Taro Pharmaceutical Industries Ltd (TARO) 2003 Q3 法說會逐字稿

Good morning ladies and gentlemen welcome to the Taro third-quarter 2003 conference call. At this time, I'd like to inform you that this call conference 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 anytime following this call through November 6th. To hear the archived call, log onto 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, please provide passcode 308456 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 up the conference to questions and answers from participants on the call. At this time, let me read the following Safe Harbor statement.

Certain statements in this release 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 marketing of proprietary product, including Carousel (ph) and ElixSure products, the potential benefits of ElixSure products; initiatives undertaken by the Taro consumer health care products and Taro Pharma division; Taro's filings with the FAD and the Company's growth. Although Taro Pharmaceutical Industries LCD believes the expectations reflected in such forward-looking statements can be based on reasonable assumptions, they can give no assurance that its expectations will be seen. Factors that can cause these actual results to differ include general economic conditions; industry and market conditions; lower than anticipation of penetration of new markets; changes in the Company's financial positions; regulatory actions and legislation action in the countries in which Taro operates; future demand and market size for products under development; marketplace acceptance of new or existing products, either generic or proprietary and other risks detailed from time to time in the Company's SEC reports, including its 2002 annual report on form 20-F. Forward-looking statements speak only as of the date of which they were made. The Company undertakes no obligation to update, change or revise any forward-looking statements, whether as a result of new information, additional or subsequent developments or otherwise. I will now turn the conference over to Mr. Daniel Saks of Taro.

Thank you, Jennifer. Good morning welcome to Taro's third quarter 2003 conference call. By now, you should have all have a copy of our results released early this morning. With me today are (indiscernible) Barrie Levitt, Taro's Chairman and Kevin Connelly, who's the Chief Financial Officer. Barry, Kevin and I have some brief remarks and then we're going to open the call to your questions. And to get started, we will turn the call over to Barrie.

Thank you, Dan. Taro continued its record performance in the third quarter of 20-03. This was the Company's 31st consecutive quarter of record sales and 21st quarter of record net income. This translates into more than 7 years of record sales and more than 5 years of record net income. While our generic business in the United States, both in topical and oral products, continued to account for a major share in this performance, Taro's proprietary product divisions, TaroPharma and Taro Consumer Health Care Products, are expected to play an increasing role in the Company's future.

The primary force behind our achievements continues to be our investment in research. We had 20 filings with the FDA on January 1st of this year, and today we have 33. Our filings include a new drug application related to our patented NonSpil liquid drug delivery system. Our research operations are now located in four countries -- Israel, Canada, the United States and Ireland. All four research centers are growing and we are attracting first-class scientists to work at each. Our research staff now numbers nearly 250 people, including 80 with doctoral degrees in medicine or the health sciences. Nearly one in five Taro employees is directly involved in developing new proprietary and generic products.

We are continuing efficacy studies on T-2000, the first of our class of non-stating (ph) barbiturates. As we've reported in early clinical studies, the drug was effective in mitigating essential tremor, or involuntary shaking and we have filed an additional patent for this indication. Of course, there can be no assurance of the commercial success of T-2000 or of any of the other drugs we are developing in its class.

During the third quarter, our internal research resulted in the launch of several new proprietary products. Three single-symptom ElixSure products are currently on store shelves. ElixSure for fever and pain comes in three child-pleasing flavors -- the ElixSure products for cough and congestion come one flavor each. ElixSure products are based on the proprietary NonSpil liquid delivery system developed by Taro Research. ElixSure products pour like liquids, but resist spilling. This property helps to ensure correct doses of medicine since parents know that what they put on the spoon is what gets into the child. In addition to not spilling, ElixSure products do not require shaking prior to administration. We hope that the ElixSure product line will enable parents to concentrate on comforting their sick children instead of struggling when a liquid medication is needed for fever, call for congestion.

