Sun also challenges Taro’s reported strong financial turnaround.

Taro Pharmaceutical’s intention to back out of the merger agreement with Sun Pharmaceutical is actually not legitimate, according to acquirer, Sun Pharma. The initial take over was reported in May 2007 at $454 million, or $7.75 per share.

Taro stated yesterday that its board of directors unanimously voted against the acquisition, because the price no longer reflects the firm’s current and future value. Taro even turned down Sun’s offer to pay $10.25 per share.

Yet Taro’s directors, at the time of the first offer, concluded that it represented the best alternative available to Taro and its shareholders, according to Sun. In fact, the firm invested in Taro at the request of Taro’s directors. Additionally, after Sun agreed to release Taro from its nonsolicitation obligations under the merger agreement between the companies, no other bidder stepped up to plate.

Sun says that Taro’s statement that the company has achieved a significant financial growth in the past year is an exaggeration. “We remain skeptical of Taro’s turnaround,” notes Dilip Shanghvi, chairman and managing director of Sun, in his letter to Barrie Levitt, M.D., chairman of Taro’s board. “Taro has only $47 million in cash as of March 31, 2008. This means that if not for Sun’s cash injections of approximately $60 million last year, Taro would have virtually negative cash — hardly the dramatic improvement of which Taro has boasted.

“Further, the only reason Taro has been able to keep its lenders at bay is with Sun’s contractual commitments to repay all disclosed indebtedness as part of the merger transactions. In fact, Taro continues to generate very little free cash flow.”

Also in the letter, Shanghvi extensively detailed Sun’s attempts to enter discussions with Taro regarding the merger. Taro reportedly either rejected such meetings or did not allow it’s board of directors to fully participate in negotiations.

“In light of Taro’s actions,” Shanghvi concludes, “Sun will now consider all of its options including without limitation commencing legal proceedings as to Taro’s right to terminate the merger agreement.”

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