Taro Pharmaceutical Industries Ltd (TARO) 2004 Q1 法說會逐字稿

Good morning and welcome ladies and gentlemen to the Taro First Quarter 2004 Conference Call. At this time, I would like to inform you that this conference call is being recorded for a 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 May 6th. 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 352645 to request the Taro call. Today's call will begin with a presentation by Taro's Executives; then at the request of the company, we will open the conference to questions-and-answers from participants on the call.

At this time, let me read you the following Safe Harbor statement. Certain statements in this call are forward-looking statements within the meaning of Private Securities Litigation Reform Act of 1995. These statements include, but are not limited to, statements that do not describe historical facts, events or circumstances the Company "anticipates," "expects," "plans," "intends," or "designs" to happen or exist; consumer, physicians or marketplace acceptance of the Company’s new or existing products; comments concerning marketing and consumer acceptance of proprietary products including ElixSure and Kerasal products; potential benefits of ElixSure products; initiatives 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 Limited believes that the expectations reflected in such forward-looking statements are based on reasonable assumptions, it has 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, regulatory actions and legislative actions in the country’s 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 where we explain that the preparation of the Company’s financial statements requires us to make estimates and judgments that effect the reported amounts of assets, liabilities, revenues and expenses. We evaluate on an ongoing basis our estimates, including those related to bad debts, income taxes and contingencies. We base our estimates on currently available information, our historical experience and various other assumptions that we believe to be reasonable under the circumstances.

The results of these assumptions are the basis for determining the carrying values of assets and liabilities that are not readily apparent from other sources. Since the factors underlying these assumptions are subject to change over time, the estimates on which they are based are subject to change accordingly.

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 new information, additional or subsequent developments or otherwise. I will now turn the conference over to Mr. Daniel Saks of Taro. Please go ahead sir.

Thank you, Chris and good morning. Welcome to Taro’s first quarter 2004 conference call. With me today are With me today are Dr. Dr. Barrie Levitt, Chairman of Taro Pharmaceutical Industries and Kevin Connelly, our Chief Financial Officer. Barrie and Kevin 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 and good morning everyone. Our results for the quarter reflects a strategic decision to make substantial investments in our Company in order ultimately to develop profitable proprietary products. While this decision is having a short-term negative impact on our results, we believe that we are on the right path for the future.

Now for the specifics, sales and gross profit increased in the quarter compared with the same period last year. However, the additional revenues were not sufficient to offset the strategic investments in the Company's proprietary product initiatives. We felt that it was important to support the ElixSure product line with the advertising, promotion and selling expenses needed to achieve nationwide distribution and consumer awareness in the United States. We believe that we have succeeded in this effort. While there has been remarkable consumer satisfaction with the ElixSure products, it takes time to change consumer buying habits. In the first quarter, we did not achieve the reorder levels that would have been necessary to offset the very substantial marketing expenses undertaken in association with the new product launch. However, the launch did achieve certain key objectives.

First, ElixSure enjoys very broad national distribution. Second, the trade supports the product line. Our market research indicates that we've achieved customer satisfaction. And finally, pediatricians are enthusiastic about the benefits of the NonSpil vehicle. Therefore, we intend to continue to invest in and grow the ElixSure product line both from a marketing and from a research perspective. We plan to continue to promote our current ElixSure products and also add new products to the line in both the over-the-counter and prescription markets.

It is worthwhile in this context to review our experience with Kerasal, another over-the-counter product which was launched last year. We started with positive consumer research and a strong customer satisfaction, but initial slow sales. During the launch, revenues did not offset the marketing expenses. We stayed the course and according to Point of Sales Data in 2004 Kerasal has become a leading product in the foot-care category and is now making a positive contribution to the Company earnings.

With respect to research, we are continuing our commitment to both generic and proprietary programs. We have more than 30 filings with the FDA including a new drug application related to the NonSpil technology. In regard to proprietary drug development, we are continuing our studies on T2000, the first of our class of non-sedating barbiturates. As we’ve reported previously 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 to study this new chemical entity. We are also working on the development of other drugs that can be added to the portfolio of products promoted by our two proprietary divisions. Research, especially on proprietary products requires substantial investments over extended periods of time, and of course there can be no assurance of the success of T2000 or any of the additional new drugs in development at Taro.

As a result of our recent capital investments, Taro has a research, manufacturing and distribution infrastructure that it needs to develop new products and support their launches. As these capital projects are completed, investments in property, plant, and equipment should decline relative to recent years.

