Taro Pharmaceutical Industries Ltd (TARO) 2003 Q4 法說會逐字稿

Good morning and welcome Ladies and gentlemen to the Taro Fourth Quarter 2003 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 24. To hear the archived call, log on 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, provide the pass code 332153 to request the Taro call. Today's call will begin with a presentation by Taro's executives, and then at the request of the company we will open the conference to questions and answers after the presentation.

At this time, let me read to you the following Safe Harbor statement. Certain statements in this call are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements include, but are not limited to, statements that are not described historical facts, events or circumstances the Company "anticipates," "expects," "plans," "intends," or "designs" to happen or exist; consumer, physician or marketplace acceptance of the Company's new and existing product; comments concerning marking of proprietary products including ElixSure and Kerasal products; the potential benefits of ElixSure products undertaken by the Taro Consumer Healthcare Products and TaroPharma divisions; the Company's research and facilities expansion programs; Taro's filings with the FDA; and the Company's growth. Although Taro Pharmaceuticals Industries believes that expectations reflected in such forward-looking statements to be based on reasonable assumptions; it can give no assurance 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, actions and [legislative] actions in the countries in which Taro operates, future demand and market size for products under development, marketplace of new and existing products either generic or proprietary, and other risks detailed from time to time in the Company's SEC reports, included its 2002 Annual Report on Form 20-F. Forward-looking statements speak only as of the date on which they are made. The Company undertakes no obligations to update, change, or revise any forward-looking statements, whether as a result of a new information, additional, or developments or otherwise. I will now turn the conference over to Mr. Daniel Saks of Taro. Please go ahead, sir.

Thank you, Becky. Good morning and welcome to Taro's fourth quarter 2003 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 are going to open the call to your questions. And to get started, we'll turn the call over to Barrie.

Thank you, Dan. We are proud of Taro's performance for the fourth quarter and for the full year of 2003. This represents 20 consecutive years of record sales and 6 consecutive years of record net income. The focus of our activities during 2003 was the establishment of additional platform for Taro's long-term growth.

As has been true throughout our recent history, new product research has been at the top of our agenda. We invested more than $40m in generic and proprietary drug development during 2003. Our research programs resulted in 23 filings with the FDA in 2003 with an additional filing and two approvals so far in 2004. We now have 35 filings awaiting action at the Food and Drug Administration. These include 34 abbreviated new drug applications including tentative approvals for loratadine syrup and fluconazole tablets. We have expanded research and development operations in Israel, Canada, the United States, and Ireland, which together employ more than 275 people including more than 80 professionals with doctoral degrees in medicine for the health science.

With respect to new drug development, we are continuing studies on T2000, the first of our class of non-sedating barbiturates. As we've reported in early clinical trials, the drug was effective in mitigating essential tremor or involuntary shaking. We have filed an additional patent for this indication and we are continuing study of this new chemical [industry]. We are also working on the development of proprietary drugs that can be added to the portfolio of products noted by our two proprietary divisions. Of course, there can be no assurance of the success of T2000 or any of the additional drugs that we are developing.

In addition to investments in research and development in 2003, we expanded the breadth and scope of our strategic marketing initiatives. In the United States, we established the Taro Consumer Healthcare Products division for marketing directly to consumers. We also launched the TaroPharma division for marketing proprietary prescription products to physicians. These expanded marketing efforts and the administrative support they required were to a significant extent responsible for the growth in selling and administrative expenses in 2003.

Taro consumer has secured a leading position in the over-the-counter foot care market for Kerasal. It's an ointment with unique moisturizing exfoliate for dry callused feet. This quarter Taro consumer is launching Kerasal cream, an exfoliating moisturizer containing an alphahydroxy acid. In late 2003, Taro Consumer introduced the ElixSure line of pediatric over the counter analgesic cough and cold products, using the patented NonSpil delivery system developed by Taro researchers. ElixSure products for fever, pain, cough and congestion are now available in pharmacies, grocery chains, and mass merchandisers across the United States. ElixSure products are effective and good tasting. These products pour like liquid but resist spilling. The ElixSure formulations are designed to provide parents with increased accuracy and easy dosing when they administer liquid medicine to children.

