Taro Pharmaceutical Industries Ltd (TARO) 2002 Q3 法說會逐字稿

Good morning and welcome ladies and gentlemen to the Taro 3rd quarter 2002 conference call. At this time I would like to inform that you this conference is being recorded for rebroadcast and all participants are in a listen only mode. This recording will be archived, and can be heard anytime follow this call through October 31st. . 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. Once prompted, enter passcode 264620 to request the title call.

Today's call will begin with a presentation by Taro's executives then at the request of the company we will open the comments to question and answers from participants on the call. At this time, let me read you the following safe harbor statements. Certain statements in this release are forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These include but not limited to statements that are not describing historically facts and comments concerning new research operations in the. U.S. investments and research in acquisition increasing manufacturing capacity and distribution.

Although Taro Pharmaceutical Industries, LPD., believes the expectations reflected in such forward looking statements to be based on reasonable assumptions, it can give no assurances that it's expectations will be attained. Factors that could cause actual results to differ include general economic conditions, industry and market conditions, slower than anticipated penetration of new markets, changes in the company's financial position, regulatory actions, legislative actions in the country in which Taro operates and other risks listed time to time in the company's SEC reports, including its 2001 annual report on form 20S (ph). I would now like to turn the call over to Mr. Daniel Saks, or Taro.

Daniel Saks, Vice President Corporate Affairs, Taro: Thank you Heather (ph). Good morning and welcome to Taro's third quarter conference call. With me today are Dr. Barrie Levitt, chairman of Taro, and Kevin Connelly our chief financial officer. Barrie, Kevin and I got some brief remarks and open the call to your questions. To get started we'll turn over to Barrie.

Thank you Dan and thanks to all of you for joining us this morning. We at Taro are understandably proud that the 3rd quarter of 2002 is Taro's 27th consecutive quarter of record sales and 17th consecutive quarter of record net income. That means that we have achieved almost seven years of quarter on quarter record sales and more than four years of quarter on quarter record net income. We feel this quarter's results are especially note worthy because the quarter of last year, last year's 3rd quarter was in itself an outstanding quarter for us due in large part of large of C B cream. This performance points on the under lying strength of Taro's core business to our ability to manufacture and market efficiently..

Unfortunately along with the good news we were deeply saddened of the death Eric Hills, our vice chairman and chairman of our audit committee. He passed away to Sunday from complications following surgery. Eric was a remarkable man who was involved with Taro for nearly 50 years, as an advisor to the company and present management, including myself. Eric had an enormous impact of shaping our corporate culture. He was a constant advocate for honest business practice and sound accounting policies. He was always calm, he was a perfect gentleman, but he of absolutely unwavering with respect to his principals. He was ahead of his time in respecting the obligations that a public company owes to its share holders, to the investment community and to the public at large. He was a great friend who will be sorely missed by all of us.

I want to take just another minute to address some of the recent events and steps we're taking in anticipation of future growth. The growth of revenues has enabled us to fund our research initiatives at record levels while maintaining our total research investment at about 12 percent of sales. Last year we built build a new research building in Israel. This year we're completing a new wing at research building in Toronto. In addition, we've just acquired a believe to house new research center in Hawthhorne (ph)New York. This new facility will enable Taro to tap into the considerable pool of pharmaceutical research talent in the New York tri state metropolitan area.

The research is not the only area in which Taro is investing. We continue to invent in manufacturing and distribution capacity to keep up with current and anticipated growth for our products. In the 1st three quarters of 2002, we've practically matched the full year of 2001 in sales, and we surpassed the full year of 2001 in both net income and earnings per share. More than ever I can say Taro looks to past with pride, to the president with passion, and to the future with promise. Thank you for your time this morning, and now I'd like to look the call over to Kevin Connelly with the third quarter financial results. Kevin?

Kevin Connelly, Chief Financial Officer, Taro: Thank you Barrie, good morning everybody. I'm just going to touch briefly on some of the highlights for the company's performance for the quarter as well as year to date. As Barrie mentioned we are pleased with the 3rd quarter, which continue to demonstrate our sustained performance, the power of our operational leverage and more importantly our commitment to research and development. Sales of 55.5 million for the quarter or about 35 percent increase from prior year and as Barrie mentioned represents the company's 27th consecutive quarter of record sales.

