Tuesday, June 24, 2014

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

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Wednesday, May 28, 2014

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

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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

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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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Sunday, May 11, 2014

Stocks DD Cites: Bill Ackman's views on GSE Restructuring, Least risk-path to the preservation of Affordable Fixed rate 30 year mortgage, best path for maximization of value for Taxpayers and his long thesis on FNMA

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Ira Sohn Presentation 2014.05.05

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Wednesday, April 30, 2014

Stocks DD Cites & Opines : Taro Valuation - New developments

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There are some new market developments that give pointers of how to look at valuation of a Business like Taro. In Summary, I will point to the following:

1. How Bill Ackman looks at/values Topical and Ophthamology Generics
2. Ontario newspaper report on $247m investment to double number of products it brings to market at Brampton facility. This is indirectly a VERY significant piece of information on forward-looking expectation of this business.
3. ROW(ex-USA,ex-CAN,ex-UK and ex-Israel) potential for taro's 190+ products
4. Novexatin - Phase 2a completed Onychomysosis drug with superior competitive advantages that can cannibalize the whole Onychomysosis treatment space considering short treatment duration and the fact that it treats underlying cause/infection unlike existing drugs. Taro's partner on their web site estimates the worldwide market for Onychomysosis in 2022 to be around $6 billion.

1. Bill Ackman ( Activist investor) in his 'Val-gan' presentation(link) has indicated

Durability nature of "Topical and Ophthamology Generics" . 

Comparable Market valuation (without Control premium of ~25%) for Durable Rx products is around 20X EBITDA

At 20X TTM EBITDA($433m), Taro would be valued around $200 per share. Please note the last quarter(oct-dec 2013), ebitda was significantly higher than prior quarters.  Also, note that NOT all products in the portfolio would be Durable. However, it is my belief that the company's new ANDA launches will offset lack of durability in its aging portfolio. Please remember Taro makes ~$50m-$60m/year R&D investment. This is a pretty low-risk investment towards bringing in new Topical generics to the market.

2.  An Ontario newspaper reported yesterday that Taro is planning to DOUBLE its production capacity at the Brampton facility with $247m investment. Link
The Province of Ontario is contributing $7 million toward the $247 million project, which will increase Taro’s plant capacity by 50 per cent and potentially double the number of products it brings to market.
This to me is indirectly a significant piece of information on forward-looking expectation of this business. Businesses and management can give all kinds of forward looking statements, but the one that investor needs to weigh in the most is where money is being actually set aside for growth...Remember, the proof is always in the pudding.
It is not clear what portion of taro's manufacturing happens at Brampton today. Majority of taro's manufacturing happens at Haifa Bay in Israel.

3. ROW potential. Taro's ROW(ex-USA,ex-CAN, ex-UK and ex-Israel) sales in 2012 was only 1% of its overall sales

4. Novexatin (A new drug for Onychomysosis) will likely be entering Phase 2b in H2 2014. Link.

Phase I and IIa clinical studies have demonstrated that NP213 is safe, well-tolerated and effective in resolving toenail infections following just one month of daily applica¬tion (currently available topical treatments require up to 52 weeks of treatment). NP213 is the first fungal nail infection therapy to address both the underlying cause of the condition and the cosmetic issues associated with the infection; by rapidly killing the causative fungi and rapidly improving the nail’s appearance.

You can read what experts say about Novexatin in the above link("expert clinical opinion"). It is my opinion that if Novexatin comes to market, it will not only cannibalize all other competition drugs in the Onychomysosis treatment space including Valeant's and Anacor's drugs, but will also likely be the standard for care for Onychomysosis treatment for a very long time, primarily for 2 reasons:

1. Extremely short treatment duration of 1 month
2. Drug treats the underlying infection

If this drug's clinical trial succeeds and comes to market say in 3 years time, one can do the DCF math, if it captures majority of the $6b market for the 15-20 year patent exclusivity period.

Conclusion: As the above 4 pieces of information are fully understood by the market, we expect Taro to be re-rated significantly from its current share price of $111 per share.


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