The ElixSure products have earned national recognition. In addition to being demonstrated on many news and general interest television programs, ElixSure products received a good housekeeping feel, soon after their launch. In December 2003 the ElixSure product line received the Good Buy Award from the Good Housekeeping Institute that is Good Buy (BUY), not goodbye (BYE) as many of our competitors would have preferred. Of the thousands of new products reviewed by Good Housekeeping, ElixSure is the only healthcare product, and one of only seven products in total to receive the 2004 Good Buy Award.

Although it's early in the launch, we are satisfied with the progress as Taro's ElixSure products to date. We continue to support these products in the marketplace, and are adding to the ElixSure product portfolio. Indeed, in January of 2004, Taro received FDA approval for a new drug application for children's ElixSure IB ibuprofen Oral Suspension. Together with its spill-resistant characteristics ElixSure IB is a unique suspension that does not require shaking before administration. This property reduces potential variability and errors in dosing. Taro has filed and yet additional new drug application related to the NonSpil drug delivery system. In our TaroPharma division the Company is teamed with medical representatives is calling on dermatologist and pediatrician across the country TaroPharma represents a long-term strategic initiatives to launch and sustain portfolio of proprietary prescription product.

Our generic division has continued its record of growth during 2003. The strong performance of Taro's generic business is attribute to the excellence of the division's sales and marketing organization and the efficiency of the Company's production and distribution operation. Finally in order to assure that our expanded research and marketing efforts could be translated into commercially meaningful results, it was prudent to augment production and warehousing capacity around the world. We invest in more than $90m in property, plant, and equipment in 2003, to provide capacity to make us a reliable business partner to our customers. We are continuing to implement a major facilities expansion program to enable the Company to keep pace with the demand for our products, enter newer markets, and broaden our product lines. We expect this capital expenditures program to more than triple production capacity by the end of 2005. We are very proud of the dedication and hard work of the Taro personnel to produce the outstanding results that Taro achieved this year. We look to the past with pride and to the future with confidence. Thank you. And now Kevin Connelly, our Chief Financial Officer will provide details of our financial results. Kevin.

Thank you doctor I would just like to touch on some highlights of the Company's performance for both the fourth quarter and the full year 2003. As Barrie mentioned we are obviously very pleased with results of the fourth quarter of this year. The results continue to demonstrate the sustained performance of the Company, our continued commitment to research and development, as well as, our ability to invest in what our essentially two new business initiatives TaroPharma and Taro Consumer Healthcare while increasing our bottom-line.

Sales for the quarter of 88.6m are 43% increase from the prior year. The sales breakdown by geographic area for the quarter, approximately 90% of the sales took place in the United States, 5% of our sales in Canada, 4% in Israel, and remaining 1% 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 maintained or increase the market share of our base business. We also had contributions from some of our new product introductions during the year such as Betamethasone Dipropionate augmented cream, Ammonium Lactate cream, and Etodolac XL tablets. In addition the launch of our Kerasal and ElixSure product lines has contributed to the overall growth in sales. Special thanks to our sales and marketing groups around the world, another great quarter delivered with their extra help and efforts.

The gross margin of 70% for the quarter remains among the highest in our industry and again demonstrates the sustained performance of our inline business, the contribution from new product approvals, and the sales of our proprietary product lines. Our SG&A as a percentage of sales was 36% for the quarter, an increase of a 114% from a year-ago quarter. And the SG&A expenses were impacted by the cost related to the launch of our new products introduced in the United States and the marketing efforts behind the promotion of Kerasal and ElixSure. In addition, this quarter's numbers include our investment in the team of professional medical representatives, who are responsible for marketing our proprietary products directly to physicians. This initiative is new for 2003.

