Taro Pharmaceutical Industries Ltd (TARO) 2003 Q1 法說會逐字稿

And welcome, ladies and gentlemen, to Taro's First Quarter 2003 Conference Call. At this time, I'd like to inform you that this conference is being recorded for rebroadcast and that all participants are in a listen-only mode. This recording will be archived at anytime following this call through April 23rd. To hear the archived call, log in to "www.taro.com" and click the link on the homepage or telephone 800-428-6051 in the United States and 973-709-2089 from overseas. When prompted, enter pass code 289566 to request the Taro call. Today's call will begin with the presentation by Taro's executives. Then at the request of the company, we will open up the conference to questions and answers from participants on the call. At this time, let me read you the following Safe Harbor. Present statements in these releases are forward-looking statements within the meaning 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 TaroPharma and Taro Consumer Healthcare Products Divisions in the US, proprietary products, manufacturing operations in the US and Ireland, expanded manufacturing or warehousing operations in Israel and Canada, research facilities and programs, increases in manufacturing capacity, proprietary products, and Taro's filings with the FDA. Although, Taro Pharmaceuticals Industries Ltd believe the expectations reflected in such forward-looking statements to be based on reasonable assumption, it can give no assurance that these 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, marketplace acceptance of existing or newly approved generic 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 development or acquired by Taro, and other risk details from time to time in the company's SEC reports including its 2001 Annual Report on Form 20-F. I'll now turn the conference over to Mr. Daniel Saks of Taro. Please go ahead, sir.

Thank you, Kelly. Good morning, and welcome to Taro's first quarter 2003 conference call. By now, you should all have a copy of our results released early this morning. 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 turn to -- going to open the call to your questions. And with that, I'll turn the call over the Barrie.

Thank you Dan. We're very proud of Taro's performance in the first quarter of 2003. This was the 29th consecutive quarter of record sales and a 19th consecutive quarter of record net income. Translating into years that means more than seven years of record sales, and nearly five years of record net income. During the first quarter of 2003, Tora's core generic products continued to produce excellent results. In addition, we made significant investments in the company's marketing, manufacturing, and research infrastructure.

Before discussing these investments and our new initiatives, I'd like to focus on our primary growth engine the Taro generics division. Taro's base US Generics business for Topicort and Ovide products remained strong and contributed to the company's revenue growth during the quarter. This growth was augmented by the addition of Topicort products approved at the end of last year. A strong performance of Taro generic business is a tribute to the expertise of the company's sales and marketing organization, we think the best in the business, the efficiency of production operations in Israel, Canada, and United States, as well as the productivity of Taro's research group. All of these operations continue to enhance Taro's reputation for quality, customer service and leadership as a supplier to the wholesale and retail pharmacy trade. We're very appreciative of the dedication and hard work of the chains of Taro's employees who enable the company to continue to produce the results that we are reporting to you today.

Now, I'd like to discuss briefly our research, our propriety marketing initiatives and our capital investment program. With respect to new drug development, we've continued work on T2000 for the first of our class of non-sedating barbiturate. We've reported that in an early Phase II study, the drug was found to be effective in essential tremor or involuntary shaking and we found the patent application for this use. Based on the data we have we are continuing to study the drug. Off course there can be more assurance of success of T2000 or any of the additional drugs we are developing in this class.

We are also looking on the development of proprietary drugs that can add to the portfolio of products promoted by our two new divisions, TaroPharma, our proprietary pharmaceutical division and Taro Consumer Healthcare products our direct to consumer division. We are proud of the growth and productivity of our research scientists and the pipeline that they have produced. After three approvals so far this year, we still have 23 filings awaiting action of the FDA in the US. One ANDA related to our patented hypnose liquid delivery system, one unique ANDA supplement and in our generic pipeline, there were 20 million ANDAs including our 10 Loratadine syrup. With respect to our new marketing initiative, Taro consumer healthcare products have secured nationwide placement for Kerasal, a unique moisturizing exfolliant for dry calloused feet. We're still in the initial phases of the Kerasal launch. And while we're satisfied with the distribution and initial sales result of this product, it's too early to tell if the initiative will be a success or will make a material contribution to our overall results.

