Taro Pharmaceutical Industries Ltd (TARO) 2016 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Taro Pharmaceuticals year-end 2015/2016 earnings conference call. (Operator Instructions) Please note that this conference is being recorded.

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

Thank you. Good morning, everyone, and welcome to our year-end 2015/2016 earnings conference 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, CFO of Taro.

We hope you have 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-to-date financial performance but also our markets, operations, strategies and other matters. 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. We ask that you limit yourself to one question and if you have more questions, please feel free to join the queue.

As a reminder, this call is being recorded and a replay will be made available on our website for the next 12 days. A call transcript will also be placed and remain on our website.

Before I 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 year-end fiscal 2015/2016 financial results.

I'm pleased with Taro's continuing solid performance and progress made, especially in the area of R&D, and congratulate the entire Taro team for this achievement. In 2015/2016, Taro received five approvals in the US, filed 10 ANDAs, and has a current R&D pipeline of 36 ANDAs of 18 FDA approvals. These results, along with the increased R&D investment of $71 million, demonstrates Taro's commitment to continue future growth.

Taro's cash balance of over $1 billion provides us with the opportunity to continue to evaluate business development with appropriate targets; however, asset prices in the industry continue to be high. Therefore, we will remain disciplined in our approach for deploying this cash.

We will continue to be diligent in facing the challenges ahead for improving the performance, developing a quality product by applying and maintaining sustainable profitability.

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

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

Overall, we are pleased with our strongest two quarters and full-year operating performance in terms of net sales, gross profit, and operating income. Our 9% year-over-year increase in R&D demonstrates our commitment to growing our R&D pipeline. During the year, we successfully passed two major regulatory agency inspections, including one by US FDA of our Israel manufacturing site.

In addition to these strong results, we have further demonstrated our commitment to creating shareholder value by implementing the $250 million share repurchase program which commenced in March 2016. As a reminder, in 2013, the Company repurchased approximately 2 million shares.

So we continue to face broader industry challenges in terms of generic landscape, driven by ever-increasing competition and customer consolidation. Nevertheless, we remain cautiously optimistic about our medium- and long-term growth and remain focused on strengthening our R&D pipeline and other initiatives that continue to keep us well-positioned in the market.

I'll now hand over the floor to Mr. Michael Kalb for a further discussion on financial performance. Mike?

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

Q4 net sales were $265 million, an increase of $21 million or 9%, despite relatively flat overall volumes. However, the volume of our US business has experienced declines from last year.

Gross profit of $224 million increased $25 million, or 12%, with gross margins expanding to 84.6% as compared to 81.8%. Cost of goods decreased $3.8 million.

R&D decreased $4 million to $20 million as our R&D spending is not evenly distributed across quarters. SG&A expenses remained relatively flat at $22 million. Operating income increased $28.2 million, or 18.4%, to $181.7 million, an increase to 68.6% as a percent of net sales from 62.9%.

As a result of the above, Q4 EBITDA grew 18%, or $28 million, quarter over quarter to $185 million (technical difficulty) as compared to 65% for Q4 last year. As Kal stated, this is our strongest quarter in terms of these financial metrics.

Net income was unfavorably impacted by an $80 million fluctuation in foreign exchange from income of $32.5 million in 2015 to an expense of $47.5 million in 2016, principally the result of the strength of the Canadian dollar versus the US dollar and increased balances in US-dollar-denominated cash and intercompany balances on the Canadian books. The FX is primarily balance sheet driven by US dollar denominated bank accounts and intercompany balances. To illustrate, at March 31, 2016, the CAD to US dollar conversion rate strengthened to 1.30 with US-denominated cash and AR balances of approximately $550 million, while at December 31, 2015, the rate was 1.38.

Tax expense decreased $13.9 million to $23 million, resulting in an effective tax rate of 16.6% compared to 19.5%. Net income attributable to Taro was $115 million compared to $152.3 million, resulting in EPS for the quarter of $2.68 versus $3.56 in Q4 last year.

Let me now briefly discuss the full-year performance and comparison to last year.

Net sales increased $88 million, or 10%, to $951 million compared to $863 million from prior-year despite volume decline, principally in the US market. Cost of goods decreased $17 million, or 9%, primarily resulting from the lower volumes and our disciplined approach to spending. Gross profit increased $102 million, or 15%, to $779 million, while gross margin increased 350 basis points to 81.9%.

R&D expenses increased $6 million to $71 million as we continue to invest in building a strong pipeline of quality products. SG&A expenses increased $4.7 million to $92 million, principally the result of marketing spend on Keveyis. Settlements and loss contingencies was $1 million expense versus a $4 million credit in 2015.

Operating income increased $86.8 million, or 17%, to $615 million. FX income decreased $34.5 million from $41.6 million to $7.1 million, principally the result of the strengthening of the Canadian dollar versus US dollar. As a frame of reference, the Canadian dollar at March 31, 2014, 2015, and 2016 was 1.11, 1.27, and 1.30, respectively, versus the US dollar.

EBITDA grew 16%, or $86 million, year on year to $629 million and margins improved 66% from 63% last year. Our effective tax rate improved to 15% from 16.5%. Net income was $541 million compared to $484 million, a $57 million increase, resulting in diluted earnings per share of $12.62 compared to $11.31.

Our cash flows and balance sheet remained strong with cash, including marketable securities, increasing $308 million to $1.2 billion from March 31, 2015, with cash from operations of $385 million. In addition, long-term bank deposits increased from $30 million to $115 million. In December 2015, Taro repaid the remaining mortgage of $6 million.