ElixSure medications are now available in pharmacy and grocery chains and mass merchandisers across the United States during this cough and cold season. We hope that in the future, our NonSpil delivery system can make it easier to administer many kinds of liquid medications in both the over-the-counter and prescription arenas. Our research groups are working on a variety of new product formulations. Naturally, the ultimate success of ElixSure depends upon consumer acceptance of this novel approach to delivering liquid medications. It is too early to tell whether these drugs will be commercially meaningful.

In our U.S. TaroPharma division, the company now has a full complement of professional medical representatives calling on dermatologists and pediatricians across the country. The TaroPharma division provides the Company with a stable platform to launch and sustain the growth of proprietary prescription products. We are pleased with the Company's progress in establishing the new TaroPharma marketing division and we recognize that this is a long-term, strategic initiative for Taro.

Two years ago, I was asked on network television what I thought about Taro's future. Based on my confidence in our research, marketing and sales teams, I said -- the best is yet to come. Since that time, we have had 10 quarters of outstanding performance, and my confidence in our research, marketing and sales teams is as high as ever. Thank you, ladies and gentlemen, and now Kevin, will you give the details of our financial results.

Certainly, thanks Barrie. I'd just like to touch on some highlights of the Company's performance for the third quarter. As Barrie mentioned, we're obviously very pleased with the results of the third quarter of 2003. I think the results continue to demonstrate the sustained performance of the Company, our commitment to research and development, as well as our ability to invest in what are essentially two new businesses -- TaroPharma and Taro Consumer Health Care, while still increasing our bottom line.

Sales of 83.1 million for the quarter are a 50 percent increase from the prior year, and as Barrie mentioned, represent the Company's 31st consecutive quarter of record sales. I'll break down the sales geographically. In the U.S., approximately 89 percent of the sales took place, 6 percent of our sales in Canada, 4 percent and Israel and the remaining 1 percent from other international markets. The sales were driven by the strong performance of our U.S. group where across virtually all of our product lines, we've increased our market share of our base business. We also had contribution from some of our new product introductions, such as Econazole (ph) and Ketoconazole (ph) Cream, which were approved during the fourth quarter of last year and ammonium lactate cream, which was approved at the beginning of the second quarter last year.

In addition, the launch of our ElixSure products has contributed to the overall growth in sales, so I think special thanks to the sales group, another great quarter delivered with their help and effort. Gross margin of 68 percent for the quarter remains among the highest in the generic industry, and again, demonstrates the sustained performance of our in-line business, the contribution from new product approvals and the sales of our proprietary product lines.

Our SG&A as a percentage of sales was 31 percent for the quarter, an increase of 97 percent from a year ago. The SG&A expenses were impacted by the cost related to the launch of new products introduced in the U.S. and the marketing efforts behind the promotion of Karisol (ph) and ElixSure. In addition, we are investing in a team of professional sales representatives who are responsible for marketing our proprietary products directly to physicians. Our commitment to research and development continued with 14 percent of our topline invested in R&D during the quarter for approximately $11.2 million. This brings our year-to-date investment in R&D to just under 30 million -- 29.5 million, compared with 26.4 million for the full year 2003. Approximately 75-80 percent of that R&D dollar was focused on our generic pipeline, which currently includes 33 filings at the U.S. FDA and numerous filings with other regulatory agencies in other countries. The other 20-25 percent of our R&D investment remains focused on our proprietary pipeline, our NonSpil drug delivery system and our new class of drugs, the non-sedating barbiturate products, which Barrie mentioned earlier.

Our operating income of 19.7 million for the quarter represents 24 percent of sales and an increase of 40 percent from the same quarter a year ago. Our tax rate of 17 percent for the quarter reflected the change in product mix between our Canadian and Israeli facilities. And as we mentioned in the past, we are an approved enterprise company in Israel, which reduces our tax burden on products manufactured and exported from there.

The sustained performance of the Company was demonstrated by the net income for the quarter of 15.7 million, or 53 cents per share, our 21st consecutive quarter of record earnings and this represent an increase of 36 percent in net income for the quarter, a performance that all of us at Taro are quite proud of.

