Taro Pharmaceutical Industries Ltd (TARO) 2005 Q3 法說會逐字稿

Good morning. And welcome, ladies and gentlemen, to the Taro third quarter 2005 conference call. [OPERATOR INSTRUCTIONS]. This recording will be archived and can be heard at any time following this call through November 25, 2005. To hear the archived call, log onto www.Taro.com and click the link on the home page, or telephone 1.888.286.8010 for the U.S., 617.801.6888 international and providing the pass code of 69447933 when prompted. 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 the Private Securities Litigation Reform Act of 1995. These statements include, but are not limited, to statements that do not describe historical facts, statements that include the words hope, will, believe, suggest, anticipate, expect, plan, intend or design, to happen or exist or similar language. Statements concerning the Company's sales and profitability, the impact of strategic initiatives, customer inventory levels, cost reduction, studies of Ovide and T-2000, recently approved products, the market's environment, the market size of the Company's pipeline, although the company believes that such statements are based on reasonable assumptions and reliable sources it has no assurance thereof.

Factors that could cause actual results to differ include general economic conditions, industry and market conditions, changes in buying patterns by any of the Company's customers, regulatory actions, and legislative actions in the country 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, and the Company's SEC reports including its annual reports on form 20-F.

On -- on an ongoing basis the Company reviews its estimates, includes those related to reserves for customer chargebacks, bad debts, income tax and contingencies. The Company bases its estimates on currently available information, historical experience, and various other assumptions that is believed to be reasonable under circumstances prevailing from time to time. The results of these assumptions are the basis for determining the carrying values, and assets and liabilities that are not readily apparent from other sources.

Since the factors underlining these assumptions are subject to change over time, the estimates on which they are based and subject to change accordingly. Forward-looking statements speak only as of the date on which they are made. The Company undertakes no obligation to update, change, revise any forward-looking statements whether as a result of new information, additional or subsequent developments or otherwise.

I would now like to turn the call over to Mr. Daniel Saks of Taro Pharmaceutical Industries limited. You may proceed, sir.

Thank you, Audrey. And good morning to listeners on the Taro conference call. On the call today are Dr. Barrie Levitt, Chairman of Taro Pharmaceutical Industries and Kevin Connelly our Chief Financial Officer. After some brief remarks, Barrie, Kevin and I will open the call to questions.

And to begin we'll turn the call over to Dr. Levitt.

Thank you, Dan. Good morning and thank you all for joining us on this conference call. Following my remarks, Kevin will discuss the details of the Company's financial performance and accounting during the quarter and year-to-date.

Our results for the third quarter reflect the intensifying competition that we are encountering in the generic drug market in the United States. In the third quarter of 2005, Taro continued to move forward toward its goals in research, marketing and manufacturing facilities.

In research, both generic and proprietary research projects are reaching important milestones critical to the Company's future. In marketing, both our generic and proprietary groups are making important progress in the United States, Canada and Israel which I will describe in a few moments. In manufacturing, we believe that Taro's capital expenditures of the past few years are providing the capacity needed to meet future market demands as products now in the pipeline reach commercialization.

I would like to review each of these areas in more detail. First, with respect to research. While we do not discuss the specifics of our generic pipeline, we believe it is robust and has the capacity to produce meaningful results. We have identified a number of generic products, the commercialization of which is critical to the Company's near term future. Several of these are already awaiting approval by regulatory authorities. Others are in the final stages of preparation to be filed with the Food and Drug Administration in the U.S. and with similar regulatory bodies in other countries.

In addition to these projects, we are developing a number of other products which we believe will make a substantial contribution to Taro's generic drug sales in the next several years. With respect to proprietary products, we are approaching definitive clinical studies to determine the safety and efficacy of two very important research initiatives.

The first of these involves Ovide, our safe and effective prescription treatment for head lice in the US. Since acquiring Ovide lotion in 2003, we have promoted it successfully to physicians and increased prescriptions for its use. We have now developed a novel formulation of Ovide, which we believe will maintain the same effectiveness as the lotion with a substantially shorter application time and greater ease of use.

We have completed Phase II studies on our new formulation and submitted the results to the U.S. food and drug administration. We are now initiating a multi-center randomized controlled Phase III study in the United States to evaluate of the safety and efficacy of this novel formulation of Ovide in both pediatric and adult subjects.