Our commitment to research and development continued with approximately 12% of our top line invested in R&D during the quarter for a total of $11.1m, and this brings our year-to-date net investment in research and development to $40.6m, compared with $26.4m for the full year of 2003, an increase of over 50%. Approximately 75% to 80% of the R&D was focused on our generic pipeline, which currently includes 35 filings of the US FDA and numerous filing with other regulatory agencies in other countries. 20% to 25% of our R&D remains focused on our proprietary pipeline, our NonSpil drug delivery system and our new class of drugs, the non-sedating barbiturates products, which Barrie mentioned earlier.

Our operating income of $18.9m for the quarter represents 21% of sales, an increase of 22% from the same quarter last year. Our tax rate of 9% for the quarter reflected the change in product mix between our Canadian and Israeli facilities. We are an approved enterprise company in Israel, which reduces our tax burden on products manufactured and exported from there, and in addition, our increased sales and marketing expenses took place primarily in the United States, which resulted in a reduction of pre-tax income in our highest tax paying jurisdiction. The sustained performance of the company was demonstrated by the net income for the quarter of $16.6m or $0.56 per share and our net income for the full of $61.2m includes our sixth consecutive year of record net income, a record performance that all of us at Taro are quiet proud of.

Now, before I turn it over to Dan and then Barrie and we entertain some questions, I'd like to highlight some items from the quarter-end or year-end balance sheet. Cash and cash equivalents as of December 31 of $159.1m represents an increase of $28.4m from 2002 yearend as the company funded part of it's working capital requirements, capital expansion, and product acquisition programs through operating income. The cash balances also reflect the proceeds from our two debt offerings during the year in Israel. Account receivable trade receivables at $120.5m represent DSOs of about 122 days, which is above the company average. A significant payment made by one of our major customers was received in the first days of January, but obviously that skews our DSOs as of yearend.

The inventory levels of $84.5m, reflects our policy of maintaining the finished goods required to meet the growth in customer demand. Property, plant, and equipment increased as the company continues to expand its capacity in manufacturing, distribution, and research & development. These programs are ongoing in our facilities in United States, Israel, Canada, and now Ireland. A total of $93m was invested during the year.

One note that both inventory and fixed assets are impacted by the change in the strength of the U.S. dollar during the year. Some of our investments are maintained in either Canadian dollar or in euros and as the dollar weakens against these currencies, the value of these investments increases accordingly. The change in currency also impacts the value of sales and the expense related to the production and operations in market outside the United States.

Finally the growth in other assets reflects the intangibles associated with products acquired early in 2003 and related to this acquisition is the change in the current maturity of long-term debt. The final payment on this acquisition is scheduled for June of 2004 and is, therefore, considered a current maturity. So, overall another quarter, which all of us at Taro are quite proud of, and Dan, let me turn it over to you.

Thank you Kevin. I would like to offer some additional perspective on Taro's results before opening the call up for questions. Taro's gross profit, both for the fourth quarter of 2003 and for the full year, was greater than the company's total revenues for the comparable year ago period. Taro reported gross profit of $62,060,000 for the fourth quarter of 2004 compared with revenue of $61,976,000 for the fourth quarter of 2002. The company reported gross profit of $213,004,000 in 2003 compared with revenue of $211,581,000 in 2002. As Kevin mentioned, Taro's gains in gross profits for the quarter reflects the company's product mix and the sales of higher-margin proprietary products. The increase in gross margins for the year has in turn enabled Taro to invest in the SG&A required to support the Company's proprietary products, while continuing to make substantial investments in capital projects and research, and at the same time to achieve strong operating results and earnings. The Company's operating margin of 24% for the year, and net margin of about 19% are in line with Taro's recent financial performance. As Barrie mentioned, there are currently 34 ANDAs and one NDA related to NonSpil in the pipeline. Just as a point of comparison, the Company had 21 filings with the FDA at the beginning of 2003. Taro submitted 23 filings during the year, received 8 approvals, and ended the year with 36 filings at the FDA.

