Taro Pharmaceutical Industries Ltd (TARO) 2002 Q2 法說會逐字稿

Good morning welcome ladies and gentlemen to the Taro second quarter 2002 conference call. By now, all of you should have a copy of Taro's earnings press release issued this morning. The release can be found at www.Taro.com; or you can call 1-888-TARO-USA, extension 223 and Taro will send you one. At this time, I would like to inform you this conference call is being recorded for rebroadcast and all participants are in listen-only mode. This recording will be archived and can be heard at any time following this call through July 30th. To hear the archived call, log into www.Taro.com and click the link on the home page or telephone 800-428-6051 in the United State or 973-709-2089 from overseas. When prompted, enter pass code 252524 to request the Taro call. Today's call will begin with a presentation by Taro's executives. Then, at the request of the company, we will open the conference to questions and answers from participants on the call. At this time, let me read the following Safe Harbor statement. Certain statements in this call are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements include, but are not limited to comments regarding Taro expectations regarding growth, financial results, operational leverage and profitability, business developments, mergers and acquisitions and other growth opportunities. Use of proceeds from the company's 2001 public offerings, research programs, regulatory filings, the growth of base business, ANBA approval are (inaudible), integration of acquired operations and international operations. Although Taro Pharmaceutical Industries Ltd believes the expectations reflected in such forward-looking statements to be based on reasonable assumptions, it can give no assurance expectations will be attained. Factor that is could cause actual results to differ include: industry and market conditions, general economic condition, lower than anticipated regulatory approval of new generic products, other regulatory actions, lower than expected penetration of new markets, changes in the company's financial position and other risks detailed from time to time in the company's SEC reports, including its 2001 annual report on form 20-s. I will turn the call over to Mr. Daniel Fax(phonetic) of Taro. Please go ahead, sir.

Thank you. Good morning. I welcome you to Taro's second quarter conference call. With me today are Dr. Barrie Levitt, chairman of Taro Pharmaceutical industries and Kevin Connelly, our chief financial officer. Barrie, Kevin and I have brief prepared remarks and then we will open to questions. To get started, I will turn it over to Barrie.

Thank you, Dan and good morning, everyone. We are proud our strong financial performance has extended into the second quarter of this year the best quarter in the company's history. The second quarter, in fact, was our 26th consecutive quarter of record sales and 16th consecutive quarter of record net income. In addition to our results, the quarter was also noteworthy for the acquisition of the acquisition and liabilities of Thames. Thames is a small and well-established manufacturer of prescription and over-the-counter pharmaceuticals, including topical products that compliment our existing product line. The acquisition brought us a number of ANDAs, as well as FDA approved managing facility, our first manufacturing facility in the United States. We are integrating Thames products into Taro sales organizations without the addition of sales and marketing personnel. Thames broadens our product offering to include a number of topical products, not previously marketed by Taro in the United States. During the second quarter, we also received two ANDA approves. The first was for Amcinonide cream, which is (inaudible) to Cyclocort. At the present time, Taro is the only approved generic manufacturer of this corticosteroids in the United States. Although the product addresses a modest market, we expect it to be profitable since we make our own steroid active ingredient for the product. The second ANDA approval was tentative approval from a round of syrups sold by Schering-Plough under the brand name Claritin. According to industry sources, Claritin had annual sales of $70 million last year. Taro and other pharmaceutical companies are in litigation with Schering-Plough, with respect to patents for Laratadine. And we believe another generic company has the right to an exclusive marketing period. Now, I would like to transition from the discussion of our generic business to a few words about our proprietary research initiatives. We are continuing the development of non-spill, our patented liquid drug delivery system. The timing of commercialization of this product group will depend upon the discussions with the trade and with the Food and Drug Administration. Research with T-2000, the first of our unique class of (inaudible) is progressing on schedule. The timing of phase II studies will depend upon discussions now under way with regulatory authorities in Canada, the United States and Israel. To review our record, the strategy of investing and research and infrastructure is clearly paying off. Our sales for the second quarter back in 1998 were $16 million. In the second quarter of 2000 were $24 million and today we wanted second quarter sales of nearly $50 million. We have doubled our second quarter sales since the year 2000 and tripled our second quarter sales since 1998. It is important to remember that while we were delivering 6 and a half years of record quarterly sales and investing heavily in research, we never lost our focus on the bottom line. We have never achieved four years, 16 consecutive quarters of record net income. We are very proud of our performance to date and we look forward to the future with conviction, confidence and commitment. Now, let me turn the call over to our chief financial officer, Kevin Connelly for review of the just announced financial results. Kevin.