The second major research initiative is the continuing development of T-2000, one of our group of non-sedating barbiturate compounds. This compound is being developed as a treatment for essential tremor. Essential tremor is estimated to affect approximately 5 million people in the United States alone. We previously announced that following its review of Phase 1 and Phase II study on T-2000 the Canadian equivalent of the US FDA approved a multi-center, randomized, double blind placebo controlled Phase III study of T-2000 in patients with essential tremor.

Subsequent to that approval, we conducted an open label study of T-2000 which gave us further positive data on the effectiveness of the drug in essential tremor. To date, T-2000 has been administered to more than 160 people in Phase I and Phase II studies to evaluate the compound's safety and efficacy. Of course, with respect both to our novel formulation of Ovide and our non-sedating barbiturates there can be no assurance that any study will reach a successful conclusion or that either drug will receive regulatory approval or attain commercial success if and when it is approved.

In the commercial arena, Taro's marketing initiatives continue to make important progress. In the United States alone, prescriptions filled with Taro's products have increased to an all-time high. Prescriptions in the third quarter of 2005 are 3% higher than in the second quarter of 2005 and 8% higher than the third quarter of 2004. in Canada, prescriptions for the third quarter of 2005 have increased 29%, compared with the year ago quarter, reflecting the effectiveness of our marketing efforts.

Market forces are different, of course, in the generic and proprietary sides of our business, especially in the United States. Unlike the proprietary pharmaceutical market, which has evolved for more than 150 years, the generic market as we mow it started about two years ago with the passage of Hatch Waxman in 1984.

Today the generic market in the United States is undergoing a period of accelerated change presenting both challenges and opportunities. We are addressing the new generic environment by emphasizing more than ever the need to maximize the profitability of each unit sold, even if this sometimes requires that we forgo certain short term gains in volume and market share.

This means that when necessary we will build a product's market presence slowly. We will continue to grow our generic business by continuing to focus on quality, service, supply and profitability. The changing environment also provides opportunities. These include the Medicare Modernization Act which could increase the demand for generic and branded drugs as pharmaceutical coverage is extended to an increased segment of the U.S. population next year.

In addition, more than $100 billion of branded prescription products will lose patent protection during the next five years. As we go forward, it will be important for Taro to adjust its approach to sales and marketing to remain competitive in the changing generic drug environment. Taro's proprietary products are making an increasing contribution to the Company's overall performance in the United States, Canada and Israel.

In the United States, the Company launched Lustra Ultra this quarter, that is in the third quarter. An unique product for the treatment of dyschromia. This was one of a number of products which we in-licensed last year. And we believe that the launch of Lustra Ultra will enhance the entire Lustra product line.

The success of our proprietary products has resulted from their capacity to meet patient needs, and from the success of our sales and marketing efforts. Price competition has been less important in this arena. Therefore, an increasing emphasis on proprietary products is warranted. We are continuing both research and proprietary products and our in-licensing efforts to add to our branded product portfolio and bring new products to market.

Finally, with respect to facilities, capital expenditures during the quarter, during the third quarter, were less than in prior quarters. Capital expenditures during the last several years have provided the Company with modern, efficient, GMP-compliant manufacturing plants and research laboratories. The importance of these facilities is that the expanded capacity will enable us to meet demand that we anticipate for products, both generic and proprietary, with the commercialization of our pipeline.

Effective commercialization of new products requires preparation of manufacturing facilities in advance, having trained personnel to operate them, and the sales and marketing personnel to launch them in an expeditious manner. Over the last few years we've developed a team of scientific operating and commercial personnel who are equal to the task.

The plant capacity that we've already built permits the efficient conversion of raw materials into finished products. This capacity allows us to maintain lower levels of inventory overall, without compromising deliveries and service to customers. In addition, the utilization of modern technology employed in our facilities should permit lower unit costs in the future to enable us to compete in the new and changing environment.

In summary, we believe that we have the focussed research, the innovative marketing, the efficient manufacturing capacity and, most importantly, the right people needed to build a solid future for Taro in both the near and long-term. Thank you.

And I will now turn the call over to Kevin, who will provide more details about our third quarter results. Kevin?