Now before I turn it over to Dan and Barrie and we entertain some questions, I'd like to highlight some items from the quarter end balance sheet. Cash and cash equivalents as of September 30th increased 6.1 million from year-end as the Company funded part of its working capital requirements, capital expansion and product acquisition programs through operating income. It also reflects the proceeds from the bond offering we recently completed in Israel. AR trade receivables of 105.7 million DOS of about 114 days, which is above the Company average. But as we mentioned in the press release, one of our major customers paid us a few days into the fourth quarter, skewing the DSOs slightly as of September 30th.

Inventory of 68.4 million reflects the Company's policy of maintaining the finished goods required to meet the growth in customer demand. Property, plant and equipment also increased as the Company continues to expand its capacity in manufacturing, distribution and also research and development. These programs are ongoing in our facilities around the world -- U.S., Israel, Canada and also Ireland. Approximately $70 million was invested so far this year, including the purchase of our production facility in Ireland for about $7 million.

Also the change in currency impacts the value of sales and the expense related to production and operations in the markets outside of the United States, as well as the value of some of those fixed assets.

One note to - let me just stop for one second and talk about the growth in other assets which reflects the intangibles associated with the products acquired earlier this year. Related to this acquisition is also the change in the current maturity of a long-term debt. The final payment on this acquisition is scheduled for June of 2004, and therefore the change in current maturities from quarter to quarter. So overall, another quarter which all of us at Taro are proud of. Dan, let me turn it over to you.

I would like offer some perspective on Taro's results and the Company's pipeline. One aspect of Taro's results in the third quarter is that the Company's sales and net income for the nine months are about the same as the Company's sales and earnings results for the full year 2002. Taro's earnings gains during 2003 were achieved concurrent with significant investments, as mentioned, in the Company's proprietary products and marketing operations, and also in manufacturing infrastructure as well. Operating margins for the quarter reflect Taro's establishment of a full complement of professional and medical representatives calling on dermatologists and pediatricians across the country. The Company's operating margin of 24 percent and net margin of about 19 percent are in-line with Taro's recent financial performance.

As Barrie maintained, there are currently 33 filings in our pipeline at the FDA. These consist of 1 MDA related to NonSpil, two unique ANDA supplements and our tentative approval for the Ratadine (ph) syrup. Twenty-two of the filings are for topical products and 11 are for oral dosage-form products.

During the past four years, Taro has invented more than $100 million in research and the current market value of the ANDAs in the pipeline remains significantly more than $1 billion. With respect our manufacturing expansion program in Israel, our new chemical plant is coming online. This plant will synthesize active pharmaceutical ingredients at several times our 2002 production levels. The plant will produce a great number of APIs (ph) and do so with a greater number of APIs and do so with greater efficiency.

Our new state-of-the-art facility for finished pharmaceutical products is currently under construction and is expected to come online in 2005. Expansion and upgrades of our research, manufacturing and distribution operations continue in Canada, the U.S. and in Ireland.

Now to begin our q-and-a session, let me remind you of three of our communications policy guidelines. First, we cannot provide guidance or comment on analyst estimates, and that remains due to the rate of Taro's continued growth, and that remains largely dependent on new product introductions, and we do not know when these approvals will occur. Second, for competitive reasons and to be fair to our customers, our policy is not to provide the information on sales and profitability of individual products. And third, for competitive reasons, we do not disclose the products filed with the FDA. So now, Jennifer, we would like to begin the Q&A.

(Operator Instructions). Greg Gilbert.

My first question is about Warfarin. It appears that your share has almost doubled in the last few months. I wanted to get your feel on that, see whether that is sustainable, could it pick up more, is it a short-term blip based on one player leaving the market and then coming back?

