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Did Sun and Taro Under-Report 3rd Quarter Results by Gaming Reserves?

NEW YORK, Nov. 5, 2012 /PRNewswire/ -- IsZo Capital Management LP, one of the largest minority shareholders of Taro Pharmaceutical Industries Ltd. (NYSE: TARO), announced today that it delivered the following letter to the Special Committee of the Board of Directors of Taro, citing evidence that raises the question of whether Taro's management may be under-reporting Taro's third quarter net sales data by artificially inflating reserves for product returns, chargebacks, rebates and other sales-related items, just a month ahead of the special meeting of Taro shareholders to vote upon the proposed merger with Sun Pharmaceutical Industries Ltd. (BSE: SUNPHARMA) at the grossly inadequate below-market price of $39.50 per Taro share.

3rd Quarter Financial Results;
Did Taro Under-Report 3rd Quarter Results by Gaming Reserves? Ladies and Gentlemen:

Recently, rumors have been circulating that Taro and Sun were intentionally trying to understate their financial results by over-reserving; all ahead of the special December 6th shareholder meeting to vote upon the Sun merger.  We have been busy using our forensic accounting skills and broad industry knowledge attempting to evaluate the veracity of these rumors.  To our dismay, Taro and Sun delivered such evidence with the reported 3rd quarter financial results; results suspiciously inconsistent with readily available commercial sources of Taro's prescription and sales data.

Taro's reported financials and IMS's reporting of Taro's sales have had nearly perfect correlation over the last year until Taro's 3rd quarter results.  Based on IMS reported data, Taro should have reported net sales of $176.4 mm vs. the $160.9 mm that Taro reported.  So Taro's results are missing roughly $15.4 mm of sales and a similar amount of EBITDA and Profit.  For example, Taro reported QOQ growth of 1% vs. IMS's 11%.

It's easier to see this in table form, bearing in mind that capture rate ("Capture %") per quarter is defined as IMS reported net sales divided by Taro reported net sales. Differences between IMS and Taro sales should be due to rebates, chargebacks, returns, reserves, etc. Q3 2011Q4 2011Q1 2012Q2 2012Q3 2012IMS Reported Sales ($mm)204,426




260,202Taro Reported Sales ($mm)138,250




160,974Capture %67.63%



67.86%61.87%Clearly, Taro's recently reported Q3 2012 numbers are inconsistent with the historic correlation between IMS and Taro net sales data, substantiating market rumors that Taro is gaming its reserves for returned products and similar items to artificially deflate net sales data, conveniently, just a month prior to the December 6th special shareholder meeting to vote upon the proposed Sun merger.

Without this apparent change in product reserves, Taro should have reported $176.5 mm of sales and 110.5 mm of EBITDA for the 3rd quarter.  Consistent with underreporting actual financial results, management has also grossly under-forecasted future Taro results.  In Taro's 13E-3, management's projections for the 6 months ended 2012 were EBITDA of $112.9 mm.  Based on IMS sales data, it looks like management will be roughly 100% too low in its 6 month projections.
Even using reported EBITDA, management is 68% too low for its forecast.  Given that Taro management's 6 month 2012 forecast will be between 68% and most likely 100% too low, we don't believe that the Special Committee and Citigroup can rely on management's projections.

Dilip Shanghvi appears tired of being famous and prefers to join the founding Levy family in becoming infamous.  Despite Shanghvi's promises filed publicly several times in SEC 13Ds to protect minority shareholders, Taro's minority shareholders have and continue to face the unprecedented threat of a take under.  In addition, Taro has refused to allow minority shareholders to verify the results of the voting at the December 2011 shareholder meeting, in violation of Israeli law.  To date, IsZo capital and other minority shareholders have not been able to identify any minority shareholders that voted for the indemnification provisions at the December 2011 meeting.  Taro has also refused minority shareholder document requests regarding the Sun merger in violation of Israeli law.  And most egregiously, the Special Committee has relied on a financial advisor that is clearly not independent under Israeli law.  Furthermore, the Special Committee and its non-independent financial advisor continue to rely on financial projections that are clearly wrong.  In addition, despite our diligent efforts, we can't find a single minority shareholder that supports the Sun merger. 

2013 will be the 5th calendar year that IsZo capital and its predecessors will be Taro shareholders.  We are more excited than ever on Taro's future.  Taro is currently the #1 Generic Dermatology Company in the U.S.; and the recent EU-Israel legislation doubles the market opportunity available to Taro without almost any additional cost.  We are very confident that in the long term, great financial reward will accrue to Taro's minority shareholders if the Sun merger offer is rejected.

Sincerely,/s/ Brian SheehyBrian Sheehy

Managing Partner, IsZo Capital 

SOURCE IsZo Capital Management LP
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