In our TaroPharma division, which we created to promote products directly to physicians in United States and Canada, we are in the building phase. We are adding steadily to the core team of professional medical representatives who are recruited to support this initiative. The strategic thinking behind having a team of medical representatives, is to develop a platform to launch and sustain a portfolio of proprietary prescription products. This is a long-term strategic initiative for Taro, not a short-term tactical maneuver. We are making excellent progress in implementing various capital investment program. We recently completely a purchase of a multi-purpose research and manufacturing facility at Roscrea, Ireland. This acquisition, the first, diversifies our manufacturing base and provides a manufacturing center for Europe. We continue to invest in manufacturing and research facilities in Israel, Canada and the United States. Upon completion of our current capital investment program in 2003 and 2004, we will have more than trebled our 2002 manufacturing capacity. Finally we're gratified by our achievement, we are planning for growth and we look to the future with confidence. Thank you. And now Kevin Connelly, our Chief Financial Officer, will give you the detail of our financial result. Kevin.

Thank you, Doctor. I just like to touch briefly on some highlights of the company's performance for the quarter. Daniel, mentioned we're obviously very pleased with the results for the first quarter of 2003. The income results continue to demonstrate the sustained performance of the company as well as our commitment to Research and Development. Sales of $69 million for the quarter or 55% increase from the prior year, and it represents the company's 29th consecutive quarter of record sales. The sale breakdown by geographic areas for the quarter, approximately 89% of the sales deplete in United States, 5% of the sale in Canada, 5% in Israel and the remaining 1% from our other international markets. Sales were driven by the strong performance of our US group, we're crossed virtually all of our product line. We increased the market share of our base business. We also did have contribution from some of our new product introductions such as Amcinonide Cream, which was approved in the middle of '02 and from Econazole and Ketoconazole Cream, which we approved in the fourth quarter of last year. In addition, to Kerasol a branded OTC food care product, which we began to promote in the first quarter contributed to the growth in sales. Our gross margin of 64% for the quarter remains among the highest in the new generic industry and again demonstrate the sustained performance of our inline business and the contribution from new product approvals. Our SG&A, as a percentage of the sales for the quarter was 25% and including the cost related to the launch of products approved in US and in the marketing efforts behind the promotion Kerasol. In addition, we did introduce a professional medical sales representative team during the quarter and they are currently responsible for marketing the products that we acquired during the first quarter for Medicis. Our commitment to research and development continued with 13% of our topline invested in research and development during the quarter for approximately $8.7 million. This is an increase of 63% from 2002.

Approximately 75% to 80% of the R&D was focus on our generic pipeline, which is dimension currently includes 23 filings at the US FDA, as well as numerous filings with other regulatory agencies in other countries. But 20% to 25% of our R&D remains focused on our proprietary pipeline, our NonSpil Drug Delivery System and our new class of drug the non-sedating barbiturate products.

Operating income was $17.9 million for the quarter represented 26% of sales. Our tax rate of 21% for the quarter, we pointed the change in product mix between our Canadian and Israeli facilities. In Israel, as many of you are familiar, we're an approved enterprise company which reduces our tax burden on products produced there. However we were fortunate to recently receive approvals on Ketoconazole and Econazole cream, which are Canadian produced products. So some other shipped in tax expense quarter on quarter reflex their contribution to pretax earnings .

The sustained performance of the company was once again demonstrated by the net income for the quarter of $13.989 million or 47 cents per share--our 19th consecutive quarter record earnings. And this represents an increase of 42% and net income for the quarter—a performance at - all of us Taro are quite proud of. Now, before I turn it back over to Dan and Barrie and we entertain some questions. I'd like to highlight some items for the quarter in balance sheet. Cash and cash equivalents as of March 31st 2003, decreased $9 million from yearend as the company funded part of it's working capital requirements, capital expansion and production acquisition program and to the product acquisition programs through operating income and cash as well as some increase in borrowings.

