Taro Pharmaceutical Industries Ltd (TARO) 2015 Q4 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the Taro Pharmaceuticals' year-end 2014/2015 earnings conference call. As a reminder, for the duration of this conference, all participant lines will be in a listen-only mode, and there will be an opportunity for you to ask questions at the end of today's presentation (Operator Instructions). Please note that this conference is being recorded.

I would now like to turn the conference call over to Mr. William Coote. Mr. Coote, please go ahead.

Thank you. Good morning, everyone. And welcome to our fiscal year-end 2015 earnings call. Joining me today on the call are Mr. Dilip Shanghvi, Chairman of Taro's Board of Directors; Mr. Kal Sundaram, Taro's CEO; and Mr. Michael Kalb, Group Vice President and CFO of Taro.

We hope you received a copy of the earnings release, which can be found on our website at www.Taro.com. We anticipate that many of you may have questions concerning not only this quarter's and year-end financial performance, but also our markets, operations, strategies, and other matters.

We have scheduled this call for one hour, so, as time permits, we will take your questions. However, we ask that you restrict yourself to one question, and as you have more questions, please rejoin the queue. As a reminder, this call is being recorded and a replay will be made available on our website for the next 10 days. A call transcript will also be placed and remain on our website.

Before we proceed, I must remind you that today's discussion may include certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Although the Company believes the expectations reflected in such forward-looking statements to be based on reasonable assumptions, it can give no assurances that its expectations will be attained, and should be viewed in conjunction with the risks that our business faces, as detailed from time to time in the Company's SEC reports.

I will now turn the call over to Mr. Dilip Shanghvi.

Thank you, Bill. Welcome all of you and thank you for joining us today for Taro's earnings call after the announcement of Taro's fourth-quarter and full-year fiscal 2015 financial results. This is the second earnings call that Taro is conducting in its effort to interact with shareholders. And while we will try to respond to most of your queries, we will not be able to share product-specific and commercially-sensitive information, including pipeline details.

I am pleased with Taro's performance and progress made to date, and congratulate the Taro team for this achievement. However, we will continue to focus on the challenges ahead of improving the performance and to maintain sustainable profitability. Taro's current R&D pipeline of 35 NDA's awaiting approval is much higher than at the end of 2010 when [Shawn] acquired Taro. We will target to continue enhancing the pipeline in future as well.

Taro's cash balance of over $900 million gives us an opportunity to evaluate business development with appropriate targets. However, asset prices in the generic industry continue to be high, implying that we will have to remain disciplined in our approach for deploying this cash, keeping long-term shareholder value in mind.

I would like to turn the call over to Kal Sundaram.

Thank you, Mr. Shanghvi. Welcome, everyone, and thank you for joining us today.

During the last call, I highlighted several significant accomplishments over four years. In 2014/2015, we accomplished a few more. According to IMS data, Taro continues to be the number one genetic dermatology company in the US in terms of sales, as it has for the past four years. The US continues to be the major market for us.

Our key financial metrics continue to show a healthy growth. Taro has successfully rolled out a patient assistance program in an effort to provide medication to qualifying individuals. These programs aim to provide needy individuals with access to some of our medications. We successfully navigated the key customer consolidations which took place this year. However, this will continue to be a challenge as we move forward.

As a result of these consolidations, we have experienced pricing pressures. We are pleased to present this quarter results and with the consistent progress we have made. Taro's sales and earnings growth is attributable to the prudent lifecycle management support product portfolio. While the overall volumes remain relatively constant, volumes of our US generics have experienced a slight decline. Thus, we remain cautious about the long-term sustainability of these prices.

I now hand over the floor to Mike Kalb for further discussion on the financial performance. Mike?

Thank you, Kal. Hello, everyone, and welcome. We are pleased with our fourth-quarter and full-year results. The comparisons that I'll discuss are all with the comparable prior-year periods. I will first discuss the Q4 highlights, followed by the full-year highlights.

