Taro Pharmaceutical Industries Ltd (TARO) 2002 Q4 法說會逐字稿

Good morning and welcome, ladies and gentlemen, to the Taro fourth quarter 2002 conference call. At this time I would like to inform you that this conference call is being recorded for rebroadcast and that all participants are in a listen-only mode.

This recording will be archived and can be heard at any time following this call through February 28. To hear the archived call, lock into www.taro.com and click the link on the home page or telephone 1-800-428-6051 in the United States or 973-709-2089 from overseas. When prompted, enter pass code 286224 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 to you the following Safe Harbor statement. Certain statements in this release are forward-looking statements within the meanings of the Private Securities Litigation Reform Act of 1995. These statements include, but are not limited to, statements that are not describing historical facts, and comments concerning the Taro Generics, TaroPharma and TCHP divisions in the U.S., proprietary products, manufacturing operations in the U.S. and Ireland, expanded manufacturing operations in Israel, proprietary and generic research facilities and programs, increases in manufacturing capacity, proprietary products, and Taro's filings with the FDA.

Although Taro Pharmaceutical Industries Limited believes the expectations reflected in such forward-looking statements to be based on reasonable assumptions, it can give no assurances that its 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 and legislative actions in the countries in which Taro operates or intends to market products, the viability of acquired facilities and difficulties in integrating them into the operations of Taro, marketplace and or physician and patient acceptance of prescription or over-the-counter proprietary products developed by Taro or acquired, and other risks detailed from time to time in the company's SEC reports, including its 2001 Annual Report on Form 20-F.

I will now turn the conference over to Mr. Daniel Saks of Taro. Please go ahead, sir.

Thank you, ma'am. Good morning and welcome to Taro's fourth quarter 2002 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 some brief remarks and then we're going to open the call to your questions. And we're going to start. I'm going to turn the call over to Barrie.

Thank you, Dan. We are very proud of Taro's performance in the fourth quarter in indeed for the full year of 2002. This quarter was simply outstanding. It was Taro's 28 consecutive quarter of record sales and 18 consecutive quarter of record net income. This translates into seven years of record sales and four and a half years of record net income.

2002 was also a productive year for scientific research at Taro. Our research programs resulted in 18 filings with the Food and Drug Administration in the last 12 months. After six approvals, we still have 24 filings awaiting action at the FDA. These include 21 ANDAs, including our tentative approval for loratedine (ph) syrup, two unique ANDA supplements, and more NDA, related to our patented, nonstro (ph) liquid delivery system.

In addition, we submitted four drug master plans last year, bringing the total to 19 DMS (ph) on file with the FDA. [Inaudible] new drug development, we continued to work on T 2000 (ph) , the first of our class in non-sedating barbiturates. In an early Phase II study, the drug was found effective in essential tremor, and we filed (ph) a patent application on its use (ph) . Published data suggests that one half to two percent of the adult population suffers from essential tremor, or involuntary shaking. Of course, as I always say, there can never be any assurance of the final regulatory approval or commercial success for T 2000 (ph) , or anything else that Taro does. However, based on the data we have, we're optimistic that we will continue to develop the drug.

During 2002, Taro continued to invest in its manufacturing operations in both Israel and Canada. We achieved record production output in both countries. The acquisition of Tim's Pharmacal (ph) in New York in mid-2002 provided us with 1: increase production capacity, 2: enhanced manufacturing flexibility and 3: and additional 19 AMDAs (ph) to augment our generic product offering.

Upon completion of our current capital investment program, we estimate that we will have more than trebled our total manufacturing capacity. Also, as we announced earlier this week, the company signed an agreement to acquire a multi-purpose research and manufacturing facility at Ross Cray (ph) , County Tipperary, Ireland. Under the agreement, we will pay less than six and a half million dollars for the fourteen acre campus which consists of 124 thousand square feet of manufacturing, laboratory, office and warehouse space. In a recent cabinet decision, the Government of Ireland has voted to provide us significant financial support. In addition to the favorable financial terms, we're terribly enthusiastic about this acquisition for a number of reasons. First, this initiative enables us to diversyify our manufacturing base. Second, it provides us with a research and manufacturing center within the European Union. And, third, Ross Cray (ph) has an exceptional talent pool. The town has been the sight of a pharmaceutical manufacturing company since 1946. And, finally, to the best of our knowledge, manufacturing companies in Ireland have a maximum income tax rate of 12.5 percent.