Thank you, Barrie and good morning everyone. I'll review certain items related to the Company's performance in the third quarter of '05. Sales for the third quarter were $72.5 million compared with $73.3 million in the third quarter of 2004. A comparative note is that this year's third quarter sales did not include trade sells of Kerasal and ElixSure which were included in the year ago quarter.

In the third quarter, approximately 79% of our sales were in the United States, 13% were in Canada and the remaining 8% of our sales took place in Israel and international markets. Our gross profit for the third quarter was $37.7 million, compared to a gross profit of $42.5 million for the year ago quarter. Gross profit was influenced by price erosion, the mix of products sold and the continued strengthening of the Canadian dollar against the U.S. dollar.

It is important to note that the majority of the units that we sell in the United States are manufactured in Canada. In the third quarter, the value of the Canadian dollar was up 8% compared with a year ago.

SG&A expenses were 22.3 million in the third quarter of '05, compared with 29.6 million in the year ago quarter. And 23.3 million in the second quarter of '05. The year on year improvement reflects our ongoing efforts to reduce SG&A, since mid- '04 as well as the absence of expenses associated with our proprietary OTC product lines which were divested in the first quarter of this year. As a point of reference, SG&A in the first quarter of '04 was $34.1 million, almost 12 million higher than in the quarter we reported today.

Now we increased our investment in research and development to 11.7 million during the third quarter of this year, compared with 10.5 million a year ago. As Barrie explained, we continue to pursue critical products to support both our generic and branded initiatives. Approximately 75% of our R&D investment was directed toward our generic pipeline and the remainder was invested in our proprietary initiatives.

Our operating income was 3.7 million in the third quarter of '05, compared with operating income of 2.4 million in the same quarter a year ago. Despite the increase in operating income, our net income for the quarter was $2.1 million, or $0.07 per diluted share, compared to net income of $4 million or $0.14 per diluted share in the third quarter of '04 as we did not enjoy the same level of tax benefit this quarter that we did in the year ago quarter.

Now in March of '05 we reported that we had entered into a multi-year agreement to divest our over the counter ElixSure and Kerasal products in North America. Pursuant to the terms of the agreements, including the sale of inventories, the company received 10 million in cash in the first quarter. Now, among other matters, the agreements provide for additional payments to be made to Taro in each of the next three years. The Company accounted for the initials 10 million payment by recording the sale of inventories of approximately 4.9 million in the first quarter and deferring the remaining 5.1 million as well as all other revenues to be recognized during the ensuing three year contract period.

The Company has reconsidered the timing of revenue recognition or approximately 4.9 million in sales in the first quarter, and the Company revised the accounting treatment to allocate that portion and the cost of goods associated with those sales over the three-year contract period. This change did not have any effect on the Company's cash position.

This change will reduce revenue, cost of goods and net income in the first quarter of '05 by 4.8 million, 3 million and 1.2 million respectively, and allocate that change over the three-year contract period. In the second quarter, revenue was therefore increased by 0.4 million and net income by 100,000. The results of the third quarter and the nine months reflect these changes.

Now that we are three quarters into the year, it is worthwhile making some year-to-date comparisons between '05 and '04. For the nine months ended September 30th, sales increased 9% in '05, compared with '04. Operating income in '05 was $17.7 million, compared with an operating loss of $4.7 million last year. And net income in the first nine months of this career was 12.6 million or $0.42 per diluted share, compared with 6.3 million or $0.21 per diluted share in '04.

Now I'll touch on some items from the quarter end balance sheet. Cash, restricted deposits and long term investments stood at 103 million at the end of the third quarter, this represents a decrease of 22.2 million from year end. And a decrease of 900,000 from June 30th of '05 as the Company has funded its capital expansion programs and working capital requirements.

Trade accounts receivable at the end of the third quarter totaled 139.8 million compared with 139 million at the end of the second quarter. This increase was affected, among other things, by the strengthening of the Canadian dollar, our days sales outstanding reflecting our business model of selling the majority of our products at the end of each quarter, and our standard terms. We are continuously monitoring our receivables and engaging in active and intensive collection efforts and we are confident in the credit worthiness of our customers.

Regarding capital expenditures, approximately 8.6 million was invested in property, plant and equipment in the third quarter of '05. We believe that the capital investments we have made in recent years have given us the capacity to commercialize our pipeline, as well as the efficiencies we need to compete in the changing generic marketplace in the U.S.