Thank you, Doctor. I would like to touch just briefly on performance for the quarter and the year to date. We are obviously as Barry mentioned, very pleased with the results of the second quarter, which demonstrate continued performance of the company, power of operational leverage story and our continued commitment to research and development. Our sales of $49.6 million for the quarter are a 36% increase from prior year and as Barrie mentioned, represent the company's 26th executive quarter of record sales. The sales breakdown by geographic area for the quarter: approximately 86% of the sales took place in the United States, 7% of sales in Canada, 6% of sales in Israel and 1% from other international markets. The sales were driven by strong performance of our base business, as we saw growth in market share for virtually all products, modest contribution from Amcinocide cream, which we received approval to market during the quarter and from product sales related to the acquisition of Thames. Gross margin of 62% remain among the highest in the generic industry. The margins reflected negative impact on the cream product, offset by new product introduction and the benefits of vertical integration programs, again, the ability to synthesize our own active ingredients. The leverage inherent in the company structure demonstrated by reduction of SG and A as percentage of sales, which was approximately 25 and a half%, versus 31 and a half percent a year ago. Our commitment to research and development continues with $6.3 million dollars in R and D for the quarter, representing 13% of sales and was divided approximately 80% to the generic pipeline and 20% toward proprietary programs, t-2000 and non-spill. The 36% increase in sales drove 80% increase in pre-tax earnings, again demonstrating leverage inherent in the company. Our tax rate of 13% for the quarter versus 7% for the same quarter last year reflected the change in product mix between our Canadian and Israeli facilities with our Israeli- supplied products tax status actually down as percent during the quarter. The sustained performance of the company was demonstrated again by net income for the quarter, which was approximately $10.2 million or 35 cents per share. Our 16th consecutive quarter of record earnings, representing increase of 68% in net income for the quarter. Some quick notes on balance sheet, property plant and equipment reflects the company's continued commitment to expanding and maintaining our R and D facilities in Israel and Canada. Approximately 17.2 million dollars has been invested during the first half of the year in property, plant and equipment. The decrease in cash reflects increase investment in working capital, as well receivables and inventory increased during the first half of the year, driven by growth in the overall business. Finally, the growth in other assets during the quarter reflects intangibles associated with the purchase of Thames. Thank you, Danny, I will turn it back to you.

I would like to provide perspective and details on Taro's approvals on the pipeline and performance of Taro. Regarding Taro's pipeline, I would like to bring you uptodate on filings. Taro has 14 submissions with the FDA. According to industry sources address market value at $500 million. The filings include 10 topical products and four oral dosage form products including the tentative approval for Loratadine syrup. Four filings were submitted this year, plus two drug master files also submitted this year. As Barrie mentioned, we received two and ANDA approvals, one for Amcinocide cream and the second for Loratadine syrup, sold under the brand name Claritin. There has been discussion about Claritin making the switch from Rx to OTC. This could be beneficial to Taro. We have strong marketing capability in the OTC segment. Regarding performance for the quarter, Taro has gained sales and market share across all principal product lines. The industry sources show that every Taro prescription product gained in market share during the quarter. We saw dosage form products where Taro manufactured the API, such as cortomazapine and Warfarin have demonstrated sustained growth and are making and increasing contribution to Taro's top and bottom line. In the United States and elsewhere, cortomazapine are sold in the United States, Canada, Europe and Israel. Another note on the Thames acquisition, Taro has 57 ANDAs. With Thames we added 19 more ANDAs for products we did not previously have, giving us a total of 76 ANDAs. Also on the acquisition front, you should know Taro's business development team is active in seeking out products and product lines and companies that are compatible with the core business, as well as in strategic areas of growth. Before we open the call to questions. I would like to briefly remind you of through communication policy guidelines. First, we cannot provide guidance or comment on analyst estimates. That is because Taro's continued growth is dependent on new product introductions, as well as acquisitions and we do not know when approvals or acquisitions will occur. Second, for competitive reasons and to be fair to customers our policy is not to provide information on prices or performance of individual products and also for competitive reasons, we do not disclose products for which we have filed ANDAs with the FDA. However, experience proves you still have much to say in answering your questions. Now, Tiffany, we would like to begin the question-and-answer session.