Our account receivable stood at $71.6 million at the end of the quarter, and that represents DSOs of about 93 days, which is in line with the company norm. Our inventory is at $50.8 million, reflects inventory turns of approximately 1.95 times; and the company continues to maintain the finished goods required to meet the growth in customer demands. Our property, plants and equipments reflects the company's continuing commitment to expanding and maintaining on manufacturing R&D facilities in the US, Israel, Canada and now Ireland. Approximately, $25 million was invested during the quarter, and that did include the purchase of the production facility in Ireland, which cost us approximately $7 million. Finally, the growth in other assets reflects the product rates associated with the Medicis acquisition earlier this year. Dan, let me turn it back 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 pipeline before we start the question and answer period. As Barrie mentioned, we have currently 21 ANDAs in the pipeline, including one tentative approval for Loratadine syrup, plus one one unique ANDA supplement. We also have one ANDA -- excuse me -- one NDA related to NonSpil. With the NDA, we have totally 23 filings with the FDA. And 14 of the NDAs are for topical products, 7 are for oral dosage form products; and that does include the tentative approval. Currently, the market value of the ANDAs in the pipeline is more than $1 billion.

And then, we get the question on the maturity of the pipeline. About one-third of the fillings are less than a year, a third are what we call middle-aged, and a third are what we would call more mature filings.

Now, to begin our question and answer session, let me remind you of our -- three of our communication pharmacy guidelines. First, we cannot provide guidance or comments on analysts estimates; and that's because the rate of Taro’s continued growth of Loratadine becoming our new product introduction, and do not know when will be the approvals will occur. Second, for competitive reasons and to be fair to our customers, our policy is not to provide information on phases of individual products, and also for comparative reasons, we do not disclose the products for which we have filed ANDAs or in filings really with the FDA. So now, Debby, we'd like to begin the Q&A period.

Thank you, gentleman. The question and answer session will begin at this time. If you're using a speakerphone, please pick up the handset before pressing any number. If you'd like to ask a question, please press "" "1" on your pushbutton telephone. If you'd like to withdraw your question, please press "" "2". Your questions will be taken in the order they're received. Please stand by for your first question. Thank you. Our first question comes from Elliot Wilbur with CIBC World Markets. Please state your question.

Good morning. Congratulations on another very strong quarter. I have two quick questions for Barrie, then a couple of quick financial questions for Kevin. Barrie, with respect to the Medicis product that you acquired, do you think there were opportunities to grow those product franchises, via line extensions down the road or should we think of them more just, given you presence in the markets that you eventually want to target?

Well I think that it's reasonable to assume that we're going to try to enhance the value of the brands and that we are going to apply the research capabilities that we have and to do that. So I think it's reasonable to assume that at some point in the future we may--I can't promise you that we'll succeed--but that we may line extend. If it's prudent and economically reasonable.

Okay. And could you just provide us with an update of the number of sales reps that you currently have or maybe perhaps so the number of reps that you're targeting by the end of the year?

Well, the number changes so quickly that it's difficult to give you a number. Even from the last week, but the fact is that we've got 60 territories that we intend to sell and we hope to sell them before the end of the year.

Okay, so terms of the actual number of actively detailing reps, we should be thinking -- sort of permanent number around 60?

I would think so. Yes and I think that one of things that - we'll get back to your first question about some of the products that we acquired. You know that pediculosis, or head lice, is a relatively common phenomenon among children when they go to camp or when they come back to school, when they share earphones nowadays, I guess it's very common. And we have the only prescriptions -- effective prescription product for head lice. There are another prescription product, but the FDA has recently issued a warning about seizures and a naturally death associated with the other products. The product that we have has generally been safe and effective. And there hasn't been any resistance on the part of the lice to our product. And of course you could say that make us a kind of lousy company but actually we are trying to prevent the lice from multiplying. And so if you think that this product Ovine is going to be a really helpful in pediatrics and dermatology. Since they provide an effective prescription name for dealing with a very prevalent problem.