The sales break down by geographic area for the quarter about 86 percent of our sales took place in the United States, six percent in Canada, six percent of sales in Israel, and the remaining two percent or so from other international markets. The sales to growth was driven mainly by the strong performance over all business as we saw growth in market share for all of our products. A modest contribution from both new products which we received approval to market during the year, and from product sales related to acquisition of tems (ph).Gross margin was 61 percent remain among the highest in the generic industry and these margins do reflect the benefits of our vertical integration program, the ability to synthesize own active ingredients. The operational leverage that we talk about that's inherent in the company's structure was demonstrated by the reduction in SG&A as a percentage of sales, which for the quarter stood at 23.6 percent versus 26.6 percent a year ago.

Our commitment to R&D continues with a record $6.8 million invested in R&D for the quarter, and this $6.8 million represented approximately 12 percent of sales and was divided approximately 80 percent towards our generic pipeline, and 20 percent towards our proprietary programs T2000 and non spill (ph). The 35 percent increase in sales drove a 52 percent increase in pre-tax earnings, again demonstrating the operational leverage for the company.

Tax rate for the quarter was approximately 16 percent versus 19 percent for the same quarter last year. The change is reflect immediate product mix between Canadian and Israeli facilities with our Israeli supplied products where we enjoy approved enterprise tax status up as a percent of the total for the quarter. The sustained performance of the company was demonstrated by the net income for the quarter of 11.6 million or 39 cents per share our 17th consecutive quarter of record earnings, and this represented an increase of 58 percent of net income for the quarter.

Some final notes on the balance sheet. Property plants and equipment reflects company's continued commitment to expanding and maintaining our manufacturing and R&D facilities and Israel, Canada and now the U.S. Approximately $30.8 million has been invested during the first three3 quarters of the year. This did have some impact on our cash and decrease in cash from December really reflects the increase investment in working capital as both receivables and inventory did increase in the first nine months of the year and the growth in other assets reflects the intangibles associated with the purchase of tems (ph), which was completed in the 2nd quarter of this year.

Dan turn it over to you for comments before we open it up to questions?

Thank you Kevin. I'd like to provide some perspective to Taro's competitive position and results. First regarding Taro's pipeline, the company has 15 ANDA (ph) submission at the FDA. These filings 11 topical products and ]four oral dosage form products, including you on tentative approval for Lorasium (ph) syrup.] Approximately 75 percent of the market value of the pine line currently has no generic entrants in the market. We don't know the status of the ANDA (ph) filings of our competitors however, Taro's ANDA's have been first to market about one third of the time. Seven of the ANDAs were submitted this year.

In the same period, Taro has submitted three drug master files which together with our existing G M S provide the opportunity for vertical integration in a large percentage of our pipeline. About our competitive position Taro continues to gain market share in nearly all of our principal product line. We believe this performance is testimony to the effectiveness of our sales and marketing organizations. Our solid dosage front products are having an increasingly significant share in this success, in particular Warfarin and carbamazepine have made substantial gains in their perspective markets.

The unit market share has Taro's Warfarin products, has grown from two percent in 2000 it's firstfull year on the market to about six percent today. The market share in unit it is for our U.S. carbamazepine products has grown since we launched this line in 1998 to about 19 percent at the present time. Warfarin and carbamazepine are both product necessary which Taro is vertically integrated, and regarding our continuing gains in the generic market for Lotrisone, our CB cream, it's reached approximately 64 percent of prescription.

And an pant aspect of this drug has been Taro's innovated marketing which we believe has resulted in the increase of size in total market. Now to begin the question and answer question, let me remind you of three of our communications policy guidelines. First we can't provide guidance or comments on analysts' estimates and that's because Taro's continued growth and the weight of it is largely dependent on new product introductions, and we don't know when these approvals will occur. And second, for competitive reasons and to be fair to customers, our policy is not to provide information on prices on individual products and also for competitive reasons we do not disclose the products for which we have filed ANDAs (ph) with the FDA. Heather (ph), we would like to begin the Q&A.