Now I'd like to say a few words about our marketing operations. 2001 and 2002 marked a change in Taro's marketing approach. In response to the rapid growth of our business in the United States, we have created three distinct marketing divisions. The first division is Taro Generics. The Taro Generics division will maintain our commitment and focus on the core growth engine, sales to the wholesale and retail pharmacy trade. The second division, Taro Consumer Healthcare Products, or TCHP. It was established for direct to consumer - direct to consumer marketing of proprietary over-the-counter products. The division has secured nationwide placement for Kerasal, a unique moisturizing exfoliant for use on dry, callused feet. We estimate that about 20 percent of the population in the United States suffers from dry, callused feet. And if anyone listening to this call has dry, callused feet, I suggest you go to your pharmacy and try Kerasal.

In 2003, TCHP plans to launch the over-the-products based on Taro's NonSpil liquid delivery system. Of course, I have to repeat again, there can be no assurance of the success of either of these ventures. The third division, TaroPharma, was created to promote Taro's products directly to physicians in the United States. In establishing this division, we recruited a core U.S. team of professional medical representatives who have existing relationships with dermatologists and pediatricians. The initial product offerings for this division include Ovide, Topicort, Primsol and A/T/S. These products address some common problems in pediatrics and dermatology, including pediculosis captivus and locitis media (ph) in pediatrics and acne, eczema and psoriasis and atopic dermatitis in dermatology.

Two years ago, we established a similar division in Canada. Our Canadian division has become the fastest growing segment of our Canadian business. The strategic thinking behind having a team of medical representatives is the development of a platform to launch and sustain the marketing of proprietary pharmaceutical products. This is a long-term strategic initiative for Taro not a short-term tactical maneuver. In evaluating the progress of TaroPharma, it's important to keep in mind that the life history of a proprietary product is almost the inverse of the life history of a generic product.

Generic products frequently begin with the height of their market share and the height of their margins, which are subject to price erosion and share erosion over time as more and more competitors enter the market. Sales of proprietary products, on the other hand, typically continue to grow over time and are characterized by price increases or price stability. Thus, the success of a proprietary product must be evaluated over time and not by its immediate results.

All the initiatives I've described today are driven by a business philosophy whose goal is profitable long-term growth. Our past accomplishments and our current strategic initiatives give us confidence that this goal is achievable. Thank you and now for the details of what's gone on during the last quarter and the last year - I'm turning this over to Kevin. Kevin?

Thanks, Barry. I appreciate that. I'd like to just touch briefly on some of the company's financial performance for the quarter and the full year. As Barry mentioned, we are obviously very pleased with the results of the quarter and the full year 2002. I think this performance continues to demonstrate the sustained performance of the company as well as our commitment to research and development.

Sales of 61.9 million for the quarter are a 43 percent increase from the prior year and represents the company's 28th consecutive quarter of record sales. The sales breakdown by geographic area for the quarter - approximately 87 percent of the sales took place in the United States, six percent of the sales in Canada, five percent of the sales in Israel and the remaining two percent from the rest of the world.

The sales were driven by the strong performance of our U.S. group where, cross-virtually, all of our product lines would increase the market share of our base business. We also had a modest contribution from some of our new product introductions during the year, such as Amcinonide Cream, Econazole Cream which was approved during the fourth quarter, and from product sales related to the acquisition of Tems (ph) .

Our gross margin of 62 percent for the quarter remains among the highest in the generic industry. Our SG&A as a percentage of sales was 24 percent and included the costs related to the launch of products approved in the United States during the quarter, the continued promotion of some of our branded products in the Israeli market, and the investment in our proprietary sales force in Canada.

Our commitment to R&D, a real strength of the company, continued with 13 percent of sales invested in R&D during the quarter or just shy of $8 million. Approximately 80 percent of the R&D investment was focused on our generic pipeline which, as Barrie mentioned, currently includes 21 ANDAs and two supplemental filings. Twenty percent of our R&D remains focused on our proprietary pipeline, primarily our NonSpil Drug Delivery System for which the company has an NDA on file with the FDA, and our new class of drugs, the non-sedating barbiturate (ph) products. The company filed for an additional patent on T2000 during the quarter as a result of an early Phase II study on essential tremor disease.