In conclusion, although sales in the third quarter were lower than in the second quarter, we believe that the upward trend in the consumption of our products as indicated by third party prescription data suggests that customer inventories are being reduced and that the fundamentals of our company remain strong. In addition, we believe that our strategy of entering markets emphasizing profitability will produce long-term value for the Company. And Dan, let me turn it over to you and then I assume we'll take some questions.

Thank you, Kevin. I'd like to offer some additional background on Taro's research pipeline and review a few of our communication guidelines before taking your questions.

There are current 25 ANDA filings in Taro's pipeline at the FDA. Six of the filings are for topical products and 19 are for products utilizing oral and other dosage forms. According to industry sources, the current market value of the ANDA's in the pipeline remains more $1 billion. For the year-to-date we have received nine final approvals from the FDA, in addition on October 4th Taro received FDA approval of its new drug application for loratadine oral suspension. This product utilizes the non-spill liquid drug delivery system developed by Taro researchers.

I'll review three of our communications guidelines before opening the call to your questions. First, our policy is not to provide information on the sales environment, such as revenue and profitability of individual products. Nor do we talk about individual customers. This policy maintains fairness for our customers and preserves the confidentiality of competitive information, second, again for competitive reasons we do not disclose the products filed with the FDA, and, third, Taro's policy throughout the years has been to avoid providing financial guidance or comment on analyst's estimates.

There are several reasons for this policy. Taro's growth is to a large extent dependent on product approvals received from the FDA and other regulatory agencies. We do not know when these approvals will be received. In addition, we do not know when competing companies will receive regulatory approvals. Therefore we cannot predict the competitive environment and pricing levels for current and future products.

We cannot predict the impact of consolidation among our competitors, or customers. We cannot predict the purchasing patterns and future inventory planning of our future customers and finally we cannot predict the impact of the changing regulatory environment.

Now with that, we will be happy to respond to your questions. Audrey, we'll start the question and answer session.

[OPERATOR INSTRUCTIONS]. Our first question will come from the line of Gregg Gilbert with Merrill Lynch. Please proceed.

Thanks. I have a few questions. Your press release and your statements indicate that prescription data supports that customers reduced inventories, and I would point out that that is a conclusion that someone who does not work at Taro could make.

So I was wondering if you could talk specifically about what is going on with your wholesalers and retailers broadly. Certainly you have some color that you could provide. You know, you have more information than we do. Perhaps you could start with where you think trade inventories are now versus what is normal versus where they were at the end of last quarter. Certainly we have to have some more input besides just pointing out that TRX's are growing.

All right. I thought you had several questions Gregg. I did not realize that you were going to --

I'll take them one at a time.

Where do we think they are? Basically we know they are down. It is difficult to get a handle on where exactly the level of inventory is. But we do know from looking at the data that there is definitely less out in the customers than there were at the end of June. I mean, we know from what we sell in, versus what the script data shows that there has definitely been a reduction in the overall inventory levels of our customers. As to exactly what is normal, it is difficult to predict at this point in time because of the fact that the script number keeps growing -- growing overall.

So what was normal at the end of last quarter hopefully means that they will require more when they get back to a normalized buying pattern, because the script datas indicate that the demand has increased. And so what exactly is the normal level? I don't have total insight into their inventory levels at this point in time. But we know that those levels are definitely reduced from where they were at the end of June.

Kevin, could you give us some relative sense of the size of each factor in terms of the revenue erosion sequentially roughly what portion was what you think is wholesaler/retailer reduction in inventory versus pricing erosion and share loss? Any general sense of that sequentially?

Yeah. Absolutely. Just put them in order of importance. Definitely the -- the volume, the purchasing from the -- from the customers was the major contributor to the sequential decline in sales. And -- and just rough numbers, if I was going to estimate, I would say probably two-thirds of the impact came from a reduction in purchasing from our customers. Some of it had to do, obviously, with erosion. And also to some extent the mix of the products purchased. And so in order of importance, it definitely was the buying patterns of our customers that had the biggest impact on the quarter.

Kevin, you mentioned DSO's are impacted for you based on your model, in part based on late quarter purchases, have you tried to adjust that to present a DSO that you think is more indicative of -- or more comparable to other companies? Do you have -- all the short term or long term goals in your DSO's, however you define them?