Okay. Thank you, Barrie. Two quick questions for you Kevin, on the SG&A line, I'm assuming that since the sales force acquisition was completed I think at the end of January that it be reasonable for us to expect that number to grow in absolute dollars over the course of the year. Is that a fair assumption?

That is a fair assumption. We have more reps it probably will cost us more money. On the SG&A side but obviously we're not doing this just to incur additional expense. Those ramps will drive our sales growth.

Okay. And with respect to your tax rate, heard you comment on the mix but that still seems to be I mean would not expect you to accrue that rate for the entire years is that?

It really is driven by the mix again if we get some additional products approved out of Israel or the Israeli portion -- Israeli reduced reduce portion of our sales increases. That would probably result in a more favorable tax rate for the company as of all. I did mention going to proved enterprises in Israel those gives us certain tax advantages of the tax rate between 0 and 10%. So again as that product mix ships between Israel, Canada and eventually Ireland that's going to impact the overall corporate tax rate. We would hope that we can drive that rate down, we are doing everything we can but it is only appropriate to pay off their share of taxes.

Okay, let me speak one last question for you Kevin, as well as on inventory levels? I think if they have increase about 40% over the last two quarters and outside your comments on just building inventory to satisfy anticipated demand if other reasons that could account for the increase?

Sure well growth in sales of the last two quarter has also been impressive so that's obviously the real driver behind that, but again we always try and maintained the appropriate level of finished goods inventory here in the states. Obviously there's a lot of things going on in the world during the first quarter. So for us to have the level of finished good inventory that we thought was appropriate here in the States, was probably the prudent thing to do.

So that probably had some impact on the overall inventory levels as well.

Okay thanks for taking my questions.

Thank you.

Thanks John. Next question comes from Paul Elliot with Dominic and Dominic. Please state your question

Yes. Great quarter guys and…it's just unbelievable. In any case most of my questions were answered by the preceeding call but I just have one additional thought processes, I wonder if you can give us some guidance on it. And this reflects the NonSpil--would you say that the higher than normal high level of SG&A related to the launching of the NonSpil later this year?

Paul, most of the expenses that you see in SG&A relate to the launch of Kerasal, which so far has been reasonably successful, but one thing that we can always guarantee you about the launch of the product is the cost. We can't guarantee results. And the other part of SG&A was driven primarily by the professional division - the TaroPharma division, where we obviously added people. People are expensive, but as Kevin said, the rate of change in expense needs to be matched by the rate of change in sales. However there is a delay between the making the investments in people and getting the return. So we released the few quarters' difference making the expense and getting some kind of an optimization and we'll respond. So, we are just going to have to wait and see the NonSpil did not measure - make a significant -- was not a significant part of the expenses in Q1.

When do you expect the launch course to start to expanded service sale as far as the non-spill?

Well lot will depend upon when the NonSpil is launched. I think that you've to remember that there are three factors involved in the NonSpil launch. The first factor is whether we will achieve a distribution, without distribution we're not going to have any expense, because it would be very silly to advertise the product and have people show up at the store and not fing it. So, first you got to get distribution. While we had a warm reception initially, there's a long way between the long reception and ink dried on a purchase order or on a check . So we are hoping that we'll get the distribution, but we can't guarantee it.

Secondly, we have to be able to get the consumer acceptance of the product and we're not sure that the consumers will accept it. Giving medicine to sick children is a very serious business. And while we believe, based on our market research, that the product is going to be accepted, you can't really extrapolate the certainty from market research to the real marketing. So the amount of demand will be a function of whether we're able to convince consumer with this kind of delivery system really make sense for them.

And finally, a part of this is going to be whether we're going to be able to keep up the demand--whether production will be able to keep up the demand. And all these things are imponderables, but I think that whether or not we'll make the expense relates primarily to whether we're going to get acceptance by the retail pharmacy trade that will allow us to do the launch. We're very dependent-- is something that is completely out of our control. So until we have more information I really can quantify or provide guidance with respect to timing, I can just tell you the problem, I can't tell you the solutions.