I guess the increase in our share of Warfarin, which we are quite gratified, is a reflection of 40 years of experience in manufacturing Warfarin. It is a reflection of our marketing efforts in multiple countries, but focused in the United States providing specific aids to pharmacists, to consumers, I think making our generic Warfarin a clear alternative to the brand. I think that in the entire marketplace, generic Warfarin is becoming more acceptable as an alternative to Co (indiscernible). So I think that this all plays a role. Whether or not it's a blip is something only time will tell. I have no insights into that, but I do believe that the basic underlying fundamentals of the increase in the Warfarin share for the time being reflect the marketing initiatives that we have undertaken and the moneys we have spent in investing in Warfarin over the last few years which are now coming to fruition. In the long-term future, the role of the various products that will compete in the anticoagulation field are going to be difficult to assess right now. But in the short-term, we at least hope that we have it right with respect to Warfarin.

Is it fair to say assume your sales team is not hearing that whoever left the market is looking to come right back?

It is very difficult to predict who is going to do what, but I believe that the Warfarin -- the changes that we have seen relate to the fundamental investments that we have made in the marketing of Warfarin. I really cannot comment on what the dynamics might be in the future.

Okay. Kevin, can you provide us an update, if there is one, on the pull-through on ElixSure, understanding that the stocking went well. Any initial read on that in any region or any chain?

I really think it is a little bit too early to tell and to make determination on the success of ElixSure. You're right. I think we're very proud of the distribution efforts related to ElixSure. I know that we're out there in basically almost every single mass merchandiser, retail chain in the U.S., but I think that, because it is a bit of a seasonal product and I don't know -- the season is obviously just starting, so I think it is a bit too early to make any judgment. But from our perspective, where very happy with how things are progressing overall with ElixSure.

I have two last questions. First, when could we see filings out of Ireland for the U.S. market, understanding that there may be some time? And secondly, you have DMFS on several products, including Gavipent (ph) and Diflucan. Are those for your own products, or as suppliers? Thanks.

First with respect to filings out of Ireland, the research initiative in Ireland is starting in earnest this month. So I think it is a little early to talk about when we can expect specific filings out of Ireland. With respect to drug master files and our ability to synthesize certain chemicals, I don't think that we are going to comment on whether this is for ourselves or for others. Suffice it to say that you are correct, that those filings have been made.

Okay, thanks.

Colleen Lahey (ph), CIBC.

Good morning, and congratulations on the quarter. I just have a couple of questions, actually one of them is a follow-up on the Warfarin year-over-year prescription growth of 45 percent. It looks like Lotrisone (ph) is also up I think over 5 percent, in terms of prescriptions year-over-year. And obviously, the gross margin benefited from the both those base products growth, as well as the ElixSure launch. And I'm just curious as to what your guidance is going forward for gross margins. And also, if you could provide a little bit more color on the strategy, leveraging your new salesforce with the ElixSure marketing efforts?

We don't provide forward guidance, because frankly, we don't have a functioning crystal ball. Maybe those sunstorms are interfering with our crystal ball operation, but it is very difficult to say was going to happen in the future.

With respect to the salesforce, we have a well-trained, experienced salesforce. They're veterans in the pharmaceutical industry. Q4, this quarter will be their first real full quarter in the field, and they are obviously participating in the introduction of ElixSure in the pediatric marketplace, and they have been involved in the early phases -- we did not have a full complement. They had been involved in the initial trials that we have performed in ElixSure across the country. Exactly how much of a role they will play and what their influence will be remains to be seen. We're certainly helpful that they will have a positive role to play in introducing this product to pediatricians so that parents will gain an additional measure of confidence because they will have heard about the attributes and benefits of ElixSure from the pediatrician, in addition to just seeing an ad on TV or reading an ad in a journal. Let's hope that all works out right.

Okay. So just so we understand, you're going to be focusing on pediatricians -- any other specialists, or just internal medicine physicians?

Well, ElixSure is not primarily for at this stage for older people. Family practitioners or general practitioners are included in the range of products, but these products are primarily, with the exception of the cough product perhaps, they're primarily focused on children. The cough product, I know that many of our employees use for themselves, is highly effective, it tastes good, it works quickly. So that maybe one product that may see some use outside the pediatric range. But otherwise, it is primarily pediatrics.