Taro has invested more than $160m in research and development during the past 10 years, and more than $100m since 2000. The current market value of the ANDAs in the pipeline continues to be more than $1b. With respect to Taro's investment in infrastructure, the Company invested more than $90m in property, plant, and equipments in 2003. In Israel, our new chemical plant is in the final stages of coming online. This plant will synthesize active pharmaceutical ingredients at several times [during] 2002 production level. This plant will produce a greater number of APIs and do so with greater efficiency. Also in Israel construction of a facility for finished pharmaceutical products is well underway, and is expected to come online in 2005. In 2003 major expansion and upgrades of Taro's research, manufacturing, and distribution operations also continued in Canada, U.S., and Ireland. And early in 2004, the Company purchased a 315,000 square foot distribution center for approximately $18m in South Brunswick, New Jersey.

That will begin our question-and-answer session. Let me remind you of three of our communications policy guidelines. First, we cannot provide guidance or comments on analyst estimates, this is because the rate of Taro's contingent growth remains largely dependant on new product introductions and we do not know when these approvals will occur. Second, for competitive reasons and to fair to our customers, our policy is not to provide information on sales and profitability of individual products. Also of course for competitive reasons we do not disclose additional information on the products filed with the FDA. So now, Becky, we'd like to begin the Q&A

Thank you sir. The question-and-answer session will begin at this time. If you are using a speakerphone, please pick up the handset before pressing any numbers. Should you have a question, please press "*" "1" on your pushbutton telephone. If you wish to withdraw your question, please press "*" "2". Your question will be taken in the order that it's received. Please standby for our first question. Our first question comes from Greg Gilbert from Merrill Lynch. Please state your question.

Thanks. First question is for Kevin wondering if anything other than geographic mix affected the tax rate in the quarter? And the second part of that question; do we expect the tax rate to be around the current level in the winter quarters and then closer to the 20% or so in the other quarters?

Well, firstly we don't give guidance as Danny said, it's always difficult to predict the tax rate based on any one quarters performance. We've mentioned the variables such as product mix in which location R&D occurs or where the spend on product promotion occurs all of that obviously has an impact on our effective tax rate. So, from an annual perspective I think you're better off looking not just at one quarter but trying to take a look at our tax rate last year, over the entire year. But your point actually is a good one, in that as we continue to advertise and promote our branded products here in the United States that will drive down some of the income in our highest tax paying jurisdiction, which is the U.S. And to some extent there will be I think a little bit of seasonality associated with some of the promotional activity, obviously, some of the products that are out there right now are addressing the cough cold market. So, I don't think there will be advertising in the cough cold market in June and July. So from that standpoint there may be a little bit more seasonality within the SG&A line as we rollout ElixSure and become more and more successful with it.

But in terms of that low 9% or so tax rate this quarter there is no sort of catch down of that rate for a full year adjustments purpose anything like that, correct?

That's correct it was really just a matter of where our consolidated -- where the income came from each of the different divisions, how it rolled up, and again, the fact that the U.S., quite frankly, had reduced income for this quarter as opposed to prior quarters.

Okay, second question is for Dr. Levitt. I am assuming you're spending several million dollars quarterly or have been recently to establish the ElixSure brand. I know it's early, but at what point would you consider adjusting that level of spend if sales don't ramp significantly or you already convinced that the every dollar you are spending there is absolutely generating a positive return?

Well, you just pointed out Greg, it is early in the launch. We can characterize the launch as have been very successful, because we have gotten a very widespread distribution throughout the United States. Of course, we are competing in a difficult market. First of all, we have the inventory of medicines that people have in their medicine chest or medicine cabinet, which need to be depleted before they buy other medicines, and we are going against or at least we are competing in an environment that we anticipate it to be difficult. Robitussin was introduced in 1953, Sudafed in 1954, and Tylenol in 1955. So individually each of these products has a half of century advantage and in the aggregate they have a century and a half advantage and I think that it would be presumptuous of me to assume that in the three months that we can dislodge a 150 years of consumer exposure to these other highly effective medications. However, on our side of the equation, we have first of all highly effective medications. The tastes are good; we have special taste masking properties that are patent protected in NonSpil system. The NonSpil does not require shaking, obviously it doesn't spill and our hope is that it's going to be the preferred method of giving medicines to children in years to come. I think that we're going to we are going to have look back on launch of NonSpil from a perspective of a few years to decide whether or not we did it the right way; however, we are going to have a measured promotional campaign in order to achieve what we hope are realistic goals.

