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Disclosure: I am long TARO. I strongly recommend any new investor to look at the TARO-SUN merger filing along with other TARO SEC filings before considering any investment in TARO.
As expected by most observers, TARO continued to post good results->Link. Cash and marketable securities are now at $486.6 million. In the quarter, TARO generated EBIDTA of $104.0 million and its Operating margin was at 56%. This demonstrates the pricing power and the low competition in the difficult to make dermatology generic business. What is important to note is NONE of these earnings are due to one-off 6 month exclusivity revenues that generic companies are used to. It appears that favorable pricing is due to the lower competition and the secular market consolidation trends in the Dermatology business. During the quarter, the Company filed one ANDA with the FDA. With this, ANDAs representing seventeen products as well as two NDAs await FDA approval.
If you assume the current quarter's earnings as the run rate, the annualized EBIDTA would be $104m * 4 = $416m. SUN's $39.5 offer translates to paltry 3.1 times this annualized EBIDTA! If you take Bloomberg's median valulation multiple(EV/EBIDTA) of 14 in recent pharma M&A transactions,then TARO's value is at $141 per share without accounting for any synergies with acquirer or the impact of EU-Israel treaty.
Below is the back of the envelope calculation for TARO's value
|Enterprise Value/ LTM EBIDTA Multiple||14|
|Implied Enterprise Value||5824|
|Implied Market Cap||6282.6|
|Base Case||Implied Value per Share||141.18|
|Upside Shown for Illustrative Purposes ONLY|
|Estimated Impact to EBIDTA - Synergy Savings*||45|
|Estimated Impact to EBIDTA - EU-Israel Treaty Impact*||45|
|Estimated Go-Forward EBIDTA||506|
|Implied Enterprise Value||7084|
|Implied Market Cap||7542.6|
|Bull Case||Implied Value per Share||169.50|
|Note*||These are just educated guesses and the company has not guided|
|Note**||As of 12/31/2012|
|~Annualizing most recent quarter earnings of 104m|
|All numbers are approximate|