Thank you.

Thank you. Our next question comes from Arnie Ursaner with CJS Securities. Please state your question.

Hi, good morning. Can you hear me okay?

Yes.

Couple of quick question, if I can. You obviously spending a firm amount facilities, can you give us a sense of the additional capital requirement needed in the timing of when some of this plans might be up and running?

You faded a little bit on us there Arnie, I think you'd asked about CAPEX program, I guess doing not over 2 or 3 years.

Now that you have the buildings, you have to invest in machinery and equipment to get them up and running. How much additional CAPEX would be required, and what is the timing and availability?

I would think that basically we've talked before about our CAPEX program going out over the next 18 to 24 months, being somewhere between $55 million to $65 million. So we're going to continue to increase our investment in facilities. We talked about being able to treble our capacity. That's going to require some investment and part of our investment is the acquisition of the Irish facility, which I mentioned earlier. That was something that came along just an opportunity right for us at the right time at the right price. Allowed us to gain a foothold into the European marketplace hopefully. So that was one additional investment that took place during the quarter.

And then going out, we're - you're correct; we're going to invest in those facilities. We're going to get those facilities up and running so that we can address all of our markets and all of our facilities. So we will continue to invest and hopefully we'll be able to increase our production capacity. At the same time, we're investing in our research and development facilities. We recently purchased a facility here in New York, where we're going to put up a state-of-the-art research and development facility. We think that's also obviously important to the company to have the capability to tap into some of the real high talented in the Tri-State area. So all those things combined, as I said, will contribute to a pretty intensive CAPEX program over the next 18-24 months.

Okay. Two question for Barrie, if I may. Barrie, I know you mentioned you have the number, it was only a week ago, the week-old number, but can you give us the current number of sales reps?

I really can't give you the number because I don't know it. I think that we're somewhere over 35 in demand 36, 37, I'm not sure, because the reps are being added all the time.

Some where in the mid-30s though, as the reason?

Yes, mid to high 30s, I think is a safe guess.

Okay. And a strategic question for you, I know you obviously think and run your business long-term and have done very successfully doing it for -- as a family for years. You're investing in this new sales platform and one of the critical elements will be your ability to get products to sell through that platform. If you'd look at over the next two years or so, what goal or percentage goal do you have of internally developed products versus products you would buy similar to transactions like Medicis? What's your strategic goal?

Well, in acquiring products in the market, you're going to a used car lot. It depends on what you find on the lot. The really great products are hard to buy because the people that have them want to sell them themselves. From time to time there are opportunities, as we had an usual opportunity with Medicis, and we are obviously going to continue to try to in-license products over the next two years. But our primary focus is on our own research. That is something which is under our control, something that we can influence. The problem with developing new products is that that are new. And so you really can't be sure that your efforts are going to pay off. However, we've been now quite successful.

And so if you ask me we'd we be able to sustain our proprietary initiative absent any business development effort, I think the answer is yes. And if we are lucky and the proper opportunities arise and if we're able to conclude agreements--and we've been reasonably lucky in the last two years in acquiring products--then obviously we will an even better even stronger mix.

Of course we have to recognize, as I am sure you did that as you increase the number of products in the hands of your sales force, there's only a limited number of products that you can talk to a doctors about. So - I mean doctors have -- they're generally very busy, when they come to their office. They don't give you very much time, you have to cut straight on one or two products so as you start increasing number of products, it also has implications for the number of people that you need in the field.

So it's a complex mix, but we are continuing to try to add products through end licensing and we are definitely involved in developing products in our own research - through our own research and for example, I talked a little bit about T2000. I can't anybody that we are going to be successful but if we are it obviously is going to be very important to have that platform available, so that we can launch over selves. And that means our shareholders are going to get the lion’s share of the profit and somebody else's shareholder because if we didn't have the platform we would have to out license even major breakthrough products. And we would end up getting as royalty and we don't want a royalty. We want the lion’s share for every shareholder. So I guess I did -- that's kind of what I can tell you about the strategy to summarize. We're primarily focused on doing it ourselves to the extent that we can for the things that are under our control. I hope we will be right and continue to choose the right products, and I hope we'll be successful in that the results of our clinical studies will turn out well in the FDA, and they will be willing to accept them. On the other hand, we're also going to continue the in-license products. That's more iffy because it depend on what's available in the overall marketplace. I hope I haven't confused you too much.