Those of you who have followed Taro over the years, know that the company takes a long-term approach to its business. While this commitment resulted in a reduction of profit in the first quarter, we strongly believe that it's the best course for us to take in order to build shareholder value. Thank you. Kevin, could you provide more details on our results?

Thank you, Barrie. I would like to review certain items related to the company's performance for the first quarter of 2004. Sales for the quarter of $84.1 million increased 22% from the first quarter of prior year. This was the second-best sales quarter in Taro's history. Only the fourth quarter of 2003 was stronger. The sales breakdown by geographic area for the quarter -- a total of 90% of Taro's sales took place in the United States, 5% of our sales were in Canada, and the remaining 5% of our sales took place in Israel and our other international markets. Regarding our sales in the United States, during the second half of 2003, pipeline fill in the stocking of ElixSure was satisfactory. However, in the first quarter restocking was not sufficient to offset the advertising and promotional expenses that we incurred during the quarter. Sales of other proprietary products including Kerasal did make positive contributions. Our gross profit of 67% for the quarter remains among the highest in the industry. We have maintained this margin, despite price pressures inherent in our generic business and a slight shift in our product mix compared with previous quarters.

Our SG&A was approximately 41% of sales for the quarter; that represents an increase of $16.6 million from the year-ago quarter. SG&A included increased advertising and promotion associated with ElixSure and Kerasal as well as the cost of building the Taro Pharma team of professional medical representatives. We should note that the Taro Pharma sales force has grown from fewer than 15 people in January of 2003 to about 70 people today. Our commitment to research and development continued with approximately 14% of our top line invested in R&D during the quarter, for a total of $11.7 million compared with $8.7 million a year ago. Approximately three quarters, 75% to 80% of that R&D remains focused on our generic pipeline. We currently have over 30 ANDA filings at the U.S. FDA and numerous filings with regulatory agencies in other countries. The remaining investment in R&D, the other 20% to 25% of our R&D is focused on our proprietary pipeline, our NonSpil drug delivery system and also our new class of drugs, the non-sedating barbiturates products, that Barrie mentioned earlier.

Our operating income of $10.5 million represents 12% of sales, and that is a decrease of $7.6 million for the same quarter last year. The operating income reflects the impact of our promotional activities to support our proprietary product lines and the increased level of R&D investment. Our tax credit for the quarter of $2.3 million primarily reflects reduced income in the United States, where the majority of our promotional activities took place. Now all of these factors combined to produce net income for the quarter of $11.1 million or $0.37 per diluted share.

So, now before we take your questions, I would like to also review some items from the quarter-end balance sheet. Cash and restricted deposits stood at a $113.2 million as of the end of the quarter; this represents a decrease of $48.4 million from 2003 year-end, as we funded our working capital requirements, our capital investments, and product acquisition programs through our operating income. Accounts receivable trades stood at a $138.1 million; that’s an increase of approximately $18 million from a $120.5 at year-end, and we should note that accounts receivable includes approximately $20 million that customers withheld from payment to Taro, in connection with customary deduction procedures. The company believes that these amounts were withheld in error, and that substantially all of these errors will be rectified in due course. Issues like this have arisen in the past and have been resolved to our satisfaction, but because of the magnitude of the amount, we felt obligated to make this disclosure. And we do hope that you understand that any additional detailed public discussion could complicate reaching a satisfactory resolution with our customers.

Moving on with the balance sheet, the inventory levels of 94.1 million reflect our policy of maintaining the finished goods required to meet customer demand. Property, plants, and equipment increased as the company continued to expand its capacity in manufacturing, distribution, and research and development. These programs are ongoing in our facilities in the U.S., in Israel, in Canada, and in Ireland. A total of $28.5 million was invested during the quarter, and that follows on the $94.4 million we invested in all of 2003. During the quarter, the primary capital addition was our new U.S. distribution center in New Jersey, which we acquired for approximately $18 million in early January and during the quarter -- one last note on the quarter-end taxes -- we did receive tax benefits from the Company’s latest approved enterprise plan in Israel and we did receive an extension of those benefits from 10 to 15 years. Now this approval entitles the Company to a tax rate of approximately 10% on income subject to this plan for a 15-year period which should end in 2017. Now, Dan let me turn it over to you and then I’m sure we’ll take some questions.