Well, I -- I don't think they will ever be as low as some of our peers, again more because of the business model that we have and our standard terms to some of those customers. Would we like to have more cash? Absolutely. That goes without saying. And to some extent we are working with some of the customers to change to some extent maybe that quarterly buying pattern of one time and hopefully get a more regular buying pattern.

But because of the nature of our business, the fact that we have relatively low volume products, it is still logistically easier for us, and for the customers, to come in and buy a case a quarter as opposed to a tube a week. So I don't know if we'll ever be able to break out 100% from that concentrated buying pattern within the quarter.

The one thing that we could do is try and move that up a little bit so that it doesn't take place in -- as late in the quarter as it does now, so that hopefully we could reflect some better DSO's quarter-over-quarter.

And lastly, a strategic question for Barrie. In addition to what sounds like an acceleration in your proprietary efforts internally and externally, are you considering any external strategic alternatives for either the Company or the generic business at this point? It sounds like you think there's been a major change in that environment recently. Thanks.

There is a change in the environment. And I think that it's very important for us to change with the environment. I think that our strategy is basically more a look to the future than a look at the past. We would like to focus on the critical products in research, both generic and proprietary, that are really going to make a difference. And we believe that we are on the right path to bringing some of those critical products to market.

I -- I admit that I can't guarantee success, I don't think anyone can. But within the limits of what I know, I believe that we've got the right products in the generic pipeline, and I think we have some very important products in the proprietary pipeline. And I'm not talking about the small ones. When we talk about T-2000 we're talking about a product that could change the entire face of the company, the entire character of the company. And make a very significant contribution to therapeutics.

So I think that the strategy is to stick to our knitting, to strict to prescription drugs, to strict to our research and to make sure that we hit our milestones and that we perform the way at that we would all like to perform, in the ways that others would like to have us perform.

So the answer is, no, you're not exploring external options at this point for either a merger or some other major move on the generic side; it's sticking to your knitting and doing what you've been doing. Is that correct?

I don't think I could say any more than I did, Gregg.

Thanks.

Our next question will come from the line of Elliot Wilbur with CIBC World Markets. Please proceed.

Thanks. I have several questions as well. Let me just state up front that Barrie I have a tremendous amount of respect for you, management team at Taro and all of the Company's accomplishments over the years and so my intent is not to kick you when you are down or be an armchair quarterback but I want to -- want to put a tough question to you, you talked about making a lot of strategic and capital investment decisions in the last couple of years to remain competitive or maintain your competitive advantage and, I guess my question is, can you do that or has the environment changed to such an extent that, that Taro is no longer a leading competitor in the topical space?

And I guess the question also has to do with, you know, the competitive environment. I mean every $50 million topical product we see approved, Tavastal, Clay - Park and Fougera now are backed by partners with significantly greater financial resources than you guys have and I just wonder how do you regain your competitive edge or advantage in the topical space?

Well, I think it is a tough question. But it is a good question. We're not -- I don't think we're focused on just the topical space.

I think that we're still either number one or number two in topical generic products in the United States. I think that I have great -- not I think. I know that I have great confidence in the ability of our scientists to perform. And I think at the end of the day, it's not just the amount of money you throw at a project but the quality of the people. The quality of what they are working on. The intellectual property that you develop that makes the difference. We believe that our pipeline is very good. We have tremendous confidence in it.

As I said before, I can't guarantee results, I cannot even guarantee results about a new drug after it is approved. But within the limits of what is reasonable, I think that we have an outstanding pipeline, both generic and proprietary, and that includes proprietary topical products. Dermatology is an area of great interest to our company, and we believe it is an area where we can grow.

However, besides dermatology, I do not know where Ovide is dermatology or pediatrics or pediatric dermatology or you can put it where you want, but both specialties deal with it, and when we talk about products like T-2000, if T-2000 achieves what we expect from it it will transform our company into a completely different company. And I think that have you to take into account that we're not at the very beginning of the T-2000 saga. 165 patients have already gotten the drug. We've already done Phase II studies.

And we believe, obviously T-2000 and drugs like it can be used for any one of a number of indications, and we have patents for neuroprotection and the animal data is certainly exciting, we have data on epilepsy and seizures and the animal data is certainly exciting. But we feel, and the basis of the clinical studies that we've done that essential tremor is the place where we can do the most good in the shortest amount of time. And we do believe that we have the knowledge, we have the expertise and the funding to carry through the -- the essential tremor program.

