Detroit-based Caraco Pharmaceutical Laboratories Ltd. (NYSE Amex: CPD) announced that the two distribution agreements with Sun Pharmaceutical Industries Limited have been extended until Jan. 28, 2012 but will each terminate following these extensions.

The agreements account for more than 90 percent of Caraco’s sales. Caraco said that the end of its distribution of Sun products following the expiration of the distribution agreements “will have a material adverse effect on our operations.”

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Caraco also announced that it no longer expects to resume the manufacturing and distribution of pharmaceutical products from its Detroit plant by March 31, as it had earlier predicted.

Caraco’s Michigan operations were halted by the Food and Drug Administration in June 2009 and its products and inventories seized by federal marshals, based on product quality concerns. In a Sept. 29, 2009 consent decree with the FDA, Caraco agreed that “a number of significant steps and processes are required to be completed” before manufacturing could resume. Those steps aren’t yet complete, Caraco said, and Caraco said it is “unable to predict when such manufacturing and distribution will resume.” 

As for agreements with Sun, the marketing agreement, which was originally set to expire in January 2010, was extended for a one-year renewal last year and is being extended for an additional one-year term. The distribution and sale agreement, entered into in January 2008, had a three year term. This agreement renewed for an additional one year term when neither party opted to cancel.

Caraco and the Independent Committee of Caraco’s Board of Directors approached Sun and attempted to negotiate long term renewals for each agreement. However, Sun exercised its right to end the agreements, citing margin constraints due to competitive pricing pressures. Accordingly, Sun has informed Caraco of its intention to transfer the sales and distribution of Sun products from Caraco to Sun and/or its wholly-owned affiliates to enhance its ability to compete. 

During the second quarter and first six months of fiscal 2011, net sales of these products accounted for $89.7 million and 92 percent of net sales and $216.8 million and 95.2 percent of net sales, respectively. For the fiscal year ended March 31, net sales of products under these agreements accounted for $211.4 million and 90 percent of net sales.

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Caraco develops, manufactures, markets and distributes generic pharmaceuticals to the nation’s largest wholesalers, distributors, drugstore chains and managed care providers.

Finally, Caraco named William Blair & Co. as its independent financial advisor and the law firim Carrington Coleman as its independent legal counsel to evaluate a $4.75-a-share buyout made by Sun Pharmaceutical Industries Ltd. and Sun Pharma Global Inc., which together already own 75.8 percent of Caraco common stock.

Additionally, Caraco announced that it has received notice of several purported class action lawsuits with respect to the proposal. The suits, purporting to be on behalf of a class of plaintiff shareholders, allege breaches of fiduciary duties in relation to the proposal, and ask the court to enjoin the proposal by Sun.

The Company also received a shareholder letter that purports to be on behalf of a Caraco shareholder, demanding that the Caraco Board take actions to remedy alleged breaches of fiduciary duty in connection with the proposal and Sun’s alleged attempt to take Caraco private at an unfair price and with an unfair process.

Caraco develops, manufactures, markets and distributes generic pharmaceuticals to the nation’s largest wholesalers, distributors, drugstore chains and managed care providers.

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