Thank you Kevin and now to begin our question-and-answer session let me remind you of three of our communications policy guidelines. First as a corporate policy we do not provide guidance or comments on analyst estimates and this is in part because the rate of Taro’s continued growth 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 information on sales and profitability of individual products. And third, of course, for competitive reasons we do not disclose additional information on the products filed with the FDA. So Chris (ph.), please, we'd like to open the question-and-answer session.

Thank you. The question-and-answer session is open 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 questions will be taken in the order they are received. Please stand by for your first question. Our first questioning comes from Greg Gilbert from Merrill Lynch. Please state your question.

Thanks. First of all, I don’t think investors have a problem with the long-term investment theme at Taro. I think actually a lot of people like that but I think the concerning part for me and others might be that a shortfall of this magnitude theoretically should have been apparent to management long before today. So I’d be curious if you could walk us through the process of closing a quarter and perhaps what you may or may not be able to do better on that front. Secondly, I think it will be really helpful if we knew ElixSure sales and SG&A related to ElixSure, or something that could help us get a feel for how much of the shortfall was related only to ElixSure versus your more important base business. I think that’s a very important theme that people care about. And finally, I am curious on your thoughts on share repurchase as the strategy at these prices.

Kevin, why don’t you take the first two and I'll take the last?

Okay, we can do that. Good morning Greg. Thank you for the questions. Just on the term of when did we find out and did we know sooner or rather than later, I mean basically, our normal course of business is, at the end of every accounting period, I mean we basically reconcile our accounts, compile our numbers. They are reviewed by our internal and external auditors and then we go to the audit committee of the Company and present the numbers for review. And quite frankly, as soon as that process is complete, we release the numbers. So, I mean that’s our normal process of going through that. We followed that in the past and we are continuing that for the quarters going forward as well. In regards to -- I think your second question related to ElixSure?

Yes, sales versus SG&A, trying to get to the bottom of how much of the shortfall was related to ElixSure. I didn’t hear much negativity around your base business and so, just want to be able to better quantify how much of the shortfall is related to ElixSure, which arguably is a short-term event.

That would be correct in regards to the ElixSure shortfall definitely contributed (sic) to, I think, what would you define as the miss to what the analysts had out there. And the only thing I can tell you is, as Danny mentioned, we do not give guidance on individual products and we are not going to breakdown the ElixSure sales or promotional costs. I can tell you though that ElixSure definitely did not have a positive contribution during the quarter; however, on the OTC side, Kerasal our other OTC product did make a positive contribution.

I guess, just a follow up on that, Kevin, are there any themes that are in the base business that we may hear about next quarter, that are softening or is it really an investment on the OTC side issue?

It is primarily an issue related to our investment in trying to build a branded business around the ElixSure and the NonSpil delivery system. And I can’t promise you what’s going to happen in the future; I can tell you as we sit here today, our base business, and as we define base business, it is basically products that were approved prior to '99 and I think when we’re out on the road and we’re talking to people about the Company, we discussed how that base business has grown in the past, how it continues to grow. I can tell you that that base business continued to increase slightly during the quarter and remains strong.

I am going to take the --?

Take the share repurchase?

Yeah, I am going to take the share repurchase issue. I think that if I can add one thing, Kevin, to what you said that is in prior quarters, in spite of the fact that we were making investments in marketing, the gross profit from our other business, our generic business was able to offset it. So that it wasn’t -- may be it wasn’t apparent and -- however, we were aware of the fact that we were standing our ground and regardless of what the gross profit was going to be, we felt that this was a wise business investment, the investment on ElixSure. With respect to share repurchase, Greg, I think that the Directors of the Company are watching their assets all the time on a continuous basis and if and when they decide that share repurchase is appropriate, we are going to have to make the appropriate announcements. So, that’s not going to be a secret, its something that we are going to disclose, I believe, we are required to disclose it by law but it is something, that’s under constant and continual review.

Thank you, guys.

Thanks, Greg.

Thank you. Our next question comes from Elliott Wilbur from CIBC World Markets. Please state your question.

Good morning. Not surprisingly a follow-up question on the ElixSure results in the quarter. I guess, based on the experience thus far with the product, Barrie, is the gameplan basically unchanged at this point, or do you think you need to, I guess, increase spending going forward? And now that we’re, kind of, out of the heavy cough-cold season, I mean, should we think about, you know, very minor level of spending in the next couple of quarters and the possibility of spending ramping up quite significantly, I guess, end of 3Q and end of 4Q or do you think there is a possibility you could actually increase spending over the next couple of quarters, in anticipation of trying to build awareness ahead of next year’s cough-cold season?

