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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