Sell Sun Pharmaceuticals - Elara Capital

• Rating : Sell
• Target Price : INR1,627
• Downside : 7%
• CMP : INR1,748 (as on 15 July 2010)

Taro bid: Court ruling merely tans Sun

US court favours Sun Pharma in dispute against Taro Pharma

A US district court has ordered in favour of Sun Pharma in the Taro Pharma acquisition case. The management of Taro Pharma had filed a legal complaint on the non-disclosure of key information on Caraco Pharmaceutical (a subsidiary of Sun Pharma) during the open offer to acquire Taro Pharma. The court also rejected Taro Pharma's request to restart the discovery process which Sun Pharma undertook in 2007 to acquire it.

Two weeks granted to re-file amended complaints

While the court set aside Taro Pharma's allegations of breach of contract and misappropriations of trade secrets due to inadequate subject matter, it awarded two weeks of time to file an amended complaint, post the correction of its defects. However, the court has rejected any possibility of granting an injunction against the completion of Sun Pharma open offer even if Taro revives the state law claims.

Long way to go before acquisition

We believe that the initial ruling of the US district court hardly increases the visibility on the outcome of the legal battle between Sun Pharma and Taro management. It is imperative for Sun Pharma to win both in the US Court and the Israel Supreme Court before acquiring Taro, going forward. We expect the Taro Pharma management to file an amended application and continue the battle in the US Supreme Court, including the appeal court, if allowed. Hence, we consider the ruling of the district court as a beginning of a long journey to win the legal battle.

Sun Pharma may seek a profitable exit from Taro

We believe that the Sun Pharma management would explore the possibility of a profitable exit from its investment of more than USD100mn in Taro. We also expect that Sun Pharma may monetize the opportunity to abort its hostile takeover bid if the management finds a strategic fit in other companies.

Downgrade to Sell: Base business stays unaffected, but lacks zing

The favourable court ruling would not affect the base business fundamental of the company in near to medium term. We believe that the company's US business has lost opportunities in large products though it managed approvals in small to medium size opportunities having multiple competitors. As the company gains benefit of a one-off sale in Eloxitin in Q1FY11, we believe it lacks an attractive opportunity in large products and base business. With rich valuation and downside risk at current market price, we downgrade our recommendation to Sell.

Source : Equity Bulls

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