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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