Sun Pharmaceuticals Ltd warned it might be compelled to initiate legal action against Israel'sTaro Pharmaceuticals, which terminated the $454-million merger agreement yesterday.

In a letter to Barrie Levitt, MD and chairman of Taro Pharmaceutical Industries, Dilip Shanghvi, chairman and managing director of Sun Pharma, said, Taro is not entitled to terminate the merger as per the agreement .

''We remain skeptical of Taro's turnaround. Taro has only $47 million in cash as of 31 March 2008. This means that, if not for Sun's cash injections of approx $60 million last year, Taro would have virtually negative cash - hardly the ''dramatic'' improvement of which Taro has boasted. While Sun has made every effort to fulfill its obligations under the merger agreement, Taro has failed to honor its side of the bargain and take all necessary action to consummate the merger. Further, Taro has ignored our attempts to discuss, and put forward to Taro's shareholders, an increase in the merger consideration in order to complete the transaction,'' Sanghvi said in his letter.

Sun, he said, will now consider all of its options. ''We continue to believe that a merger with Sun at $10.25 per share that we have offered to recommend to Sun's board is in the best interests of all Taro shareholders,'' he added.

Taro had yesterday said its board of directors unanimously determined that the merger agreement, signed in May 2007, force was no longer in the best interest of the company.  (See: Israel's Taro to terminate merger with Sun Pharmaceutical)

Taro also cited differences over the share price and an unexpected operational and financial turnaround since last year.

Sun Pharmaceutical had announced plans to acquire Israel-based Taro Pharma for $455 million (Rs1,789 crore), including equity worth approximately $230 million at $7.75 per share in cash, in mid-May 2007, in a $454-million all-cash deal, (See: Sun Pharmaceutical to acquire Taro Pharma for $454 million).

Sun Pharma has so far made equity investments in Taro totaling $59 million, including $41 million to help the cash-starved Taro avoid an impending payment default and another $18 million through the exercise of warrants.

Taro had postponed a shareholder meeting to vote on the proposed merger to the first quarter of 2008, a third time since the announcement of the deal. 

Sun's revised offer to raise the merger price to $10.25 per share, with a condition on elimination of a voting threshold required by Israeli law to implement the merger, was not acceptable to the board of directors of Taro, its chairman Barrie Levitt said in a letter to Dilip Shanghvi, Sun's chairman.

Taro said Merrill Lynch had also advised the company that based on most recent projections, $10.25 a share, the same price Sun had paid to Brandes Investment Partners L P in February, was inadequate.

Franklin Advisers and Templeton Asset Management, which holds about 9 per cent of Taro's ordinary shares, had challenged the deal in the Tel Aviv district court citing undervaluation. The court, however, did not issue an injunction to stop the merger proceedings and the case is still pending in the court.

Taro reported net sales of approximately $313 million for the year ended December 31, 2007,  with an estimated gross profit of $168 million, or 54 per cent of sales, and net income of approximately $21.1 million, compared to an estimated loss of $141 million in 2006.