No. Actually, that was a great answer. Thank you very much.

Thank you. At this time, we do have time for one more question. Our last question comes from David Deir with Morgan World Corp [ph]. Please state your question.

Good Morning. You've answered a lot of questions. But relative to your sales growth, should we look at the growth sequentially or should we look at it in terms of year-over-year?

You can look at it both ways, I don’t know. Again, there is a lot going on. A lot depends on the approval process out of the FDA. When we look at our business, we look at it comparing our baseline, which is our year-over-year performance and then we factor in those new products that were approved outside of a year ago quarter. So I don't know that's quiet the answer for the question actually you'd asked, but again we look at our baseline business comparing Q1 to Q1 a year ago and then we factor in new products approvals outside of that quarter a year ago.

David, to the extent that if the the business is seasonal -- for most probably we do not have a seasonal business.

Okay.

I think, maybe, I may as well chime in here…...

Yes. We're all trying to...

I think the lesson is that we're really not looking quarter on quarter--fankly not even year on year. I think we're looking at longer-term initiatives. And our research is not focused on 2004, our research is focused on 05 or 06 or 07 or 08. You can for the time being synchronize a new drug and get it into the laboratory and then get it into the clinic. You can't look at quarter on quarter sales. You can't even look at year on year sales. You have got to take a longer period this time.

And frankly, the strategic view -- and I would like to back in the course of looking forward -- the strategic view of investing in research while it was very, very unpopular with some of our shareholders and the financial community in the late 1980s and the early part of the 90s--we just have to bear the lack of popularity and just damn the torpedoes full speed ahead. And so we just kept on and in spite of the torpedoes. I think it was the right thing to do. We weren't looking at the bottom line quarter on quarter, we weren't looking at the bottom line year on year. We were looking at the bottom line decade on decade. It paid off. Research paid off in a science based industry having good scientist picking the right products, doing the right research, doing the clinical study, getting the right endpoint, writing them up in such a way that makes them understandable to the FDA, ends up giving us the kind of quarter we just had in the added that we had last -- in the fourth, in the third, in the second and in the first and then back for 10 years. I mean it's been quarter after quarter of performance, which is just unbroken.

So I think that the long term it was the right thing, it's not a quarter on quarter, look its not year on year one. The question is are we going to be able to develop drugs that are meaningful and medicine, are we going to be able to get more patients to feel better, are we going to be able to cure more diseases and it will follow, as the day the night, that we're going to make more money as we reproduce value proportions. We are going to produce value for Taro. And I think that is the essence of the strategy.

I couldn't have said it better myself. Kevin, can you qualify when you see inventories come down in terms of days of inventory or can you not – do you not have that granularity?

I wouldn't want to project down to that level of granularity but we pretty much only as been changed our inventory levels at around a turn of 2 times. So sometimes it's a little lower, sometimes its going to be higher, it also depends on how we feel about the coming quarters obviously. So how do we feel about new products the growth of our inline business and also the potential for new products in the future. So we're obviously trying to be timely with the launches of any new approvals that take place. It pays to have the inventory on hand. Well whether or not—I don’t know how fine you get your model down to but basically, keeping it around two has usually been about right. So, whether it is up a little or down a little on any given quarter, that is tough to predict exactly.

We have short term and long-term models so we agree to that. Thank you very much for your time.

Thank you.

Gentlemen, there are no further questions in queue.

I want to thank you very much for joining us today. And we look forward to reporting on our second quarter results. Thank you.

This recording will be archived and can be heard at any time following this call through April 23rd. To hear the archived call, log in to "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 289566 to request the telecom. At this time, our conference call is concluded. All participants may now disconnect.

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