Our operating income of 15.5 million for the quarter represented approximately 25 percent of sales. Our tax rate of 17 percent reflected a change in the product mix between our Canadian and Israeli facilities with our Israeli supplied products, where we enjoy our approved enterprise tax status, down slightly as a percent of the total for the quarter.

The sustained performance of the company was demonstrated again by the net income for the quarter of 12.9 million or 44 cents per share - our eighteenth consecutive quarter of record earnings. And this represents an increase of 32 percent in net income for the quarter - a performance that all of us at Taro are quite proud of.

Before I turn it back over to Dan and Barrie and we entertain some questions, I'd just like to highlight some of the items from the year-end balance sheet.

Our cash and cash equivalents as of December 31, '02 decreased 20 million from a year ago as the company funded its capital expansion and acquisition programs through operating income and cash. Accounts receivable - trade receivables, I should say, of 68.3 million represent a days sales outstanding of about 99 days, which is pretty much in line with the company norm. Our inventory of 42.4 million reflects turns of 2.2 times as the company continues to maintain the finished goods required to meet the growth in customer demand. Property, plant, and equipment also reflects the company's continued commitment to expanding and maintaining our manufacturing and R&D facilities in the United States, in Israel and Canada. Approximately $46.8 million was invested in these facilities around the world during the year. Finally, the growth in other assets reflects the intangibles associated with the Tems (ph) acquisition earlier this year.

Dan, let me turn it over to you.

Thank you, Kevin. I'd like to offer some information on a few of the questions we've been receiving and provide some perspective on Taro's results.

First, regarding Taro's pipeline, as Barrie mentioned, there are currently 21 ANDAs, two unique ANDA supplements, and one NDA related to NonSpil in the pipeline. Fourteen of the ANDAs are for topical products, and seven are for oral-dosage form products. The current market value of the 21 ANDAs in the pipeline is more than a billion dollars. And we know we'll get the question on the maturity of the pipeline - about one-third of the ANDAs have been at the FDA for more than one year.

Regarding Taro's generic product offerings, nearly every product line and market share during the quarter. Of course this includes both oral dosage and topical products and this trend is continuing.

Just to begin our question and answer session, I'd like to remind you of our re-communications policy guidelines. We cannot provide guidance or comment on analysts' estimates and that's because the rate of our continued growth is largely dependent on new product introductions and we don't when these approvals will occur. And second, for competitive reasons and to be fair to our customers, our policy is not to provide information on prices of individual products. And also, for competitive reasons of course, we do not disclose the products for which we filed NDAs with the FDA. And with that, Anna (ph) , let's turn it over to questions.

Thank you, sir. The question and answer session will begin at this time. If you're using a speakerphone, please pick up the handset before pressing any numbers. Should you have a question, please press star, one on your push button telephone. If you wish to withdraw your question, please press star, two. Your question will be taken in the order it is received. Please stand by for your first question.

Our first question comes from Paul Woodhouse (ph) with Merrill Lynch. Please state your question.

Good morning. Couple of questions, first off, can you give us a sense of what proportions of Varfarin and carba are now - what portion of sales now that they're outside the States? And can you comment a little on the extent of the sales in these other markets.

We're having a hard - boy I don't know if you can hear us, but you're very faint.

What proportion of the Warfarin and Carba sales now ex-U.S.? And can you talk about the developments in some of these global markets?

I don't think we can give you a precise number. Let me just say that in Israel we had 99.99 percent of the market for Warfarin under the name Coumadin.

In Canada, I think that we are not number one. I guess we're a little over 50 percent of the generic market for Warfarin in Canada and that's growing, but I can't - I don't have the precise numbers and we don't generally disclose precise numbers of sales.

And Warfarin was introduced into Great Britain this year. And again, I don't have the precise numbers in Great Britain and that market has been rather unstable so it's not clear what kind of contribution we expect from Great Britain in the early part of '03.

