Sun Pharmaceutical Industries has reacted angrily to Taro’s decision to terminate the firms’ proposed $454 million merger, saying the Israeli company has no rights to take such a step.

The Indian drugmaker was responding to Taro’s announcement that it was pulling out of their merger agreement which was originally signed a year ago because it is “financially inadequate”. Sun later upped its offer to $10.25 but Taro’s board said this was not enough, given that it has experienced “a dramatic return to profitability”.

However Sun chairman Dilip Shanghvi is non-plussed. In a letter to his counterpart Barrie Leavitt, Mr Shanghavi said Taro “is not entitled to terminate the merger”, adding: “I am very disappointed that you have chosen to take this public step without engaging in any meaningful discussions” with Sun. He added that during a meeting with Taro’s board on May 14, “you prevented the directors from engaging in any meaningful discussion with me, asking them to remain in ‘listen-only’ mode during the course of the meeting”.

He then turns the screw saying that without Sun’s equity contributions of around $60 million, “Taro would be unable to boast of survival, much less a purported financial and operational ‘turnaround’.” Furthermore, the only reason Taro has been able to keep its lenders at bay is with Sun’s contractual commitments to repay all disclosed indebtedness, he claimed, noting that it continues to generate very little free cash flow.

Mr Shanghavi said that Taro had $47 million in cash as of March 31, 2008, which means that, “if not for Sun’s cash injections last year”, it would have “virtually negative cash - hardly the ‘dramatic’ improvement of which Taro has boasted”. He added that the latter firm has “failed to honour its side of the bargain and take all necessary action to consummate the merger”, such as holding shareholders’ meetings to approve the deal “in a timely manner”. The letter goes on, among other things, to note that Taro has still not produced audited financials for 2006 and 2007 but despite this, Sun has “consistently been willing to complete the merger… a highly unusual concession rarely made by a buyer in a corporate acquisition”.

In light of Taro’s actions, Mr Shanghavi says that Sun will now consider all of its options, “including without limitation commencing legal proceedings”. He added that as the Israeli firm’s largest shareholder, his firm encourages attempts to enhance its profitability and “notwithstanding the options discussed above, we continue to believe that a merger with Sun at $10.25 per share…is in the best interests of all”.

At time of writing, Taro had yet to reply but this is unlikely to be the last letter sent over the matter.