I think that those are the very questions that we are asking ourselves. I think it would be worthwhile to just review for a moment, where we are with ElixSure. The launch did achieve certain key objectives. We did get the national distribution that we were looking for; as a matter of fact, we got more than we thought we would get. Secondly, we got and are continuing to receive support from the trade, which is terribly important because this is an over-the-counter product and if it’s not available on the shelf, we can -- whatever our advertising is, if the customer doesn’t see it on the shelf, they are not going to buy it, they are not going to be able to buy it. Our market research even up to this morning, indicates that we have achieved -- are achieving consumer satisfaction. We have had almost no consumer complaints with respect to the many hundreds of thousands or I don't know exactly the number of units of bottles that have gone off the shelf to the consumers.

And finally, we've got a very positive response from the pediatric community, which means that there is a tremendous amount of hope for both over-the-counter and prescription products in this NonSpil vehicle because it means accuracy, it's -- I don’t want to sound corny with advertising but we don’t have to shake the product. So, it's no shakes, no spills, no errors. This is a product which really, I think as a physician represents a step forward in giving medicines to anyone who can't swallow a pill and certainly children. So, we believe it makes good business sense to continue to support the ElixSure line both from a marketing and research perspective. And we are going to continue to promote the ElixSure product and to add new products and I think that the other question you asked about cough, cold, is a very valid question. We've now added Ibuprofen to acetaminophen. Now both Ibuprofen and acetaminophen are not primarily cough-cold products.

So, we have two products, ElixSure congestion, ElixSure cough and ElixSure cough incidentally did quite well during the season. But those are primarily cough-cold products. We are introducing Ibuprofen now and the question of exactly how much effort to put behind the launch in this quarter versus next quarter and on to the fourth quarter is under active review, but there is going to be support in the current quarter. There has to be because we want the Ibuprofen not just to get on to the shelf but to get off the shelf and there is a lag. We are dealing with branded products, so there is a lag between the time you make the marketing effort and the time the consumer buys the product and the time that we get that the reorder. Our financial statement only reflects the restocking, so even if we’re successful -- we sell the goods in -- there is a lag till the consumer takes them away and then a lag until the restocking comes in. So you're sort of out of phase. During a launch there is a phase lag between the time that we make the advertising investment and the time that we see, as a company, the benefits of the investment we’ve made.

But I think if we review our experience with Kerasal, which is probably at least within Taro the best analogy to draw, at least from a historical perspective, we started out with doing consumer research and we felt that we had a product that met consumers needs, I mean there was a perception that there was a certain percentage of people in the market they were concerned about their feet and about -– problems with their feet and we had a product that worked as an exfoliant moisturizer and we had tested it clinically and were satisfied that it really worked. We did the consumer research, including initial consumer trials and got a very positive results. So we launched the product, and of course and this now last year, we were very disappointed with the initial sales because we thought it was going go flying off the shelf, and we learned that’s not the way it happens.

So we stayed the course; revenues didn’t offset the marketing expenses, but now we are having a positive response. Not only do we have a positive response for Kerasal in terms of Point of Sale Data that we’re getting from our customers, you know the sales from the shelf to the consumer, but we are also now having sales from us to restock Kerasal broadly all across the country and Kerasal is making a positive contribution. So if you look at the historical analogy, it just makes sense to follow what we did successfully with Kerasal and of course everything boils down to a business assessment. Is ElixSure, a product that it pays to support? Does ElixSure have sufficient competitive advantages over the other medicine against which it competes, to make it a wise business decision to promote? Well, we think the fact that you don’t have to shake the product compared to the need to shake many of our other competing products; the fact that it doesn’t spill; the fact that it tastes good; the fact that we have consumer satisfaction; that we have national distribution; that we have a support from the pediatricians, makes us think that there is enough objective evidence that this is the right product group to support so that we feel that we are going to continue to support. I hope I have answered your question.

I appreciate the commentary. Barrie, I want to ask one follow-up question of you as well, with respect to a recent development on your latest product launch. I guess, you know, I used to be under the impression that there was, kind of, a lower bound on the type of products we may see these so-called authorized generics on but I guess that that’s no longer the case. And I am just wondering, Kevin, if you may provide us with a little bit of insight into in terms of how the initial share between you and Watson (ph.) sort of has shaken out at least in the trade. And then going forward, I mean, are you hearing from customers that there may be possibilities, I guess, of you know, other authorized generics on some of this -- on the products in your pipeline or how does this, I guess, impact your longer-term strategic thinking in terms of looking at new product opportunities?