Thanks.

Paul Elliott (ph), Dominic and Dominic (ph).

Barrie, with the addition -- here again, it is on ElixSure. With the addition as another product and as far as TaroPharma and the Taro consumer area, maybe you can give us a little more details as to the infrastructure investment, in terms of the number of personnel, the marketing and the timing on leveraging this investment, in terms of new products?

The investment in the TaroPharma division involves now between 70 and 75 people that are in that division directly. Most of these people are in the field all across the United States. And as I said before, these are experienced pharmaceutical veterans, and it must be clear from what Kevin said that the expense of these people is already in the so-called SG&A. Obviously, we feel that we we're in an investment mode, but obviously under GAAP rules, we have to write the investment off each quarter.

However, I believe that this a long-term investment, in terms of seeing the result. I think we're going to have to be patient. This is a strategic initiative, as I said, and we have to look for a payback over a period of years. This is not over a period of months or quarters. And I think that this is the right strategy. I know that, Paul, you have been following the Company for a number of decades. And in prior decades, I was very roundly criticized for long-term investments in research when people insisted that I should be focused on bringing money to the bottom line and creating immediate shareholder value. My position was that the investment and research was going to create shareholder value. I think my position has been vindicated.

And now I think, in addition to research, if the research is productive research, it's important to make an investment in marketing to be sure that the results of research become available to the medical community and to consumers at large. And so we're in another investment mode, focused on the long term. We're not looking at quarter on quarter, we're not looking at year-on-year. We are looking at decade on decade to build a meaningful pharmaceutical company focused on meeting the needs, the unmet needs of consumers, broadening and widening the therapeutic (indiscernible) available to physicians and having a team of well-trained, professional representatives as an integral part of bringing the fruits of our research to the community -- to the medical community and to the general community.

You're not supposed to reveal my age.

I will rescind my remark.

Let me refine a little bit more here. Given within the next year to 18 months, how many products do you think you will have out there, in terms of the TaroPharma or Taro USA product line?

The whole business, we will have a sufficient number of products to make this a meaningful initiative, and you can bet your bottom dollar that, if we're spending the money on research and if we are spending the money on the salesforce, we intend to marry those two efforts. So that what we're doing in R&D is going to find its way into the hands of the sales force. But I think it would be (technical difficulty) to talk about specific numbers, because that involves assumptions that I would have to make about how long the FDA is going to take to approve really novel drugs, and I don't think that -- I'm not in the position to do that anymore. So if you would have asked me that question 15 years ago, I would have known the answer and not been able to tell you. That's when I was working for the FDA. Now, I don't know the answer and I can't tell you. Obviously it is an imponderable. All I can assure you is that our R&D groups are focused on providing products for the medical representatives to bring to physicians and to consumers, and we hope to keep these in sync, but the medical representatives represent a stable platform that will be there available to allow each of these products to be launched at an appropriate manner at the right time.

Thank you.

(Operator Instructions) Arnold Ursaner (ph), CJS Securities.

Good morning. A couple of questions related to the branded area. Could you give us a quantification of the number of salespeople you had at the end of the third quarter?

We have over 70 people in the field now. I think the question asked just a moment ago related to the total number of people in the TaroPharma division. But we have right now 70 people across the country calling on physicians.

And most of them were there by the end of the third quarter?

They were not all in the field. In the third quarter, there was still a fair amount of training going on. So it is really only now in the fourth quarter that they are all in the field, but the cost was there. In other words, the third quarter already incorporated the cost of those people.

I know you don't give individual product revenue numbers, but can you give us a percent of the Company's total revenues that are coming from branded today, and did it make a positive contribution in the third quarter to earnings?

You broke up a little bit -- can you repeat that?

Sure. Can you give us a percent of overall revenues that came from branded in the third quarter, and did it make a positive earnings contribution in the quarter?

