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Summary: Caraco (CPD, Sun’s 75.5%-owned U.S.-based subsidiary) announced that its two
distribution agreements with Sun have been extended by one year to January 28, 2012. This
marketing agreement was originally set to expire in January 2010, but last year it was extended
by one year. Importantly, this appears to be the last extension of the tie-up, which will terminate
next year. Sun has exercised its right to end the agreement, citing margin constraints.
We see two ways to think about the news: Sun will have to quickly build sales/marketing
infrastructure and team (upfront investment) to ensure smooth transition. It does not plan to
leverage Taro (recently acquired 64%-owned subsidiary) for this purpose. Since the majority of
the (non-government) contracts are one year (or less) in duration, CPD/Sun will need to
contractually transition the current business to Sun in the course of 2011, we believe. Sun’s
decision may indicate of its favourable assessment (high revenue potential) of its US pipeline in
the mid/longer term.
Second: Sun’s privatization proposal (buy CPD shares at $4.75) made in December 2010 is
pending with the CPD board. Termination of the marketing agreement could facilitate (force) CPD
Board and/or shareholders to accept Sun’s offer.
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