business is very much in-tact.

Short term challenges: Link Quote
We believe that loss in market share (New Rx) in Nystatin-Triamcinolone, Topicort (0.25 percent External ointment), Desonide and Clomipramine were the main reason for lower volumes of Taro in Q4FY14. Taro lost market share by 7 percent in Nystatin-Triamcinolone, 3 percent in Desonide, 16 percent in Topicort (post generic launch of Glenmark) and 3 percent in Clomipramine in Q4FY14 vis-à-vis Q3FY14. Taro raised its sales to more than US$200m/qtr in Q2FY14 and Q3FY14 mainly with substantial price rise in Desonide and Clomipramine, despite losing market share in Nystatin-Triamcinolone and Topicort along with price competition

Remember Taro is very well diversified and I suspect after the Nystatin-Triamcinolone market share loss no product makes up for >10% of overall sales. That's the beauty of this diversified business.

Taro's Stellar 3 year Performance
SalesY-on-Y sales growthEBITDAY-on-Y EBITDA growthEBITDA Margin
Fiscal Yr 2012$543.08$256.1947.17%
Fiscal Yr 2013$671.00+23.55%$346.37+35.20%51.62%
Fiscal Yr 2014$759.30+13.16%$446.87+29.02%58.85%

Why Taro is Long-Term Buy:

Taro is still significantly undervalued both on a short term, and importantly, on a long term (5 year - 27 ANDA's and 1 compelling NDA opportunity) basis.

TARO Valuationin Billions
(rounded to 2 decimals)
Market Cap (05/27/2014)$4.74
Enterprise Value$4.13
Assigned EV/EBITDA (as of 05/27/2014 -share price $109)9.23
EV/EBITDA* of Agila (another niche generic pharma) Transaction that closed in Dec 201318.6
Taro's Illustrative Market Value using the Agila Transaction Multiple$208.56per share

Valuation Notes:
Bill Ackman, an activist value investor, in his VRX Presentation values Topical & Opthamology generics business at 20 times EBITDA because of the durable nature of revenues. The above $209 per share assigns ZERO$ to the below value items.
  1. Novexatin (My NPV values it at $53 per share. More details of how I arrive at this value can be found here. Of-course new drug development entails significant uncertainty and risks) - This compelling Onychomycosis New Drug opportunity is entering phase 2b this year.  In essence, an investment in taro today is like getting this potential home run call option for free.
  2. Growth
    1. Organic
      1. Taro has had Double digit organic growth rates in EBITDA and Sales in ALL of the last 3 years.
      2. Rest-Of-World(ex-USA,ex-CAN, ex-UK, ex-Israel) sales in 2012 was 1% of overall sales. ROW potential for some of Taro's products was alluded to in a Sun's earnings conf call last year. This potential is yet to be tapped. The strong growth emerging markets of BRIC and the markets of Japan, Eastern Europe, Western Europe(ex-UK), Australia, South Africa, etc cannot be disregarded.
      3. Taro has announced doubling their production volume capacity with $247m investment in the Brampton facility in 5 years (anticipating growth in next 5 years). This news did not come from Taro, but came from Ontario newspaper.
    2. In-Organic
      1. Excluding the 5-year $247m investment outlay for the Brampton plant expansion, Taro would still be left with ~$390m cash(03/31/2014) which can be opportunistically used to pursue inorganic growth: buy late stage or marketed assets. Taro could even easily take on $100m-$200m in debt (its current debt is ~$18m only) for this purpose.
Other Notes:
  1. The controlling owner Mr. Dilip Shanghvi has a stellar track record for creating value for shareholders. He has returned 38% annually for 20 years in the parent company 
  2. ANDA pipeline waiting approval is now 27. ANDA filing has accelerated. In the Dec Qtr 5 Andas were filed and in the March qtr 3 Andas were filed
  3. Taro makes ~$50m-$60m/year low-risk R&D investment (this is not the big pharma's highly unproductive hit and miss R&D kind) to keep the ANDA pipeline growing and replace aging products and/or loss of revenue due to competition in existing products of its basket of ~200-products 

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Saturday, May 17, 2014

Stocks DD Opines - Taro's Novexatin (Onychomycosis Opportunity) - NPV Calculations

Read, understand and consent to the blog's DISCLAIMER here before proceeding to read the article

Some readers have asked me how one should look at a new drug's(with 8 year FDA exclusivity and ~18 year patent exclusivity) value. Here is how I would look at Novexatin's Value. Feel free to critique it. As you can expect calculating future value of new drug product entails lot of assumptions(including assumption on discount rate- changes to which can lead to wild swings in the present value) and is inherently speculative in nature. I think I have tried to err on the conservative side, but would greatly appreciate fellow value investors/readers to opine on this through comments to this blog.

Before going into the DCF calculations, I would like to briefly summarize competition/therapies in this market -> Link

  • Discount Rate = 15% (The drug is expected to enter phase 2b in 2H 2014 and experts have opined very favorably on phase 2a results - see the link & link)
  • Profit sharing b/w partners = 50% (This is not public. So this is an assumption. I have modeled it based of similar market agreements I have seen Eg: Generic copaxone agreement between Momenta and Novartis)
  • Onychomycosis Global market = $5,000m (Taro's partner estimates this at $6000m)
  • 3 more years to get to market assuming successful clinical trials
  • Revenue period of 18 years (patent exclusivity period)
  • Zero sales after the patent period of 18 years
  • Basing market share assumptions on the big competitive advantages of this drug vs existing drugs in the market

  • Sales and Cash flows:
    • 1st period - 3 years - Zero Sales (drug still under development)
    • 2nd period - 3 years  - Market share = 12%     Sales - $600 m  Net Profit margin - 50% - $300m - partner profit - $150m
    • 3rd period - 3 years - Market share = 25%   Sales - $1500 m    Net Profit margin - 70% - $1050m  - partner profit - $525m
    • 4th period - 12 years - Market share = 50%  Sales - $2500 m  Net Profit margin - 80% - $2000m  - partner profit - $1000m
Present Value = $2,284m  or  $53.4 per share

Readers can change assumptions and find the impact on Present value here->Link

Present Value Cash Flows
Interest Rate:
discount rate per Period
per Period 
Cash Flows at Period
Number of Lines:

LinePeriodsCash Flows

For the Cash Flow Series
Present Value = $2,284.30

Cash Flow Stream Detail
PeriodCash FlowPresent Value

Calculate the present value of a series of future cash flows. More specifically, you can calculate the present value of uneven cash flows(or even cash flows). To include an initial investment at time = 0 use Net Present Value (NPV) Calculator.
This is the frequency of the corresponding cash flow.  Commonly a period is a year or month. However, a period can be any repeating time unit that payments are made. Just be sure you are consistent with weeks, months, years, etc for all of your inputs.
Rate per period
This is your discount rate or your expected rate of return on the cash flows for the length of one period.
is the number of times compounding will occur during a period.  You might have a yearly rate and compounding is 12 times per yearly period, monthly. 
Payments at Period Beginning or End
Choose if payments are made at the beginning of each period (like an annuity due in advance) or at the end of each period (like an ordinary annuity in arrears)
Cash Flows
The cash flow (payment or receipt) made for a given period or set of periods.

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