But we are in all markets there we've introduced the product we're doing very well and we're increasing market share against some rather stiff competition I might say.

In respect to Carbamazepine, we are outside the United States we sell the drug principally in Israel and the United Kingdom and essentially and we're continuing to gain market share in both of those countries.

And we have in the United States, of course, about 20 percent of the - of the market in the United States, but you asked for outside the United States.

Yes. OK. And the second question is you've launched in the last couple of months Econazole and Ketoconazole. It's still obviously very early days into the intro launch, but can you give us a sense of the competitive landscape here? You know, how are the products doing up against the competition?

Well, both products - both products there is one competitor. It's a different competitor for each one. In the case of Econazole, the basis of the orders we have, on the basis on the products we ship and the programs we have in place, we're confident that we'll get our fair share of the market. Progera (ph) has done a nice job as the competitor in this particular market, and we think that we're going to do a nice job as well. I think we're going to be a little early to assess the market, the data is really rather scant, it's like trying to predict an election return at 9:05 when the polls closed at 9:00. So I think it's a little early to sort out who has what share.

With respect to Ketoconazole, we're up against the largest generic pharmaceutical company in the world, or our colleagues at Teva, and there again, on the basis of the orders we have, the products we've shipped, and the programs in place, we will give a very good account of our sales in the Ketoconazole market in the United States. We've also made significant in-roads in Canada with Ketoconazole, which we sell under the name ketaderm (ph) in our proprietary sales force in Canada, and so in both instances we seem to be doing well, I guess we'll just have to wait a few more months until it becomes clear what the exact competitive landscape will be.

Was there another part to that question that I didn't answer?

That covered it.

Thank you, the next question comes from Elliot Woeger with CIBC World Markets (ph) . Please state your question.

Gentleman, good morning, and congratulations on a very impressive quarterly performance. I have a couple of questions, first off for Barry, particularly with respect to the recent acquisition of Elan, selling infrastructure. Can you give us a sense of the number of reps that are actually out in the field, detailing the products you've licensed from Medicis, and also what kind coverage that gives you in terms of the percentage of the Hyposcribing (ph) dermatology?

Well, to answer that question, we didn't refer to it as Elan, but we did, a lot of this came with an arrangement we had with Elan as they got out of dermatology and pediatrics and we got into it. They have sixty regions in the United States, which is pretty much what you would put in place to get substantial coverage for both dermatology and pediatrics. We, it's a little early to say how many people we have since we are adding people at a very rapid rate from a number of pharmaceutical companies, and we're still getting a lot of additions to our staff from Elan. We imagine that by the end of the year we will have the country covered properly.

OK, then, a follow-up question on NonSpil. It looks like that's a slight acceleration of the launch time of the first product out of that program, and my question is, Is this going to be a Taro label product, or is this going to be sold on a private label basis?

It's definitely going to be a Taro label product, if and when, when we launch it, and we certainly do expect to launch more than one NonSpil related product. They will be Taro-labeled products.

OK, one last question, Barrie, on your R&D spend and your pipeline. Obviously your growth in the past couple quarters has allowed you to accelerate reinvestment back in the business, and just looking at the size of you A&D (ph) pipeline now versus what it was a year ago. Should we be thinking about Taro going forward as a company that maybe, on an annual basis, be submitting something like 15 to 20 applications as opposed to the historical range around 10 to 15?

Well, last year we submitted between 15 and 20, it was 18, and all I can say, I can't predict the future, but... And we don't make forward-looking statements as a rule, but let's just say that we increased the total budget for R&D, we've increased the total facilities in Canada, in Israel, in Ireland and in the United States for R&D, so adding two more R&D areas, and we're increasing the total number of people involved in R&D, I guess we would be very disappointed if there were slowdowns in the output from all this research. So, as you correctly said, Elliott, we are reinvesting a very substantial amount of our revenue in our research, and we will continue to, because we believe that, more than anything else, is the barometer of what we're going to look like in the future.

OK, thanks, and two quick financial questions for Kevin. Could you address the sequetial increase in receivables and inventory levels at year end?