Q4 net sales were [$234.2 million], up $57 million or 30.5%, as we continue to realize the benefits of previous price adjustments. Overall volumes are relatively flat. Gross profit increased 41% to $200 million, resulting in a 630 basis point expansion in gross margins to 82%. R&D expenses increased $11 million or 81% over last year's comparable quarter, as a percentage of net sales were 9.8%. Our R&D spending is not evenly distributed across quarters.

SG&A expenses of $22 million were $4.4 million lower, and as a percentage of net sales, were 9.1% versus 14.2% in Q4 last year. As a result of the above, Q4 EBITDA grew 49% to $52 million quarter-over-quarter to $157 million. EBITDA margins improved to 65% as compared to 57% for Q4 last year.

Net income was positively impacted by foreign exchange income of $32.5 million compared to $3.9 million or a $28.6 million increase over Q4 of last year, the result of favorable currency fluctuations, particularly the US dollar to Canadian dollar exchange rate. I'll touch on the FX comparisons in a minute. Net income increased 70% to $152 million, driven mainly by topline growth and the positive impact from foreign exchange, offset by increased R&D and income tax expenses. Earnings-per-share for the quarter was $3.56 compared to $2.10 for Q4 last year.

Let me now briefly discuss the full-year performance. For the year, net sales were up 14% to $863 million compared to $759 million. Gross profits increased 16.7% to $677 million or gross margins increased 200 basis points or 17% to 78.4%. R&D expenses increased $10 million to $66 million as we continue to invest in building a strong pipeline of quality products. Selling, marketing, general and administrative expenses decreased by $4.1 million.

As a result of the above, EBITDA for 2014/2015 grew 22% or $97 million year-on-year to $543 million. EBITDA margins improved to 63% as compared to 59% last year. Net income was favorably impacted by FX income of $41.6 million compared to $7.1 million or a $34.5 million increase over last year. As I previously stated, this reflects the favorable impact primarily from the strength of the US dollar versus the Canadian dollar, both for the quarter and full-year, coupled with an increase in US dollar-denominated intercompany balances and bank accounts.

For the quarter comparison, the average FX rate for Q4 2014 was 1.0976 versus 1.237 for Q4 of 2015. For the full-year comparison, the average FX rate for 2014 was 1.0552 versus 1.11438 for 2015. The income tax rate was 16.5% versus 18.6% last year. Net income for the year increased 34% or $124 million to $484 million, resulting in earnings-per-share of $11.31 compared to $8.14 last year.

While our overall volumes slightly declined year-over-year, the level of both cost of goods and SG&A reflect a modest benefit due to the strengthening of the US dollar and the cost efficiencies realized, as we continue to actively manage and remain disciplined with our spending. Our cash flows and balance sheet remains strong, with cash, including marketable securities, increasing $288 million to $920 million for March 31, 2014. Cash from operations was $407 million.

I will now hand the floor back to Kal.

Thanks, Mike. While we are pleased to -- with our quarter [four] and full-year results and the success we have achieved in executing our business plans, we remain cautious over ever-increasing pressure on business from strong competition, the continued consolidation of our major customers, which creates major buying alliances, and in general, the industry consolidation.

We have begun to experience the impact of these factors on their product price and therefore our profitability. However, we continue to pursue the initiatives that will strengthen our long-term business model and keep us well-positioned for the future. We continue to focus on R&D and building a quality pipeline.

During the quarter, we applied to file [five] ANDAs with the FDA, and year-to-date, we have filed 11 ANDAs and we have received three approvals during the year from FDA. Taro also -- Taro has ANDAs representing [35] products and one NDA waiting to be approved. And [51] BMFs filed with their [DSO partner]. We have increased our R&D output and the process through improving product selection and seeing productivity to build a quality portfolio for Taro.

Our year-over-year increase of $10 million in R&D investment demonstrates our commitment to growing our pipeline of quality products. We expect to continue to spend significantly on R&D in order to further improve and grow our pipeline of quality products in order to maintain competitiveness in a highly competitive market.

We continue our business development efforts to seek growth opportunities, whether it is through organic growth, acquisition, or strategic alliances such as goal promotion or core development opportunities. However, we remain disciplined in our evaluation of all these opportunities to ensure we are creating long-term shareholder value. We continue to manage our costs and driving operating efficiencies in the organization.