The question-and-answer session will will begin now. If you are using a speaker phone, please pick up the handset before pressing numbers. If you have a a question, press 1, followed by 4 on your push button telephone. If you would like to withdraw your question, please press 1, followed by 3. Your questions will be taken in the order they are received. Please stand 00:16:30 by for the first question.

Elliott Warbur, CIBC World Markets. Very impressive quarter. I have a couple of questions and the first several may be for Kevin on the financials. You guys were able to generate impressive sequential top line growth in the quarter, even with the pricing impact on generic Lotrizone. I am just wondering if the run rate in the quarter is a good base line number that reflects true run rate of the business to model out going forward or was there anything specifically that may have provided a boost in the quarter you may not see repeat going forward?

Again, we don't go into details on guidance. I appreciate your question. Quite frankly, there really were no unusual events during the quarter that drove the business either on the upside or down side. You mentioned the impact of pricing pressure on CB cream. It appears as if we have been able to offset that with growth in the overall business. CB cream overall continues to grow. Our market share there reached about 63% was the latest IMS data that I was privy to. I think we started off the quarter approximately 58 or 59% of the market share. It appears as if the impact of pricing pressure has been more than offset by the growth in our base line business. We are proud to say we remain the number one company in topical prescription products in the United States.

Okay. Similar question on the gross margin line. I am assuming that reflects perhaps a lower relative contribution of CB cream versus the base business. Just wondering how the acquisition of Thames impacts your gross margin line and again, if this is sort of a good base line number to look at going forward?

You know, Thames has not been - we purchased assets of Thames and liabilities of Thames about the middle of May. If you wanted to do when doing modeling, take the full quarter impact of Thames into the model. That would be wise. Outside of that, again, nothing unusual in the quarter. We are obviously looking to improve the overall performance of Thames, as we continue to integrate their operations into our business. As Barrie mentioned, we are looking to play on the operational leverage story there, as we are bringing their sales on board, we have been able to do that without adding sales and marketing personnel. We are able to keep overhead down, while increasing the sales and the overall contribution.

Ultimately the plan to move into most of the manufacturing of the complementary ANDAs into your facilities?

Thames was a company that operated in our area of core confidence in several products. We are rationalizing the product line and focusing on increasing efficiency, as I mentioned, our sales team is excited about the growth potential of the acquired products. It is really a story of operational leverage, the ability to add sale necessary gross margin without having to add operating expenses.

Okay. Kevin, I think you mentioned capex is 17 and a half million, if I heard the number correctly?

That is correct. Yes, 17.2, actually.

Okay. I think your last conference call you had indicated full year might be 25 to 30 million and you may be tracking ahead of that. Is that -

That is accurate. What we will see is really over the next two years, the company has looked at base business and what we have in the pipeline and what we plan on submitting in the near future. All of that, when laid out, will require increase in manufacturing capacity and increase in R and D facilities so we can keep growing our business in the years to come. So, I think a number we are looking at over the next two years, 18 to 24 months, is probably capital investment between 40 to 50 million dollars in total.

Okay. I guess, when you look at capex investment, how is that split between maybe increasing capacity for semi-solid dose products versus solid dose?

It is pretty evenly split in basically four areas. One is increase in capacity on the semi-solid side. One is increase in the solid dosage group, out of Israel. The third is increasing our vertical integration capacity, increasing chemical facilities with the idea of being able to satisfy our own needs. Not really a strategy there of trying to become a chemical supplier to the world and finally, increase in R and D facilities. It will be pretty evenly split between all four of those initiatives.

Okay. One last question on the ANDA pipeline. I understand you can't comment on timing. The good new system we are a quarter closer than last quarter. Just wondering if the competitive outlook for any pending ANDAs has changed, meaning have there been other companies that have received approval for some of the products that may suggest we are looking at lower profitability potential when you get approvals? I think last call you said the majority of the products that you currently had filed did not have competition.

There is Barrie, no real change. I think we ought to give someone else a chance to ask a question. Thank you.

Thank you.

Ladies and gentlemen, we ask that you limit your questions to two per participants. The next question comes from Paul Woodhouse. State your affiliation, followed by your affiliation.

Paul Woodhouse, Merrill Lynch. I wonder if I can delve into the top-line performance. If, as far as we are able to strip out some of the price effect and net off some of the volume gains and then assume perhaps a million dollars or thereabouts from Thames pharmaceutical in the quarter and a small contribution of half or three quarters or thereabouts from (inaudible). Strip those out and look at the performance against the first quarter and same period last year? My calculation is suggesting we are looking at year on year based on business growth of close to 40% and sequential growth of 16 or 17%. Are those reasonable assumptions?