Thank you sir, the question and answer session will begin at this time. If you're using a speakerphone, please pick up the hand set before pressing any numbers. If you have a question press star one on your pushbutton phone. If you wish to withdraw your question, please press star two. Your question will be taken in the order it is received. Stand by for your firstquestion. Our first question comes from Arnie Yursinner (ph) with CJS Securities. Please state your question.

Arnie Yursinner (ph); CJS Securities: Good morning. Can you give us the dollar value of your file products at the F D A and the number that have been at the FDA great than a one year period place?

The dollar value of our file products is probably in excess of three quarters of a billion dollars. I'm not sure how much can you relay on that number since have you to apply the generic discount to what and it's impossible to know what the competitive environment will be. With respect to the products this year, I believe Dan Saks said that seven of these products were filed this year. Maybe I might as well preempt the next question, and that is when are we going to get our next FDA approval. Obviously, I don't work at the FDA, I'm not privy to that information. I'm very confident in our value of our research, and its pace and its progress. I am extremely pleased with the quality of scientific information that we submitted to the FDA and confident that the FDA will get it right and they will do their job. They have to take the time that they feel they need to protect the American public. I am confident we will get our fair share of approvals in a reasonable period of time.

Arnie Yursinner (ph): Barrie, as a quick follow up to they believe the 750 million branded value is materially higher ...

We filed additional ANDAs (ph) and that's what changed the number.

Arnie Yursinner (ph): OK thank you.

Thank you our next question comes from Elliot Wilbur (ph) with CIBC World Markets. Please state your question.

Elliot Wilbur (ph), CIBC World Markets: Congratulations on the strong quarter. Barrie preempted my first question. Let me just ask a quick question of Kevin. I guess the most impressive aspect of your results in the last couple ofquarters - just how strong your base business has been and you've been able to generate pretty impressive sequential growth. Is there anything that occurred this quarter that we couldn't reasonably expect to continue going forward? In other words, were there and sort of one time large orders any 1 particular product that maybe sort of abnormally boosted base business?

I think it is short answer to that is no. Basically we're hitting on all cylinders across the board. Our Israeli group performed absolutely out standing this year. We're extremely pleased with what's going on out in Canada and the growth there and key products and of course the U.S. where the majority of our business takes place. We're really are - we're really hitting on all cylinders there both in the prescription and over the counter business is moving along nicely. There isn't and any one particular event I can point to, so based on that it was really nothing unusual for the quarter, just business as usual with growth in sales and growth across basically the entire company and the entire product line. Something we are very, very pleased with. Elliot Wilbur (ph): Can you provide us with a quick update on the tems (ph) acquisition as well, in terms of integrating that business. Has the infrastructure been fully consolidated or is there still some potentially some additional cost savings.

Would you mind if I answer that question? This is Barrie Levitt. The tems (ph) acquisition is proceeding according to plan. We have not yet seen the impact of some of the sales of tem's (ph) products. There will be I hope some additional, I hope, cost savings associated with the full integration, but we also expect to see revenue growth from products where tems (ph) was not able to market effectively where we believe that we are going to be able to do a better job. I realize that's a forward looking statement but it's a reasonable one, but I think we still have some more to anticipate from the tems (ph) acquisition, and tem's (ph)is doing its part in manufacturing. They are now manufacturing a variety of products including a number of Taro products at tem (ph). They're doing their part in helping us keep up with the unanticipated demand we've had, so we can keep our customer supplied promptly.

OK, Barrie, just one quick follow up for you. Given the apparent success with this acquisition, is it reasonable to assume that you're ready for your next?

We're all looking for opportunities. We would like the next opportunity whenever it comes to be as good as the tem's (ph) opportunity was in terms of our ability to integrate it. So we are looking and we will continue looking.

Great thanks and congratulations on a great quarter.

Thank you our next question from Paul Woodhouse for Merrill Lynch.

Paul Woodhouse, Merrill Lynch: You touched on most of the question I was going to ask but a couple of follow ups. Am I right in thinking both the filings in this quarter was cream ointment in nature?

There were cream and ointment filings.

Both cream ointments.

I didn't say they all were, I said there were. Generally we try to be silent on the nature of our filings because we don't want to provide information to our competitors which include the branded companies. So we generally try not to comment too much about the nature of the filings.