Before we move on to your questions, I'd like to thank Taro management team and all employees for another successful year, and the continuing outstanding efforts to successfully move the company forward.

With this, I'd like to open the floor for questions. Thank you.

(Operator Instructions) Greg Gilbert, Deutsche Bank.

My question -- I have a two-part question. One, can you give us a sense of what kinds of products are in your ANDA pipeline? And the second part is on the pricing pressures that you are seeing, are those new? (technical difficulty) And are they based on new terms with the wholesale or retail or buyer groups or some other new competitive threats that we were not seeing last year? Thanks.

Given our focus on dermatology, pretty much -- I'd say the majority of our pipeline continues to be dermatological products. We also have private label liquid policy products. We have some of those. So, largely, in terms of portfolio, it is more expanding the range of products we continue to offer to the market.

Then, moving on to your next question of what is your pricing pressure that's in the consolidation. I think these sort of things are happening on both fronts. It's not only products if you look at all the generic companies. This pressure is being experienced today by everyone. So, a consolidation of a wholesaler with, let's say about a chain naturally sort of brings a lot more buying power in their hands. And that puts pressure on the manufacturer's prices.

And also for a number of our products where we had limited or no competition for a period of two or three years, we are seeing increasing number of competitors entering the market. So, in some substance, the specialists are coming both from customer consolidation as a lift into your competitors too or existing portfolio.

Thank you.

Neha Manpuria, JPMorgan.

This is Neha from JPMorgan. Thanks for taking my question. Just continuing on the pricing question, so I understand that your competition is increasing and industry consolidation, but given we are the largest player in dermal, what is our stand on market share versus profitability? I mean with increasing -- given we have the largest market share in certain products, would we then try to cut prices to protect market share? Or do you mean rationale with pricing?

Sorry, we couldn't hear you properly. You may have to come back again. There was a lot of line disturbance.

Can you hear me now? Hello?

Yes.

So my question was on pricing. You know, what is our stand on market share versus pricing?

Like I said, there is no -- our own approach is optimization of our sales and profits over the short, medium, to long-term. So it's not there is a market share and the cost of price or price at the cost of market share. We have to balance it.

Did I answer your question?

Dheeresh Pathak, Goldman Sachs.

Thank you for the opportunity. There's a large cash balance and you talked about this generic assets being pricey. So can we think about a dividend or a buyback? And second, on the R&D rate this quarter was very high, so is that the new normal or this was just lumpy this quarter? Thank you.

I'll take the second question first. As Mike said, it can be very difficult for us to whatever you say evenly spread the R&D expenses for quarters. A lot depends on when certain clinical development trials are completed. It depends largely on the speed with which sort of things get completed and we make payments. So, I don't want you to read based on a single quarter. On a year-over-year basis, we got a [$10 million] increase and I think in our own comments we generally went on to say we commit ourselves to continue to invest in R&D to strengthen our pipeline.

As far as cash is concerned, we are certain our first proof of blueprints will be to buy high quality assets at attractive valuation. So, the whole idea is to sort of preserve the cash [value] and that started late only cash to the shareholders is concerned, if you remember right last year, we bought back close to about $200 million [of a] with a share buyback which in overall terms in terms of what do you say effectiveness is a lot more effective there, returning cash to the shareholders. It will continue to evaluate both an opportunity to buy products (inaudible), et cetera, and also, effectively returning cash to the shareholders.

But so to your point that it would be the most cheapest and good quality assets available so buying back our share is probably the most easiest decision to make?

We continue to evaluate as we said, we have a good group of finance people. We'll see that that's always helpful.

Thank you.

Brian Sheehy, ISO Capital.

Nice quarter. It was a similar question to the last question. You guys have an incredibly overcapitalized balance sheet and with negative -- hugely negative leverage. So just at this point, if you can't find attractive acquisitions to help consolidate the space, it seems to make sense to do another Dutch tender.

And then, if I could ask one more question besides that one, could you kind of address that? What's your plans to monetize the Israeli EU patent harmonization legislation that passed a couple of years ago?