And my last question is on the actual branded marketing side. Could you characterize the productivity of your sales reps and whether or not their bag is full or whether or not do you think they would -- could be further leveraged with additional business development activity?

Yeah I think that they certainly -- they can always be better leveraged with additional business development activity, since they are always better products; however they really do have a full time job and they are giving a good account of themselves in the market having made significant headway, I guess, that's with Ovide that [contributes] to head lice and also with Topicort and they are contributing significantly to the ElixSure program. So, I think that they are going to be fine and as we add additional products to the ElixSure line, they are only going to be more effective for us. In addition, we are launching a product U-Cort in the pediatric and dermatology markets, that's a prescription gentle steroid, which we will use -- for which we will use the medical reps as the principal methods of marketing.

Thanks a lot.

Thank you. Our next question comes from Kati Dani from CAIB. Please state your question.

Operator.

Kati, your line is live.

Oh, sorry. Can you hear me ma'am. Hello, can you hear me know?

Yes, please speak up Kati.

Thanks very much. First of all congratulations for the great result. It really looks great and I have two follow-up questions to the previous one. One is on the tax rate, the 9.4% looks really great, congratulations for that as well. And I remember Kevin usually explaining the tax rates, with the geographical split. Bob, I mean this quarter the 9.4% is so slow that I guess something should be drastically different. Will be it possible to give the guidance for us, that's where we look for when trying to look ahead what can we expect going forward and from the 17 to the 9 with the geographical mix, we changed into --?

Kati, it is very difficult to hear you. I am wondering if you could just speak up a little bit louder. I think you are getting the question on the tax rate -- as to whether the 9.4 will be sustained or -- and I think quiet frankly that again you can't look at any one quarter predict the trend especially in the area of taxes. So, I think the annual rate is probably more indicative of where we will be over the course of 2004 and beyond. Again there are certain things that took place within the quarter, the promotion of our branded products in United States, which were heavily promoted during Q4, and obviously into Q1 as they are addressing primarily the cough, cold, fever, pain market and there is some more seasonality in those markets. So, to that end, one could anticipate possibly a lower tax rate in Q1. If we continue that marketing effort, which we are, but again from an overall perspective I think the annual rate is a much better indication of where our tax rate will turn out for 2004 and 2005. Again there are a lot of other things that go into that tax rate or approved enterprise status in Israel. Our operations in Ireland can also have an impact now on our consolidated tax rate. So, there is a lot that goes into that tax rate, but I think this quarter the real driver, the real change is the fact that the advertising took place in United States and that's what we supported our ElixSure and Kerasal products with. I couldn't answer your question because I didn't quite get all of it?

Sorry --

If you have a second question Kati, please speak up very --

You mentioned in your report as the reason for the SG&A costs, legal costs associated with intellectual property matters, it usually belongs to that icon, is there a specific reason that you mention it now in this quarter -- that quarter, is it unusually big or is there something specific we should pay attention to?

Well, this is Barrie Levitt, Kati, the reason that it was mentioned in the press release is, obviously, we are now a selling in new orders with respect to intellectual property. The generic part of our business has to confront the minefield of patents that are being laid down by the proprietary industry, and we want to be sure that we don't infringe anybody's intellectual property and that obviously is required increasing the staff of the intellectual property attorneys, in-house, as well as, the use of outside counsel. On the other side of the coin as a proprietary Company we also are laying down the minefield of patents around our intellectual property in order to inhibit others from getting into areas that are sensitive to us. So, we both have an offensive and a defensive strategy with respect to intellectual property, which has required some additional expense, and that's why the statement was made in the press release.

I see. Thanks very much, Barrie.

Thank you. Our next question comes from Paul Elliott from Burnham Asset Management. Please state your question.