This is Dan. We can't reasonably comment on your assumptions. I think Kevin answered the question another way in the first question asked. Was there anything unusual this quarter in terms of the business that we would kind of take out and look at in analyzing the base business kind of growth of the company? The answer was really there isn't. So, I think sequentially we're in a range that, you know, reflects that kind of question on any particular huge events or large events that would have affected the results.

All right. If you look at the numbers of sequential growth this quarter, there appears to be higher than previous quarters. It looks more like baseline business is driving that rough acquisition or the Lotrezine effect.

Yes, Paul, (inaudible). Market share increases on every single one of our prescription products during the quarter. You are right in your assumption the base line business is very strong and continues to grow. We are pleased with the performance of that baseline business. It has been a driver for the growth of the company.

The growth is accelerated sequentially?

Based on what we have seen from ims data, the market share continues to grow and is improving quarter over quarter. We are very happy with the performance of our products, really driven by an excellent sales force here in the United States.

Okay. Thank you. One other question. Can you comment on the net financing presuming there is currency loss in there? Where is cash at the moment? When can we look to get a better return on the cash?

Thanks for that question. We did actually have a net financial expense for the quarter, really the result of two factors. The first would be what you mentioned foreign currency swings during the quarter. Both the Canadian dollar and Israeli shackles had movement during the quarter. This did have a negative impact on financial expenses. So, we do have hedging activity, but again, we - it did have negative impact on us, all be it minimum, but it was there. In addition, the majority of our borrowings are long term and higher interest rates than our cash investments. We made - we made the decision to keep the cash in short-term instruments, which obviously are yielding less than the cost of the long-term debt. That way the cash will be readily available to us to complete any transactions related to our business efforts. It is definitely a decision we made to keep that cash available so that we could move quickly as things evolve in our business development efforts.

Okay. Thank you.

Thank you. The next question comes from Shimon Levey. Please state your affiliation, followed by your question.

Shimon Levey of Goldman Sachs. couple of quick questions. Number one, can you discuss with us, besides CB, the general pricing environment for your products? Last quarter obviously margins were up and that was a good pricing environment for generics. Into the first month of Q3. The second question is on the integration of Thames into the current business, seeing it is your first acquisition in a while, how that is going? Is it going according to plan, etcetera?

This is Dan. I will take the last question first. The question for Kevin to answer. In terms of this, the progression with Thames, it is really going very well. We are bringing the product into our sales organization and beginning to actually incorporate them into our own operations. So, going forward, it is going to be virtually impossible for us to differentiate the sales of Thames. We will not be able to break them out. It wouldn't be a reflection of anything that is realistic since it is not within the organization. I think that we are very, very pleased with what has happened with Taro and we certainly are with the products that we have acquired and the manufacturing operations that we have now in capacity increase. On the first question, Kevin -

I don't really think anything has changed. It is the generic industry. Pricing is dynamic in the industry. In the quarter, we see decreases, as well as increases. So, every product is different. So, I really would have to say, nothing unusual than what we are used to dealing with.

Also, our gross margins will change with new product introductions whether we have them and other factors in the industry. So, there isn't really anything here that is at this point, that much different.

Thank you very. Much.

Thank you, the next question comes from Paul Elliott. Please state your affiliation, followed by your question.

Hi. Paul Elliott (inaudible). Great quarter. Barry, maybe you can comment on the importance Vertical integration as far as your model is concerned and maybe quantify the capex that is going to be going in over the next three years?

Thank you for the questions. I think I am a forgotten executive here. Vertical integration is a very important part of our program. Clearly, when we make technological improvements, improvements in synthetic chemical methods employ more efficient manufacturing procedures. One doesn't see it as an announcement. We don't generally announce change in the process publicly. Frequently the gross profit that results can be greater than the gross profit you see from a new ANDA. So, in our overall plan, increasing both the capacity and the efficiency and the effectiveness of chemical manufacturing is terribly important for us. As Kevin pointed out, 25 to 30 percent of capital expenditures are in order to manufacture active pharmaceutical ingredients, some of which are not readily available in the market. We have actually had constraints placed upon us by limitations in the availability of active pharmaceutical ingredients. I think our performance might have been even better had we had ample supplies. Going forward, we are going to try to eliminate that limitation by manufacturing increasing amounts of the chemical that we use and by improving the processes that we use in order to increase profitability and really it is the secret way of increasing shareholder vowel without making a big fuss about it. It assures customers of consistent quality and continues uninterupted supply of pharmaceutical product, which to us is important. It is very important because in many of these products, some of them are nontherapeutic index products, such as Warfarin. Customers and patients don't want to be changing the source of their medication. Therefore, we have a moral and ethical responsibility to maintain supply and that may mean since both Warfarin and (inaudible) sals have been increasing substantially as you can see from ims numbers, we have increasing responsibility to meet our obligations with respect to both chemical, as well as pharmaceutical manufacturing. So, this is an area of research for us. It is an area of investment for us. It is an area of really good return. I think it is a wise area of investment and it has and will continue to produce an increase in shareholder value.