On your second question, maybe what we say I need to get an update and then come back to you. What I also will tell you we put it in our website also. So (inaudible) cash and sorry, Brian, you wanted to say something?

No, go ahead.

I don't have -- I need to, what do you say, get back to you and the Israeli EU aspect that you are talking about.

The legislation.

It's been noted. We'll come back to you.

Okay. And then about the Dutch tender which is similar to the last question?

Brian, again at our end -- I don't know if the problem is at our end, the line is again breaking.

Can you hear me now?

Yes, I can.

Okay. I was just going to say if you want to comment it seems like if you can't find attractive acquisitions, you would lean towards doing another Dutch tender.

We continue to look at both options.

Okay. Okay, great. Thanks for your time.

Chunky Shah, Credit Suisse.

This is Chunky from Credit Suisse. I had a question on clobetasol. I know that you are not ultra specific but this is a large product for us. And we find it really surprising that in a [three year] market, market share has been declining. So if you are a market leader you are back around [50%] market share. And now we are left with 20%. So, the reason here is that is there a differentiating power pricing with this competitor? Or is there anything else which we are missing?

I told you in the last earnings call also for what do you say competitive confidential reasons I prefer not to answer product-specific questions on this call. Hope you don't mind.

Okay, thank you.

Sameer Baisiwala, Morgan Stanley.

I know that you don't provide any guidance but any color on the outlook for the (technical difficulty) in fiscal 2015 would be helpful, both in terms of sales and the margins. And a second question if I may is, on the Forex gains of [$30 million], that looks fairly disproportionate given your exposure to Canada and Canadian market, both in terms of sales as well as production and the imports that you do. So any more light would be very helpful

On the what do you say Canadian dollar to US dollar, I'll ask Mike Kalb to answer. Both, what do you say the extended movement is not only with Canada even though that is much sharper than what we experienced in Israel. But overall when you look at last year, US dollar substantially strengthened against major currencies. So, Mike Kalb will answer that.

As to your question into the forward guidance, even last time we mentioned, given the dominance of sort of US generic business to our total business, and the unpredictability of mark -- what do you say market and what the competitors or customers will do, it will be difficult on our part to give any guidance. That's why sort of we didn't give any guidance in the past and such is the case even now. So, I'm afraid (multiple speakers) --

I'm not asking you for guidance. Just color on the outlook.

I don't know what the difference is.

Guidance is a formal number and color is (multiple speakers) --

I think it's positive.

Directionally you see (multiple speakers) --

In one (inaudible) okay. Our hope is that it will continue to grow.

Okay. And that includes (multiple speakers) --

I'm sorry can you (multiple speakers) --

(multiple speakers)

There are a lot of consolidation of customers.

Customers and yes (multiple speakers)

It's going to be a balance between market share and (multiple speakers)

And topline profitability in that, correct.

So Mike, you want to add a little bit sort of details to the public change gain?

Sure, Kal. Canadian dollar to US dollar from Q3 to Q4 moved up about 8.7%. And just for rates, Q3, our rate was 1.1378 and the Q4 rate I gave you was 1.237.

Our Canadian balance sheet has a combination of US dollar-denominated cash as well as a US dollar-denominated receivable from the US entity. The Canadian entity's functional currency is Canadian dollar. So these are the effects of basically what I'll call US GAAP and accounting principles but again, coupled with real movement in the Canadian dollar -- or the US dollar strengthening against the Canadian dollar.

Does that help?

Yes, that does. So it's both translation as it is transaction impact?

Correct.

Okay, got you. Thank you.

Saion Mukherjee, Nomura.

Thanks for taking my question. I've seen some increase in receivables. Can you throw some light on that, (inaudible) data we keep for the last 12 months? Thanks.

Sure. So we had stronger Q4 sales. We also are seeing the impact of some of the customer consolidations that we discussed. Payment terms in some of our largest customers have been extended. When two customers get together, they typically want the most favorable terms for them and that has impacted DSO.

Okay, thank you.

Prakash Agarwal, Axis.

Thanks for the opportunity. Two questions. First one is on the split in the US as well as ex-US in terms of revenues. Hello?