As you know, we really don't break out individual units or products, either in regards to sales contribution or profitability. But you're correct. At quarter-over-quarter, there were certain new products that contributed to our growth. We have had a number of different contributors to the overall growth. Obviously, some of the new products that we have this year that we did not have last year. DEconazole (ph), Keticonizol, ammonium lactate, were some of the semi-solid products we had out there on the generic front. Also on the solid dose on the generic front, Etodolac XL was also one of our new products that have contributed to the growth.

Obviously, the branded side of the business, the proprietary piece, both Topicordinovide (ph) were positive contributors to the topline. And finally this quarter did include the two OTC initiatives related to Karisol and ElixSure. So I think it is just a bit too early to break out any one of those products individually. But quite frankly, we're all looking forward to their continued growth and positive contribution to the Company.

(indiscernible).

Hi. Congratulations (indiscernible). I have two questions, if I may have. I would (indiscernible) that the answers can be quite limited (indiscernible). First of all, one is related to ElixSure. Cough and cold season is coming and you have a great (indiscernible), looking really great. Can we assume something for how big the marketing or promotion campaign we would calculate with, or something about your strategy? Would it be something (indiscernible) burden (ph) on the fourth quarter results, or do you have a different approach of that? Understand again that from competitive point of view, you cannot say too much, but maybe you can say something in generic terms.

I'm not sure that I heard the entire question, so I will try to answer the part that I heard. With respect to the marketing and sales initiative, in terms of quantification, financial quantification, we are not going to do that early in the launch. I think it is not good strategy to define for your competitors exactly how much money you're going to spend and where you're going to spend it. So that is going to have to wait for some future time for discussion. We are making what we think is an adequate investment in advertising, both television and print and calling on physicians and clinical research in order to assure, or at least to do everything that we can do to make the ElixSure launch a success.

(indiscernible) thank you for answering that. The second question would be on the approvals. We have not seen new approvals in this quarter (indiscernible) where you have more than six ANDA filings, five more than 26 months ago. I know it is very difficult to say anything by the delay, but if I may ask, what's your perception, Barrie, why is the delay in approvals not coming? Do you perceive anything about that, or can we see anything about that, like bottlenecking (indiscernible) the FDA (indiscernible) or something special?

Again, the question did not come across clearly. Maybe it had something to do with the microphone here. But I will answer the question that I heard. I believe that you asked why, whether I had or whether any of us had any insight into why we have not had any approvals recently, and I think -- is that correct?

Yes.

I think it is a matter of policy, and we've stated it many times, that we tried to choose products that have difficult regulatory barriers. Difficult regulatory battery barriers means it is more difficult for us to get the filing together, and it is clearly more difficult for the FDA to deal with the filings that we do. The benefit associated with that is that it is obviously difficult for others, so that after we can approval there were fewer competitors. But it means that we have to be patient.

The FDA I think is doing an excellent job in protecting the American consumer and we have to just be patient and allow them to do whatever it is they need to do. We are being very responsive to their questions. I believe that our submissions are excellent from a scientific content perspective, and we have to allow the government the time to take whatever regulatory actions they feel appropriate. I know that there is a lot of anxiety in the general community about why we're not getting approval. A very close friend of mine called me the other day and said I don't understand why you don't just call 1-800-APPROVALS and see if you can get some approvals. Well, I called, the line has been busy.

But all jokes aside, we're doing our very best to try to move our drugs through the agency expeditiously, and as soon as we have something to say, you can be sure that we will disclose it. We generally disclose things within hours of the time that we know of the approval.

Thank you very much.

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

Thank you all for joining us today. We look forward to speaking with you again on our next conference call.

Ladies and gentlemen, this recording will be archived and can be heard at any time following the call through November 6th. To hear the archived call, log onto www.taro.com and click on the link on the home page or telephone 1-800-428-6051 within the United States, or 973-709-2089 from overseas. When prompted, enter the passcode 308456 to request the TARO call.