Okay. Then I wanted to ask two -- two follow-up questions as well. Just maybe a segue. You've made some comments on the R&D pipeline and I wanted to try to delve into that a little more.

If I look back to 1Q '04 you guys had roughly 31 ANDAs pending and it's basically gone down every quarter since then. Obviously, some of that has to do with the approval activity, but we've also seen a pretty significant ramp-up in R&D spend and the mix of products in the pipeline has now switched from roughly two-thirds topicals to two-thirds solid dose and if I guess -- if I map out the competitive landscape or thinking about the productions that could be approved in the next to two to three years and then some of the things maybe a little bit more out there on the horizon I mean, I can think of a dozen or so topicals that seem to be very attractive targets for the Company that, for whatever reason at this point, don't necessarily seem to be in the pipeline.

And I'm just wondering maybe is it just -- is this just the trends in the business that have sort of resulted in the pipeline mix being what it is today, or is this more of a -- a strategic or conscious decision on the Company to devote more R&D investment and time and attention towards the solid dose side?

Well, I think -- let's try to get the definition of pipeline correct. When you talk about pipeline, you're referring to the number of abbreviated drug applications.

Strictly your generic pipeline, yes.

Yes. But you're talking about drugs on file at the FDA. There is a dynamic change or a dynamic equilibrium associated with the number of drugs that are filed and the number of drugs that are approved. Now unfortunately we had five drugs approved this quarter. So the number of drugs in the pipeline went down. But in the fourth quarter, we haven't finished filing.

So I think that you -- we have to -- when we look at the pipeline, we have to look at the products we're working on that are not yet at the FDA or are going to be at the FDA in a month or two or three. So that when we talk about our pipeline, we're talking about a broader range of products than what you're referring to, which is a very narrow range of products in that the one -- those are the ones that are filed.

And in terms of the R&D spend, some of the products to which you allude, I assume -- and I'm not going to comment on specific products, but they require -- the products I think you're talking about require clinical studies and clinical studies take longer and they cost money. And so I don't think that you can draw an assumption that we're not working on one or another particular project.

We're going to pick projects and we're picking projects where we think we bring something to the party where, at the end of the day, we will be able to have some lasting impacts on the bottom line from the product, as opposed to picking a product which is either impossible to accomplish, where the clinical testing is impossible, and I -- and I can think of a few like that, and those are products that we're going to shy away from, or where we think there are going to be so many people in the product that the return on investment starts to become very small.

So I -- I don't think that you can predict -- the short answer is that you cannot predict from the number of topical ANDA's that are currently at the FDA, you cannot predict that we're not working on topical products. I said before that dermatology is a focus for us, both proprietary and generic. We do have expertise in this area. We have facilities with the capacities to produce topical product.

And I think it would be wrong to assume that we're not going to continue to be a competitor in the topical arena, because we are going to trial to remain an important competitor in the topical arena.

Okay. Thank you, Barrie. And let me just ask one final question here please on the -- just maybe to follow-up on Gregg's line of inquiry on the wholesaler issue. I mean, what can you guys do to stop, for lack of a better term, being victimized by the wholesalers at the end of every quarter?

I can think of two things, you enter IMAs or DSAs with these guys so that you pay dollars and have much better visibility with what they have on the shelf with respect to your products, which is what a lot of the companies on the brand side and the engineering side have done, or number two you try to alter your business mix and do more direct negotiation with the chains so you don't have sort of the customers with the incentives to, investment buy constituting a majority of your business.

Let me -- let me -- let me start and then I'll let Kevin finish. I don't think we're being victimized. I guess that, each customer does what they think is in their best interests, which is to be expected. I think that the ultimate focus here is that we need to develop programs that evolve with the market place. Obviously the most important thing for any company, and specifically for us, is to have prescriptions filled with products manufactured by us. That is the ultimate target.

And we have to align our supply arrangement, be it with wholesalers, be it with chains, be it with distributors, or be it with integrated healthcare that allows our products to move through to the ultimate consumer: the patient that is getting his or her prescription filled.