This is Kal here. We don't provide geographic split-up sales. But I'll say the majority of the sales comes from US.

Okay. And do we follow any hedging policy or everything is open?

Mike?

Sorry. So just to clarify what Kal said, there will be a geography split in the [20th] but we will put it in the [20th]. As to the second part, can you repeat that question?

Do we follow any hedging policy for the exports ex-US?

So it's actually a little different. We manufacture predominantly Canada and Israel. So we do have hedging programs against local market costs in excess of local market currencies.

Okay, thanks.

Dheeresh Pathak, Goldman Sachs.

Thanks for the follow-up. If you can give the FDA regulatory status of the main manufacturing assets in Canada and Israel?

We remain compliant in both the facilities.

No, I meant when was the last inspection at the main assets?

Recently.

Sorry?

2014/2015 and these intend to be having inspection both in Israel and Canada, and the inspection of goods will remain compliant.

Okay, congratulations. And on your balance sheet, there are two categories of receivables. One is the normal trade receivables. The other is called other receivables and prepaid expenses. Can you just explain to me the nature of those? Because they also have been going up more than the sales. So can this explain the nature of (multiple speakers) --

Line is breaking up.

Sure. I can answer on other receivables. Largely driven by two pieces, our deferred tax assets in the United States. For tax purposes, the gross to net accruals are deductible basically when they are fixed and determinable for tax purposes, which is a different definition than for US GAAP accrual purposes. We also had -- so that's really the biggest driver of it.

So you think the biggest component of that line item is deferred tax asset?

Yes, that's -- the biggest driver of the increase, yes, and also the biggest component. That's correct.

Okay. And that is going up because cash taxes are higher than the penal taxes?

Well, it's going up because our -- well, our sales are going up, but also our gross genetic accruals are going up. So, the accruals against chargebacks, rebates, things like that are increasing. And for tax purposes, it's timing of when you can deduct it.

Okay, okay. All right. Thank you.

You're welcome.

Nimish Mehta, Research Advisors.

Thanks for taking the question. Just had one question -- if you can give us any update on biotics -- lower biotics?

We can't update at this point.

(Operator Instructions) Greg Gilbert, Deutsche Bank.

Just one follow-up. I understand that the generic buying groups are more powerful now and are asserting themselves to get better pricing and better payment terms. But my question is whether there are any positives that offset those negative effects, such as more certainty on volume or any other variables? Thanks.

I think the trading terms do not substantially change in terms of offering guaranteed volumes at duration. We have to operate with those existing constraints. But because of the consolidation, their ability to negotiate better prices that have gone up.

I guess a key strategic question is do you think your Company is well-positioned in light of this new dynamic or this evolving dynamic?

I don't think that we are either, how would you say, solely either positively or negatively affected by this. They should, what do you say, if it is an issue, they should (inaudible) in the industry. We have [four] customers having substantial market share and manufactured as sort of very many more than number of customers at this point.

Thanks.

Sameer Baisiwala, Morgan Stanley.

Question is on the NDA which you filed in the quarter. Is it a novel delivery or is it the generic product which needs to be branded?

I think we didn't file it in this quarter. (inaudible) what is an ANDA that was filed for which we are waiting approval. So it's not an ANDA and that it's not a generic. It is an ANDA for us (multiple speakers) communication.

Filed one in the quarter? Sorry, so it's the same product?

(multiple speakers) Filed earlier on.

Okay, got you.

So instead of saying is that part of the pipeline, we have an NDA that is awaiting approval that the NDA is first in new indications.

Okay, got you. And just one more quickly. For your [35] ANDA spending approval, any color that you can provide on the addressable market? Or is it fair to assume that you know the average sales quotation could be whatever $20 million or $30 million per product?

Sameer, I don't have the data right in front of me. But we'll update you.

Okay, no worries.

Saion Mukherjee, Nomura.

Thanks for the follow-up. Regarding your R&D float for the pipeline, will it be fair to assume that most of the investments and most of the pipeline is for topical fulminations?

Yes.

Okay. And in terms of your filings going forward, there has been a significant ramp-up. How many filings do you know we would expect in the following year?