Sure. Quite frankly, a lot of it's driven by a strong performance on the topline, I think that basically our DSOs, our Days Sales Outstanding have been somewhere between 90 to 110 days, depending on when the sales take place within the quarter. So I think we're pretty comfortable with where the DSO level is at the end of the year, at about 98, 99 days of sales outstanding. So that's pretty much in line. So the real growth there has been an increase in the top line. And, the inventory growth is obviously driven by the growth in the top line, and during the year, as well as to some extent making sure that we have enough inventory onhand to cover the increase in demand that we'll see going forward into 2003.

Thank you, the next question comes from Paul Elliott with Dominic, Dominic Advisors (ph) . Please state your question.

Yes, Barry. Generic companies overall have not had very good success in introducing, or entering the proprietary pharmaceutical market. What confidence can you provide us that Taro will be successful?

Well, that's a good question, Paul. First of all, I guess, the first part of the question relates to how other generic companies... When you look at the history of proprietary companies, and you look at the ones that have been successful, it's taken them a while to achieve success. I mean, Pfizer started in 1846, Lily in 1876, and Merck in 1668. So, when we look at them, we realize that the timeframes there are measured in centuries, not in quarters.

I think it's early to say that some of the generic companies will not achieve very substantial success in the proprietary business, so that's just with respect to the industry in general, but I think it's early to discount the initiative that some of our competitors are undertaking, and I think that some of them are going to succeed, and succeed nicely. Certainly, Teva (ph) , which has been around a hundred years, has very significant proprietary business.

With respect to Taro, there are a number of factors that make me think that we have a very good chance of being successful. First of all, we started out as a proprietary company. The move to generics only happened at the passage of the Waxman-Hatch or Hatch-Waxman--depending on whether you're a Democrat or a Republican--Act. And so, that represented the innovation for us. But our mindset has always been a direct to consumer and direct to physician mindset, and that has been our experience.

Secondly, more than 90 percent of our senior executives come from the proprietary pharmaceutical industry, and they have extensive experience in launching and maintaining pharmaceutical brands, even some of the major brands that you're all familiar with.

Thirdly, the areas in which we're working are areas in which we have we believe both a scientific and a competitive advantage. We're operating in areas of our own specific competence.

Fourth, as a company with many physicians in senior management, and that's besides myself, we believe we understand the mindset and the needs of practicing physicians. Many of us have been practicing physicians; we've run into the problems ourselves; we come from the trenches; and we understand what's going on in the trenches. So we believe that we will be able to provide the kind of guidance to the company to make sure that we hit the targets and hit them properly.

But finally and most, I guess, significantly is Canada. As you know, our Canadian company is headed by the former Head of Marketing from Eli Lilly, and we established a proprietary pharmaceutical unit in Canada two years ago. In that unit, we've been able to establish the necessary infrastructure, the support team for medical representatives including sales, administration, reporting systems, and all of the programs that are necessary to achieve a desired and effective result.

And the result of this pilot program in Canada has been simply outstanding performance. I mean this is the most rapidly growing segment of our Canadian business. I mean it's not big enough - remember, there's only - what? - 30 million people in Canada - it's not big enough to make a dent in the overall Taro business, but it certainly represents a pilot program where we got all the bugs out - both the bugs out of the computer programs and the bugs out of the marketing programs, so that we feel confident that transplanting this south of the border should be successful.

And indeed, I know we've only been in the field for a matter of a few weeks, but the response that our people have gotten in medical offices across the country has really been very rewarding - promising, and we've gotten a very warm welcome. I must tell you that there are very few dermatologists in the United States who don't know who Taro is since most of the prescriptions they write, or many of the prescriptions they write, are filled with our products, and they've been very satisfied. So, I guess they're looking to Taro to continue leadership now in the proprietary [Inaudible] - the proprietary side in the same way that we've done on the generic side.

So, all in all, I know I'm - this is - I sound like I'm hyping this particular venture, but we're certainly - we're certainly confident. I can't assure you that we'll succeed, but we certainly believe that we've got the cards stacked in our favor.

Thank you.

The next question comes from Arnie Ursaner (ph) with CJS Securities (ph) . Please state your question.

Hi. Good morning. Barrie, one of the major themes you've had for investors over the last years has been that your earnings would be leveraged off the infrastructure in place. And in this quarter, we saw net income growth a little slower than revenue growth. Do you expect this trend to continue for the next few quarters?