And so going forward, we are going to have to evolve to arrangements and models that make the most sense for us, and each of these individual types of customers who do not all -- not each customer has the same business model, they obviously have different business models, and we have to evolve with them and it is going to be incumbent for us in the near term to get to win-win relationships with all of our customers. And eliminate the perception to us and to others that we're being victimized.

I think that we've got to get our relationships organized, and maybe some of the things that you just mentioned are -- are reasonable approaches. But there are others as well. To align our interests with those of the customers so that we get a more smooth operating curve, and not these jerks -- jerking motions up and down which apparently are -- are disturbing to people.

Kevin, do you want to -- I do not know if I've said it right.

Actually I would just like to start off by thanking Elliott for his kind remarks as he -- he started his questions. But I -- I do think that one point that we should make, Elliot, is that we are focusing on landing more third party contracts which may pull through the wholesalers but are not dependant so much on what the wholesaler decides to do at his end. I think we've been somewhat successful on that.

I think there was a recent announcement on some of our products being landed at the VA, and business like that is going to help reduce the variability in the wholesaler buying pattern because these customers are just going to pull through on a relatively steady basis and we may not be as dependent on the wholesaler model of selling out to their customers directly. We will get our customers, land them through third party contracts and hopefully that will help to smooth out the business model to a large extent, and as I mentioned, that VA contract is a start in that direction.

And our next question will come from the line of Arnie Ursaner with CJS Securities. Please proceed.

Good morning. The first question I have is for Kevin. I'm trying to go through a little bit of the math here on the Canadian dollar, Kevin. My math says that the Canadian dollar dropped from 1.24 to 1.16, you do about two-thirds of your production there, about 36 million of cogs, if my math is right, it should have a negative impact on the quarter of about $2 million? Can you comment on that, please?

You're pretty good. No, I -- I think actually that -- that -- you're correct in that we do about two-thirds of our production up in Canada and, yes, the impact of the Canadian dollar has been somewhat significant quarter-over-quarter and year-over-year. And, the -- the $2 million impact, very rough numbers on your part, but that would -- that would to some extent bring that margin back up to where we were in some prior quarters.

Longer term, we really do believe that the U.S. dollar is going to be one of the strongest currencies out there, and we still think that we benefit to some extent by having our production offshore, whether it is in Israel or in -- in Canada. And that we do have some lower cost production models.

However, we are subject to some extent to some of these currency fluctuations and you're right in that 1.24 and 1.16 at the end of this quarter, also, unfortunately for us, about two years ago the Canadian dollar was as high as 1.60 to one U.S. dollar and so you can really see a dramatic change from 1.60 back in 2003-2004 to what is now 1.16. And so we -- we definitely have suffered a bit on the margin because of the currency fluctuation.

Also the other question that I have are for Barrie and I guess I've been involved with you guys for a long time and over a decade you've been research driven. I guess the question I have is you are getting probably the best number of approvals you've had in quite a while, but I think perhaps you could comment on the state of the market, are any more of these first to market with authorized generics are you even getting any pipeline sell? Is there a change in international competition?

Can you comment a little more about what is happening when you do get your products approved, whether you are getting the returns that you had even hoped to get when you conducted the -- when you conducted the research?

Well, first of all I think that the -- well, first of all I think that the five approvals that we did get is a kind of a confirmation on the part of the third party, namely the United States Food and Drug Administration about the quality of our research and the quality of our facilities and the fact that we do dot the I's and cross the T's at all of our manufacturing facilities.

I -- I think that it's clear to anyone that obviously authorized generics have made a difference because instead of being all alone, if an authorized generic enters the market then there is automatically now two generics and that has been a problem for us with certain products and so it's just a fact of life and so as we choose our critical products going forward, we take that into account, that there has been a change. And clearly, if we are able to bring to market the critical products that are in our pipeline, we will change the nature of Taro's position in the market. I think that this is all about competition and research which I think is a -- basically healthy thing. In other words, our research versus other's research. At the end of the day, it ends up being to the good of the country as a whole.

So I -- I am very confident at that we are going to be able to -- to operate, to act, to research the milestones that are critical to the research programs. I can't guarantee at the end that a drug is going to be a success. But I can guarantee that we're going to make every effort to utilize efficiency in research, to spend the money wisely, to have and keep the best scientists that we can so that the products in our pipeline really make a difference.