Previously to this we had been had - I believe the breakout is 11 topical products and four oral dose so that is up in both categories during the quarter.

OK and Kevin you were talking about the strength of business across the board and some of the marketing initiatives. Can you give us a sense of what's been happening here where it's been clearly impacted in the Lotrisone market. Where else is it showing through -- is this a feature with a number of products or are you focussing on one or two specific areas? How much of this momentum is sustainable or indeed can be increased.

It's Barrie, and I hope I'm not giving the impression that I'm hogging the question. I have been criticized by not answering enough. Actually the business increase is across all sectors in all countries. Specifically in the United States. We just -- as we are able too keep improving customer service we keep getting more business from all of our exists customers. We're trying to be careful not to sell too much. We're not trying to load customers but we are trying to meet customers needs in a timely basis and that is continuing to increase. I guess the more you provide good timely serve and more it's a appreciated and the more people buy from you. So it's a across the board. As Kevin said we really have out standing performance from our Canadian group. They have done a tremendous job.

OK, and one final question. Are you seeing fairly stable pricing across the board without talking specifically about individual products? Or are you seeing erosion here and there, increases.

The last time I looked we were in the generic business in the United States. We are experiencing what everyone else is experiencing. I think that's the nature of the beast. It's not uniform across all products but nothing unusual has happened this quarter. As I look back over the first ...

A relatively stable pricing assignment?

It's what 1 would ordinarily anticipate. There hasn't been any significant change.

Thank you.

Our next question comes from Paul Elliot with Dominic Advisors. Please state your question..

Paul Elliot, Dominic Advisors: You people historically have all been very active in term was aggressively pursuing research efforts and the budgets have increased historically and obviously currently and I'm sure in the future basis. Do you see and change in the historic relationship with respect to topical versus oral dose, generic versus proprietary going forward as far as the research effort is concerned.

Well, we done very well in the topical areas, and we're one of the leading providers of topical medication in the U.S. Some quarters, I'm not sure about this last quarter because we haven't seen the numbers yet, but in earlier quarters we were the largest supplier of topical medication in the U.S. And so the topical business is going to continue to be very important to us. Most human beings have skin, some thicker, some less thick but all of us need treatment from time to time. The wonderful thing about dermatology is, I guess I say this as a physician, the parents don't die and they don't get well so it's a good area to be in. So we do intend to stay there.

However, having said that, we also are going to continue to be aggressive in the pursuit of appropriate topical -- oral products where we think we have something we can bring to the table, where there's a specific competitive advantage that would allow us to make contribution and get significant value from being in that. With respect to your second question about proprietary and generic, obviously as Kevin pointed out the bulk of our research is focused on the generic business because it returns faster, and as you know Paul, you have been a share holder of ours since 1984, some of these products we were looking on in 1984 we're still working on, so you are going to have to be a lot more parent and therefore conservative about the investment in proprietary products. Where we think we can make a significant contribution to therapeutics and where we think there is a market that will bring a return to our share holders we will continue to pursue proprietary products,.

Thank you our next question from Shamon Levy, Goldman Sachs. Please state your question..

Shamon Levy, Goldman Sachs: Just a couple of questions. If you can give us some sort of update on none spill if you still see that coming into the market in 2003. Second question is you mention said that seven out of 15 ANDA's (ph) filed this year, are you able to give us a blanded (ph) value of those ANDA's (ph) filed over 12 months ago. The last question is regarding the margin and tax rates. Margins other than slightly lower because of the product mix, and the tax rates for the same reason. In the absence of -- we hope this won't happen -- in the absence of interest new approval necessary this quarter would we expect those margins and tax rates to more or less stay level with this quarter.

I guess Kevin you and I will have to share that question. I'll do the non-spill part, and we'll both not give him the information on the (inaudible) ,-With respect to the non spill, our current plan, first of all it's moving along exactly as according to plan. The exact timing of introductionwill depend on mark conditions, the pharmaceutical market, not stock. We do anticipate to be commericializing that in the next 24 months. I don't the to pin the company down to a particular quarter or year. For competitive reasons we will let the competitors guess about when we will introduce what products we're going to introduce.