Our whole area will be to maintain or what I'll say the momentum. So from an expression of (inaudible) we do believe to invest in R&D careful the value short to medium to long-term. So we are coming and we want to maintain the momentum. But it will be difficult for me to say how many products we'll file in the coming year.

Right. Okay. And in terms of R&D spend, you know we have seen a fair bit of increase now. I mean based on clinical projects and trials, (technical difficulty) what do you take from here? Or are activity levels in other (technical difficulty) levels and your more moderate growth from here on?

Our intention will be to maintain momentum.

So do you think that there would be an increase, further increase in R&D spend? Hello?

Give or take the current level that we have, our plan will be to maintain the momentum, depending upon the product and the new opportunities we see. There are significantly attractive opportunities. We remain very open to increasing the spend.

Okay, thank you.

(Operator Instructions) Saion Mukherjee, Nomura.

Just one more question from my side. When you look at pricing, competition and you know how we think about going forward, again between topical and the oral solid formulations that you have, is there any dynamic that you would like to share where you are seeing more price erosion? And how do you think that would -- going forward, how do you think that will pan out?

In truth, I probably answer the same. The pricing sort of dynamics depends on a number of competitors for a given molecule at a given exchange. Then to say whether it is out of oral solids or topical or injectables. So a lot depends on number of players for a given ANDA that are in the market.

Okay. And you know you talked about the channel consolidation and the impact on pricing. So I mean is it something that you have seen very recently? And you know, I mean, how do you see that going forward? Because you have some companies indicating that the worst impact of channel consolidation is behind us.

I think what do you say, the major customer groups have come down to (inaudible). Is that what you are referring to? But the go down is limited. But given the sort of power that they have, their ability to exert continued pressure on pricing, I wouldn't tend to underestimate that.

Moshe Granger, Potango Investments. (Operator Instructions)

Our next question is from [Fario Partrub], Phillip Capital.

Thanks for the opportunity. So is it possible to say what is the kind of revenue mix between specialty product and obtained related to this product? And what is the kind of mixed data that you are anticipating over the next two or three-year period?

I mentioned that at a product level or a mix of product level there is a competitive sensitivity since I a prefer not to answer that.

Okay. But at least direction-wise, can you say something? Sorry.

Sorry, I didn't get you.

At least direction-wise, can you provide some indication that, okay, what is the kind of revenue mix there you should be anticipating for the specialty business three years down the line?

I think what do you say, given that we are seen as the number one dermatological player in the US, that will continue to be our dominant percent of our business.

Okay. Yes, thank you. Thanks a lot.

Prakash Agarwal, Axis.

Thanks for the follow-up. Questions around your comment on customer consolidation that has taken place. You've been the largest player. Ideally with customer consolidation, you will have gained volume. In all your past comments in the last one year, we have heard about the volumes have been stagnating and the gain that you've grown is largely through pricing. Could you please explain that?

Why should we gain if the customers consolidate? They have the option, isn't it? I assume customer raise buying from the manufacture (multiple speakers) --

You've been the largest player with the largest portfolio.

That shouldn't matter for a customer. The quality should be good. Service level should be good. And if the price is competitive, other things being equal. They'll want to keep the set of prices open. So, no, no, let me answer. So our service levels are very good. Our quality is very good. They do their technicians that's right, we are able to keep a dominant position.

That doesn't necessarily mean that when they consolidate, we'll get more volumes. Also, another dynamic is when the prices go up there are times the overall demand part of particular molecules or part of a particular presentation also, the market demand will certainly go down. So it's not a matter of sort of all the time our volumes are stagnant, marginally down because we have lost share. The overall market itself, the volumes may go down.

Thanks.

Did you get me?

(Operator Instructions) I am showing no further questions at this time. I will now hand the floor back over to Mr. Coote for closing remarks.

Thank you, operator. Thank you, everyone, for joining us today and taking the time to be on our fiscal 2015 earnings call.

For clarity, our present plan is to hold semi-annual earnings calls. Therefore, we will speak to you again after our Q2 2015/2016 results are published. This concludes the call. Again, thank you for joining.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day.