Frankly, the determinant of what you're looking at is not what happened in one quarter. I guess trends are not - one point in time doesn't constitute a trend. The best barometer of what's going to happen in the future in terms of the infrastructure being in place and leveraged is the number of ANDAs and NDAs that we file and are going to be approved over the near, intermediate, and long-term.

And basically it's not just a numbers game; it's a quality game. It's did you choose the right targets? Did you get the work done quickly? Did you get it done properly? Did you present it to the FDA in a way that they can evaluate it expeditiously? And are you going to be able to get the approvals? And that, I think we've demonstrated that we're able to get market share when we have an approval. So when I look at our history in the last year, we started with 12, we ended with 24 and we're hoping that it can only get better.

The fact that at one pint in time the bottom line growth was slightly below the rate of change in top line growth because we began to in fourth quarter put a lot of money into proprietary initiatives, proprietary marketing initiatives, shouldn't be taken as a trend.

The only barometer of future growth for a pharmaceutical company like Taro is the speed and effectiveness of its scientific research.

As a follow-up to that, do you - you've already had capacity in place to essentially double your revenues and yet you've made very significant investments in tensin in Ireland. Do you view these as opportunistic purchases or are these in fact a view that you have an acceleration even further in your sales growth?

Well, I don't think there are very few companies that build new facilities for past sales. It's - I think the move to Ireland - Ross Cray (ph) may have been an opportunity because someone else got into trouble in difficult economic times and we're in solid - in solid financial position and we're able to take advantage of the opportunity. But if it hadn't been Ross Cray (ph) it would have been somewhere else in Ireland.

Ireland has been a target for Taro over the last three years and we've been trying to choose a right time, the right place in order to optimize the entry into the European economic community. I'd like to assure you that this has nothing to do with Kevin making tax-free trips to Ireland.

Ireland is mid-way between Israel and the United States and Canada. It's an English speaking country. It has favorable economic environment for the pharmaceutical industry. They're very hospitable to foreign investment. They're very supportive. They're very much like Israel in that regard. Costs are not high. Labor is available. Good science is available. And so this was a strategic move.

The timing may have been opportunistic in that we did it in January as opposed to March or April simply because there was an opportunity. But I think that the most important part of our capital expense program is that when we have the kind of pipeline that we've got, it's extremely important that we have the facilities in which to manufacture the goods.

Yes, it's true that we've been investing in capital expenditures. We've been making capital expenditures over the last decade, but they've been substantial and that's the reason we're able to supply the market. Otherwise, what we'd be doing is creating a lot of unhappy customers. And the last thing in the world we want is unhappy customers. Customer service is the name of the game. We have to have enough capacity, not only to deal with our base business, which fortunately has been increasing year on year over the last decade, but also to be able to accommodate all the new business that comes from all the new products that we're working on. To get an approval and not be able to manufacture the goods just doesn't make any economic sense. So what we're trying to do is to prepare for the future and that's where the industrial comes in.

Final question on NonSpil, I assume, given your sales force hold up in pediatric and the use of NonSpil primarily for pediatric or geriatric, should we assume that this will be a pediatric product?

I think - I think we mentioned that we were - we had an interest in and we're focused on pediatrics, so it wouldn't be wrong to assume that pediatrics would be a target and it is wrong to assume that pediatricians take care of old people. So I would assume that the geriatrics would be something that we'd look at just a little bit later. The most important thing that we have to assure ourselves in the near term is that we will get consumer acceptance for NonSpil. We have universal acceptance for NonSpil within the company. As a company, that's not a really valid sample, so we really need to be sure that what we're doing is going to achieve consumer acceptance. We believe it will, but time will tell, we'll just have to find out in the marketplace.

OK, and congratulations.

Thank you.

Ladies and gentleman, this recording will be archived and can be heard at any time following this call through the 31st. To hear the archived call, log in to www.Taro.com, and click the link on the homepage, or telephone 1 (800) 428-6051 in the United States, or (973) 709-2089 from overseas. When prompted, enter passcode 286224 to request the total call. This concludes our conference for today, thank you all for participating and have a nice day. All parties may now disconnect.