The non-spill is after all a delivery system, it's not a drug, so there are a number of specific products that are going to be introduce immediate this format but the precise timing of that will just need to wait. But it is proceeding on schedule. With respect to the value of ANDAs (ph), we not go to allow something to guess which ANDAs (ph) we filed. So the current value is in excess of three quarters of a billion. I'm not giving you precise number but conservative, again so that nobody guesses what we've prices. So I'm certainly not going to say what the value of - I mean it's against company policy to say what the value of any particular ANDA (ph) or any particular subgroup and I think the are questions belong to Kevin. They have to do with taxes.

Bottom line on the margins and tax rate, all of that depends on the product mix quite frankly. On the Canadian products, the creams andointments we have somewhat of a higher margin due to the competitive environment. On our solid dose products out of Israel, more competitive at that time so somewhat lower margins, but at that point we all pay lower taxes because of our approved enterprise status. So a lot depends on the customers and mix of the products that they will buy from us. So to predict what's going to happen with the margins with the tax rate always difficult to do, but the bottom line we are pleased with the performance quarter year to date.

To see the margins still being probably the highest in the generic industry at over 60 percent. A net income that that returns almost 21 percent of sales down to the bottom line after tax number which is basically also a 58 percent increase quarter over quarter and something we are very, very pleased with. And the year to date basis you can't get much better than looking at a 96 percent increase in bottom line performance year over year. So just overall pleased with the performance but difficult to predict because so much depends on product mix, what our customers are looking for and difficult to comment on exactly where we will be next quarter. That's why we have it so we can figure out where we are going to be.

OK one further follow on question regarding tems (ph). Tems had revenues of before you acquired them of an annual rate of $9 million dollars. Is that nine million something which you would assume that you are going forward on the business you bought, or are you take taking discontinuing some of their products.

The tems (ph) products -- there may be a few that's just weren't profitable but the bulk of the products we will be continuing with, we haven't as I said before we haven't reintroduced all of the products yet. We have a very important part of our culture with Taro is if we can't supply a product on a continuous basis we'd rather not get involved with supplying it at all. So as soon as we're in a position to really supply the Tem's Products continuously we will reintroduce and relaunch of those products, but we are satisfies with the sale of our products. Tem is a new integral part of Taro sales. We did the same sales force. We didn't add any sales people to in order to market sales of the tem (ph) products. But the tem (ph) products are still a very small part of the over all Taro business. We hope it will be a larger part as time going on.

Thank you very much.

Thank you our final question comes from Dan Seeda (ph) with Bank of America Securities, please state your question. Dan Seeda, Bank of America Securities (ph): I was wondering if you could tell us whether Lotrisone sales other than up or flat during the quarter and also I was curious - you talked about your increase necessary mark share. I was wondering for your portfolio over all what your average market share is and I guess maybe you being break it up between the orals and semi solids.

Again we don't get into the individual products. I do know from looking at the weekly IMS (ph) data that a certain company puts out and sent to me in part of their reports, that our market share last week of just over 64 percent. So that would be an all time high for us in market share on Lotrisone, and more exciting for us is that market continues to expand in total script. So can you put that you will together to try to decide what's going on with Lotrisone, but ... Dan Seeda (ph): Have you seen and change in pricing.

We don't comment on individual pricing. The over all environment is relatively stable over the last quarter but ever individual products always vary. So in that regard just looking in continuous increase the total market as well as our total market share on some of those major procuts and again not only Lotrisone, but Warfarin, carbamazpine, across the board that, business in the generics side in the U.S. continues to grow quarter over quarter, something we're very pleased with.

Dan Seeda (ph): OK.

If there are no further questions I will now turn the conference over to Mr. Saks to conclude.

Thanks very much for participating with us today and we look forward to our conference call for year end. Thank you.

Ladies and gentlemen, this recording will be archived and can be heard anything following this call through October 31. To hear the archives call, log onto www.taro.com, and click the link on the homepage, or telephone 800-428-6051 in the U.S. or 973-709-2089 from overseas. On prompt, enter password 264620 to request the Taro call. Again, ladies and gentlemen this concludes our conference call for today. Thank you all for participating and have a nice day. All parties can now disconnect.