Thank you.

Thank you. The next question comes from Arney Saner. Please state your affiliation, followed by the question.

It is Arney Berser with CYS.

You had a good jump in the quarter, can you expand on that and guide us if this is retesting of existing filings or from new filings?

Arney, the investment in research increase as you get closer to filing. The most expensive part of research and clinical research and usually that is the most expensive part, sometimes animal research can be expensive, as well. The reality is that as we get closer to a filing the level of expenditures goes up. In the case of Taro, what you are seeing is increase in clinical expenditures, as well as increase in the breadth and depth of the lines of research going on in the company. I think that this - I hope the good future performance. We are counting on the fact our research will continue to be successful. We are preparing for it.

Are you disappointed you did not get more filings in this quarter?

Our filings are proceeding according to plan. We have strict milestones for our filings. We are the R and D Institute of Taro's research institute is meeting obligations in a timely matter and within budget. I can't say that I am disappointed and I am hopeful when the year is over, we will all look back and say they did a good job. They will give a good account of themselves.

Final question is can you comment broadly on your strategy for cash? It obviously has significant cash on the balance sheet and generate free cash. Can you comment about prioritization of your strategy?

I will let Kevin answer that.

Arney, we are focusing on core confidence. I think Thames was the start of the outgrowth and really success of our business development efforts. I think what you are going to see is us focusing on areas of our core competence, we are talking indoor companies. We are also looking to other areas in the pharmaceutical world, where we think that our ability to synthesize active ingredients gives us an advantage over competitors. Those are really the areas we are focusing on for business development and obviously the cash is there to take advantage of these opportunities as they arise.

I think we ought to add, we acquired derma(inaudible) from Smith-Kline, (inaudible) steroid in the Canadian market. That also goes into the equation of the utilization of funds in the future if we get additional opportunities to buy brands or generics that are going to earn money for the company. So, we will avail ourselves of those opportunities.

Okay. Congratulations on a very good quarter.

Thank you. The next question comes from Daniel Sedo. Please state your affiliation followed by your question.

Banc of America Securities. Most of the ANDAs you have been on file for quite sometime. How many do you hope to get approved this year? Second question, in terms of the tax rate, it was down sequentially, I was wondering why that was and what we should expect going forward?

The answer to the first question first. I am no longer employed by the Food and Drug Administration. I was for 21 years and I would have had an opportunity to make a statement. It would have been illegal if I had. The FDA will take its time to assure itself that generic drugs meet all of the requirements that it feels are appropriate to protect the American public. While it is annoying to us that approvals don't happen when we would like them, in a democratic society, we have to tolerate what government decides to do. So, I feel that our applications are in order. I am confident that they will ultimately be approved. It is just a matter of time. It is impossible to predict. It would be irresponsible for me to try to predict when an ANDA would or would not be approved. With respect to the tax rate, I will just steal it from Kevin. It is a question of product mix. Product that is originate in Israel, where we have approved enterprise status and preferential tax rate, the taxes are lower in Canada. There are tax credits. We are fully tax company in Canada and of course, a fully taxed company in the United States. So, the tax rate is really a function of where the products originate, where the manufacturer originated.

Okay. Thank you.

Thank you. I will turn the conference back to Mr. (inaudible) for final remarks.

Thank you very much for participating. We look forward to getting with you after the third quarter. We will be happy to answer any additional questions that you have by the phone today. Thank you very much.

Ladies and gentlemen, as a reminder, this recording will be archived and can be heard through July 30th. To hear the archived call log into www.Taro.com and click the link on the home page or telephone 800-428-6051 in the United States or 973-709-2089 from overseas. When prompted, enter passcode 252524 to request the Taro call. Ladies and gentlmen, that concludes our conference for today. Thank you all for participating and have a nice day. All parties may now disconnect.