Hi, guys. How are you doing? Barrie, I think most of the question were responded to with respect to the NonSpil, my question relates to outside the United States with only 10% of the sales go into the outside, what thoughts and processes are you going through with respect to increasing that percentage, or do you see NonSpil technology have any application outside United States, as well as, some of the other product lines?

Well Paul thank you, the NonSpil technology, obviously, has potential applications outside the United States but I think it was the inappropriate for me to disclose in advance what we intend to do or which countries in which we intend to do it. Since, obviously, that would provide aid and comfort to the competitor. So, I'm going to decline to answer that part of the question, suffice is to say that we are looking at foreign market. With respect to increasing the percentage of Company's business overseas, this is been a problem for us because our growth in the United States has been outstripping our growth in other markets. The U.S. market is probably the best pharmaceutical market in the world and despite the efforts that we make in other countries our U.S. sales organization has been able to undo any gains from a percentage perspective of what we've done outside. But I think that we certainly have made significant gains in Canada, we've made significant gains in Israel. There are some, there is some increased activity in the United Kingdom, clearly the initiative in Ireland is focused first and foremost on the European market and only subsequently on the United States. So, there are going to be attempts to expand our overseas operations, however, the gains in the U.S. are such that there is always competition and I'm not sure that I can predict that the percentage will decrease. Indeed, over the last few years we've seen quite the opposite, mainly that the U.S. is occupied a progressively larger part of both our sales efforts and our results. So, yes, the answer is yes we are going to make an effort overseas. Yes, we are going to try to optimize the use of our marketing expenditures or investments in order to gain foot hole for ElixSure technology and other products in other markets. But I guess the U.S. being what it is will remain dominant in the overall picture of Taro.

Thank you.

Thank you our next question comes from Arnold Ursaner from CJS Securities. Please state your question.

Good morning gentlemen this is actually Will Seddon for Arnie. Can you just comment on any impact from new competition on pricing and distribution for Lotrisone?

We'll share our -- I think your question you broke-up a little bit but I think you are asking about Lotrisone in the competitive marketplace. So, I mean really at this point the competitive environment on CB Cream really remains relatively stable, you know, the latest market share data that we have from for IMS reflects little change in our position in the marketplace. And -- but obviously, we recognized that we are in the generic business and that can change in any time. So, I mean for that reason that's why we are putting the money we are into research and development, into sales and marketing, and trying to develop some of our proprietary products. But quite frankly at this point in time, things look relatively stable out there.

Great. Thank you very much.

We have time for one more question.

Thank you. Our last question comes from Richard Watson from William Blair. Please state your question.

Hi, thanks. I just wanted to talk a little bit about the API business. I know you kind of talk about this previously but just to clarify what the ongoing internal manufacturing capacity expansion, without disclosing specific strategy should we continue to rule out API sales to external customers as a future revenue source and if so can you remind us why?

This is Barrie Levitt, I know that Dan made a forward-looking statement in his remarks about our increasing efficiency and output, which obviously is something we hope to achieve, but we can't guarantee. The problem that we've had in API manufacturing is that our own sales have increased so dramatically that we are having a difficult time keeping up with the demand created by the marketing and sales department in the United States. We do -- we have commitments to certain customers especially with Carbamazepine and we feel that we have a moral responsibility to supply those customers with products, and so that we will continue to sell APIs to establish customers, but until we're able to catch up with the increasing demand in the United States, we don't have the plan to make this a separate independent revenue or profit center, which is a little different from some other companies operating in the same home country as we. However, I cannot exclude the fact that if we have excess capacity at some point in the future, that we might not explore the possibility of selling drugs to the generic or even to the branded industry. So, I think that, that represents something that's -- its not for closed, but at present we are focusing our activities on just keeping up with the internal demand.

Okay that's very helpful. Thank you.

Thank you. We'd like to thank you very much for participating on today's conference call and we look forward to providing you with an update on the first quarter. Thank you very much.

This recording will be archived and can be heard at any time following this call through February 24. To hear the archived call, log on 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 the pass code 332153 to request the Taro call. Ladies and gentlemen, this concludes our conference for today. Thank you all for participating and have a nice day. All parties may now disconnect.