Well, first of all, authorized generics are not new to us. That has been standard operating procedure in Canada for the last 10 or 12 years. So, this is not the first time we meet authorized generics. Authorized generics really eliminate the benefits of being first and alone in the market. I guess, it is really -- you mentioned terconazole; it is really not important what kind of market share you get, and we’ve done very well, I believe. I mean, it is early and very, very early in the game, so we really don’t know how it is going to work out.

The question really is, what kind of profitability is preserved for the authorized generic and with respect to any authorized generic, the question with respect to the product is, what is the behavior of the authorized generic versus the behavior of what we might call the unauthorized generic and how it plays out -- it plays out very much the same as when you have two companies -- two generic companies entering the market at the same time. So, I guess the generic marketplace, not principally for our product, but the generic marketplace in general is undergoing a bit of paradigm shift and we are not sure how it is going to work out.

But the one thing that I would like to emphasize about Taro is that we keep our eye on profitability and not market share. So we are going to try to optimize our position in the market with respect to all the products where we are generic, but we are also going to continue to develop proprietary products that are patent-protected, so that we don’t have to deal with authorized generics for 15 or 20 years into the future on our own products, we hope. So there has got to be a balance as the Company moves forward, and as the environment changes -- and the environment is changing all the time -- and it's important for our company, at least, to react to environmental changes in such a way as to optimize return to the shareholders and to build shareholder value in the long term. And that’s one of the reasons why we are placing a little bit more emphasis on what we think is an important part of the future of our company, and to the extent that we have good science -- and we do -- our ability to develop products where we can have intellectual property protecting those products, makes good business. That’s it.

Okay. I appreciate your commentary, Barrie. Thanks.

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

Hi. Good morning. Two questions if I can; if you would focus again on ElixSure, how much of the shortfall would you view as a timing mismatch on revenues versus expenses or disappointing sales overall?

Is there another question behind that, Arnie, or are you going to wait?

I will wait on that.

Okay. Again, we are not going to break out the individual sales. But, I think, a good part of this could be a mismatch between the advertising and the promotional activity behind it, and the sales. And I think we made a strategic decision during the quarter to promote ElixSure not only for what was out in the trade now and what we put out there in Q3 and Q4, but also looking at what's going to happen to us come next season, come Q4, Q1 of next year. And so there is a -- if you want to look at it this way, it’s a 100% mismatch because we are advertising now, so that we can continue to maintain distribution in the stores and that come next year, with the next season related to these products, we are looking for a big uptick into the stores again.

So, going back to Barrie's point earlier about Kerasal, it does take time to build these businesses and I think all of our advertising quite frankly is related to getting future sales. So, that’s really what we’re we focused on. We are looking at this for a little bit of a longer term than just this one season or just one quarter. So, we made a decision during the quarter to continue to advertise, continue to promote, (one) on looking at accelerating the pull-through at the store level but also looking a little bit further down the road and realizing that a better performance in the stores during this quarter is going to drive our sales, Q4, Q1 of next year as well.

Staying on that question, if I can, obviously you included the advertising I believe in the SG&A portion of your model. Can you give us a sense of sort of the SG&A expectations over the balance of the year?

This is Kevin, and I just want to say one word. I think that while we are in the midst of this initial promotional effort or campaign, I would like to able to answer that question if we could but I don’t think we want to tell our competitors when and where we are going to attack and with how much force because it's going to -- it will allow them to respond and preempt some of you efforts. So, while I think, I can understand where the question is coming from, there is a desire to try to figure out how much expenditure’s going into which quarter as you go forward into Q2, Q3 and Q4 and maybe Q1 of next year, I think that question had best remain unanswered for the reason that I stated.

Barrie, I think what I was trying to get to is you build up your sales force quite materially which I would view as more permanent in the expense structure. I am trying to get a better feel for how much of the SG&A expense is likely to be booked permanent.

It is likely to be --

Permanent, more embedded internal --.

Well, Kevin you want to.

Well I think you're right, I mean we talked about the fact that we now have 70 people in our TaroPharma division and you know, you can run some numbers as to what that’s going to cost the company to support a sales force of that size going on dermatologists and pediatricians and promoting our products, so that is definitely permanent. We are committed to that, we’re pleased with the performance of that unit and that group, there is leverage inherent in that group because we can add new products to that expense base and I think we’re going to see some nice return on that as we continue to grow the prescriptions of all the molecules in there, and as we add new molecules. So that part of the model is permanent on those -- on that investment of about 70 people or so, that will be there.

