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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|
|Sales||Y-on-Y sales growth||EBITDA||Y-on-Y EBITDA growth||EBITDA Margin|
|Fiscal Yr 2012||$543.08||$256.19||47.17%|
|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%|
|TARO Valuation||in Billions|
(rounded to 2 decimals)
|Market Cap (05/27/2014)||$4.74|
|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 2013||18.6|
|Taro's Illustrative Market Value using the Agila Transaction Multiple||$208.56||per share|
- 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.
- Taro has had Double digit organic growth rates in EBITDA and Sales in ALL of the last 3 years.
- 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.
- 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.
- 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.
- 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
- 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
- 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