In 2007, the two companies entered into a merger agreement that would see Sun invest more than $400m in cash-strapped Taro. The Israeli firm had been struggling since 2003 when it was required to restate its books after assessors discovered errors in its estimation of charge-backs from wholesalers and the actual inventory present in the distribution chain.

Late last week however, Taro announced that it had terminated its deal with Sun, on the basis that it was "no longer in the best interests of the company." The Israeli group also said that it had agreed to sell its Roscrea plant to a group of Irish investors, claiming that the facility was currently costing it around $800,000 a month to operate.

In response, Sun, which holds a 34 per cent stake in the Israeli firm, said that it "vigorously disputes the termination of the merger agreement" adding that it would not "stand by idly if Taro pursues actions contrary to the merger agreement to strip the company of assets of strategic importance."

Observers were unsure of the impact on Sun if the merger deal does fail. Bhavin Shah, of equity firm Dolat Capital Market, told India's Livemint.com that "on the one hand, [Sun's] balance sheet will look healthier, better and the uncertainty of payback will no longer be there," but added that on the negative side, the firm would lose out on a significant market opportunity.

Potential to produce substantial revenues

In a letter to Taro's board on June 5, Sun chairman and managing director Dilip Shanghvi said that the company was concerned that Taro's sale agreement had "significantly undervalued the Irish operations."

He also said that the facility "presented Sun with considerable strategic and synergistic value as part of its merger with Taro," and added that it "has the potential to produce substantial revenues for Taro in the future and any sale now is premature."

Shanghvi also questioned Taro's contention that the proposed sale was designed to improve liquidity. He argued that "at no point in time during the financial crisis that precipitated the entry of the merger agreement, did Taro identify the disposal of the Irish facility as a measure to ease liquidity despite the monthly operating costs related to those operations."

When contacted by in-PharmaTechnologist.com, Sun said that it would not be commenting further and Taro had not responded at the time of going to press.