Kerasal, what we’re seeing with Kerasal quite frankly, Arnie, is that it’s not as seasonal as we may have originally expected. The sales so far are looking real good, so I think we’re going to continue to pursue the advertising on Kerasal and that also should be at this point in time relatively steady-state. I don’t think we’re going to see too much seasonality in the advertising in Kerasal and quite frankly the Kerasal advertising we may, depending on whether we’re launching a new product, would go up and down just a little bit and I think we should also point that we recently just launched a line extension of the Kerasal product where we launched the Kerasal AL creme and that’s also doing very well. So there is a little bit advertising behind that.

The one variable on that and the one that I’m not answering even though have danced around a little bit is obviously the investment in ElixSure and so, based on the other two factors that I gave you, you can make an estimate as to where the ElixSure advertising was for the quarter. And again there’ll be some seasonality associated with the product in advertising but it also does depend on new approvals and new launches associated with the ElixSure product line. I think Barrie mentioned in his talk that we are continuing to invest not only in marketing but also in R&D. So there are a number of other products that may be coming out using the -- NonSpil vehicle and that also may impact to some extent the timing of some of the promotional activity.

I would like to add one thing for everybody. Even though Elli had asked the question; not every product in the ElixSure vehicle requires regulatory approval. So you can't just count the number of NDAs we have and then figure out how many products we are going to launch because as (sic) some products don’t require FDA approval. So, I just wanted to make that point.

Okay.

Thank you. Our next question comes from Richard Watson from William Blair. This will be the last question.

Hi, just kind of following up a little bit on the last question, with bearing in mind that you sort of have this fixed costs of the sales force and I think people understand that you are spending some dollars upfront, on the ElixSure rollout, is, you know, in-licensing of products that would allow you to gain more operating leverage from your sales force in a more immediate sense, is that something we should be thinking about and potentially modeling that there could be -- there's activity there and if there is, could you in some way maybe characterize what areas you might be looking in and how imminently we could potentially see something there? And I just had a follow-up on the base business. Thanks.

I'll just say that, first of all, the areas in which we would be looking at in licensing products are in the areas of pediatrics and dermatology, which is the -- those are the two foci of our current sales force and I’m not talking about a horizon of 2 to 3 years because if some of the neurology products come into focus then obviously the Company’s direction may change a little bit or may change a lot.

We are in continuous discussions with a number of companies about in-licensing products, companies all over the world where those -- where the investments in such in-licensing is material, we are going to disclose it promptly. There are some arrangements which we -- where the product is so small or the cost is so small that we will just disclose it during our quarterly press releases. But we are -- we have a disclosure committee in all of these. Every time we do business deal, it goes through disclosure committee. We like to err on the side of disclosing these kinds of things early.

Just to summarize, there are discussions going on. They, of course, have been going on all the time and there are a number of things on the table and as soon as the Company -- and of course, as you know, it takes two to tango. We may want to license the product; somebody else has to want to license it to us. So when we come to an agreement and if it's material, we are going to announce it promptly, but yes we are anxious to leverage the sales force. We believe if we can add revenue without adding expense that there is a lot of economics sense behind it. We are not too proud to say that other people also have good science, good research, and good products and if they want to find a way to collaborate with us we are happy to collaborate with them.

Great and if I could just a quick follow up, can you maybe just comment on the mix of the, sort of, generic products in the base business -- the mix and then maybe the wholesaler buying patterns, and what impact that might have had, if any, on operating margins during the quarter?

Sure, I mean, we mentioned there is a slight change in mix, and that’s typical for us over the course of the quarter and quarter-on-quarter. So, a slight change in mix there, nothing that dramatic. On the buying patterns of our customers, we do sell obviously to the big three; Cardinal, McKesson (ph.), and ABC. And quite frankly their sales are normally, they make a big quarterly buy. They make that buy late in the quarter. And that has been typical for us for a number of years now. So, there was really no change in the typical buying patterns that we have seen. But it should be pointed out that most of those sales from the wholesalers do take place late in the quarter.

Okay. Great. Thank you.

Thank you. I will now turn the conference back to Mr. Saks to conclude.

Thank you very much for joining us on today's call. We will be available throughout the day for any additional questions. And we look forward to speaking with you again in coming quarters. Thank you very much.

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