I guess going right down that path though, if you are spending 7 5% of your R&D on generics and the dynamic of the market has changed to where every generic you go out with will have an authorized generic from the start taking away from your profitability, is that a reasonable approach for your R&D spend?

Well, you're referring what we spent in the past. And we're talking about the future. As the -- the proprietary drugs move forward, they are -- there is probably going to be a shift in the way resources are allocated. I don't think that we have to assume -- and I think if we look at the -- at the marketplace, not every drug has an authorized generic. And we try to -- we try to be as careful as we can in selecting products. And I think the products we selected have a -- again, this is belief, but I believe that those products have a -- a good chance of success in the marketplace in any event, that they'll give a good account of themselves if and when they're approved.

One more question if I could. I know you've said a couple of times you can't guarantee the success of any product but one thing I'm sure that you can be very certain of is the cost of the R&D to get these products to market. Can you give us a little bit of a feel, your R&D spending in dollars has gone up. Obviously as a percent of sales its gone up even more. Can you give us a little feel for what your R&D spend is likely to look like for the next four to six quarters, and also comment on the minimum length of studies that would be required before we could see any approval process towards the drugs you have, the proprietary drugs you have?

Well, you know, unfortunately or fortunately the amount of money you spend, especially in a new drug program is a function of the efficacy of the drug and the results you get in the studies and so it's very difficult. Of course we have budgets but I'm not sure that -- that I can provide a meaningful information.

Drugs that are very effective require much smaller studies than drugs that are marginally effective which require much larger studies. With respect to timing, I'm not sure how long the Ovide study, the Phase III study that we I believe are going to be beginning in the very beginning of next year, how long that will take.

It's a question of how many -- what the speed of recruitment of patients is, and the -- how effective the centers are. I can remember from my days working at a certain government agency that many investigators promise a lot and they don't always deliver what they promise and so you're really, to a very significant extent at the mercy of the investigators when you start a multi-center study.

However in the case of Ovide we're talking about a relatively short term treatment so that the major factor is going to be enrollment and the prevalence of -- of pediculosis at the beginning of next year. The more lice there is in the southern part of the United States, the easier it is going to be for us to get the study done even though I believe the study includes even centers in New York. So it -- it depends on where they are.

With respect to T-2000, I think we're talking about longer term studies, but I think that we will all be in a much better position to understand what the context is from a time perspective after we get our next study completed. In that case, we will sort of have a better feel for what the -- the degree of improvement, the number of patients required to demonstrate efficacy and safety. And so I think it's premature to make a projection about T-2000 until we've been in some -- at least one larger study than the Phase II studies that we've completed. So I think it would be wrong to predict without that -- the next study being completed.

Would it be fair to say it's almost impossible for it to have any financial impact prior to '07?

On T-2000 I would agree with you.

Thank you.

Ladies and gentlemen, we have time for one last question. And it will come from the line of David Risk with Halpern Capital. Please proceed.

Hi, I'd like to know what your plans are with respect to publication of the Phase II data for T-2000 and if you do plan to publish it, will it include data from the most recent open-label study?

I think that's a good question. With respect to the publication of the results of our Phase II studies, as a scientist, I think that it's very important to make available to the scientific community data that suggests the effectiveness of a new drug in treating a disease for which there's really no good treatment available. And I think all of us are in favor of making this data available. However, I think it's appropriate to do it in the right scientific forum.

And I hope that this data will be -- become available in an appropriate scientific forum in the not-too-distant future. So the answer to the question is, yes, we would like to see the data published. Yes, we think it is important that it be published on purely scientific grounds and as soon as we have some information on this, we will make some kind of announcement, some kind of public announcement.

Okay. Thank you.

Ladies and gentlemen and gentlemen, this does conclude your Q and A portion of the call. As a reminder, this recording will be archived and can be heard at any time following the call through November 25th, 2005. To hear the archived call, log in to www.Taro.com and click the link on the home page or telephone 1.888.286.8010 in the United States or 617.801.6888 from overseas. When prompted to enter pass code 69447933 to request the Taro's call. I would now like to turn it back over to Management for closing remarks.

We want to thank you very much for participating in today's call. And we look forward to our next call with you. Thank you.

Ladies and gentlemen, this does conclude your presentation. At this time, you may disconnect and have a wonderful day.