Our DSO remained at 82 days. During the fourth quarter, we announced and implemented a $250 million share repurchase program utilizing a 10b5-1 program. In total, through May 23, Taro repurchase approximately 638,000 shares at an average price of $136.20. $163 million remains under the Board authorization.

I will now hand the floor back to Kal.

Thanks, Mike. Before we open the floor for further questions, I'd like to briefly talk about our recent announcement we made earlier this month concerning Keveyis.

Keveyis was originally priced with an expectation of maximizing patient access, access to medicine, and eventually covering millions of dollars invested in creating patient awareness support services, medical education, awareness of pediatric paralysis, and ultra-rare disease with very small patient population. Taro's investment sharply improved patients' diagnostic care and cost us considerably more than the sales the product yielded.

We felt that this investment was needed since solely to us, not about the disease, even amongst the physicians. After attempting to make Keveyis available commercially, we realized that we could not sustain these levels of investments and loss. Recognizing we have an obligation to the patients, we decided to make the product available free of cost to distributors.

Before we move on to your questions, I would like to thank Taro team and all of our employees for another successful year and the continuing outstanding efforts to meet the challenges in front of us and to successfully move the Company forward.

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

(Operator Instructions) Saion Mukherjee, Nomura.

Thanks for taking my questions. My first question is, is it possible to share revenues US and ex-US for the quarter and for the full fiscal year?

Mike, we don't provide normally geographic split of the revenue? (multiple speakers) 20-F?

It will be in the 20-F.

20-F.

Okay. You mentioned that the volumes have declined in the US year over year. In terms of revenue, can you confirm whether there was a growth in the US market?

Yes, but is a substantial part of -- majority of substantially major part of our revenue coming from US and I'll say the increase in revenue is again substantially contributed by -- if not totally, substantially contributed by the US market.

Okay. That's helpful. And my second question is -- I know you have provided commentaries on the pricing environment in the US. Are you seeing anything which is significantly different or out of trend in the recent past over the last three, six months with respect to pricing compared to what you saw earlier?

What I say will be we are talking about that in the context of increasing customer consolidation: consolidation of wholesalers, consolidation of insurers. Naturally, we will put pricing pressure on the manufacturer, nothing out of the ordinary or unusual, but a steady increase in the trend for pressure on pricing.

That I mentioned that we've got to keep in mind is as the FDA is speeding approvals, inasmuch as we will get to more approvals for our products, we've got to realize that our competitors also will be getting approvals for product that will compete with us. So a combination of Taro's stronger customer bargaining position and probably more increase to number of competitors competing with our products will have ongoing pricing pressures. That's what we had in our mind when we mentioned that.

Okay, thank you.

Elliot Wilbur, Raymond James.

Hi, this is Daniel Sanchez on for Elliot Wilbur. I wanted to continue with the pricing thematics here and get some color from you in regards to the extent and impact of any deflation you may have witnessed and if you've noticed any areas that have demonstrated outsized resilience to deflationary pressures in the market? Thank you.

Okay. I don't want to get down to the individual product level to talk about pricing pressure. It's basically rule of economics: when you have more competition, there will be more pricing pressure.

It's known that in the US market probably there are some four or five customers command 90% of the market share. So when you've got such a consolidated customer base and, what do you say -- in such a situation, if there are, let's say, four or five competitors, the product will come under intense pricing pressure. So if you look at our portfolio, we have a number of products we are either exclusive, semi-exclusive, but equally we have a set of -- given our product base, we also have products which face significant competitors' intensity. So those products naturally will continue to come under pricing pressure.

Thank you.

[Raul Jawani], IIFL.

Hi, so thanks for taking my question. So if we look over the last three years, Taro's top line has grown by around 12% CAGR. So would it be possible for us to split out this growth between price, volume, and new product introductions?

Like I mentioned, whether more for to keep our confidentiality of information to our competitors, I prefer not to... I'll say it's a mix of price, it's a mix of volume, it's a mix of product mix, and it's a mix of new products.

So just some clarity would help. So over the past three years what would be the volume decline in the market (technical difficulty) market?

I don't have that information ready, so --.

Okay. That's it from me, thank you.

Anubhav Aggarwal, Credit Suisse.

One question, on the sequential increase in sales that you reported in this March quarter over the December quarter, would you say that this is simply the full benefit of price increase that was taken in the past now partially visible in December quarter and now fully visible now? Or is it like more than the price increase this growth is driven by?

(inaudible) I'll answer the other way. On a full-year basis, our growth is about 9% or 10% or so. The last quarter growth is about 9%, so I don't see things that are significant. It's a sort of normal trend line in our sales that we are seeing the fourth quarter that's still today equally stronger compared to last year.

Yes, but just clarity there, that you are talking about year-on-year growth, but sequential growth would be driven with what? Because -- is it like you've [gained] -- because you mentioned losing volumes as well?

Like I mentioned, it's a combination of product mix also, so we should not assume everything is driven by price or volume; it's a combination of product mix. If you look at as Mr. Shanghvi mentioned we got five new product uploads last year and some of the approvals came through in the last quarter.

Okay, thank you.

Girish Bakhru, HSBC.

Just on Keveyis, would it be possible to share the number of, say, cost or investment you would have made in creating this asset and creating higher access for this asset?

Okay, once again, we don't give product-level information. What I'll say will be what we spent was significantly higher than the sales that we made, which continuing that would have made the product certainly ineffective; would have had a negative impact on the overall P&L.

In the context of the overall company, I'll say that it's not that significant. We are a billion-dollar company, so you've got to take that into context. But firstly, the product between sales and revenues there's a significant mismatch in terms of what we spent to what we realized.

Right. And just to understand this better, the real challenge I see is, is it in just simply finding the patients who will see incremental benefit or in per se generating prescriptions from the doctors in terms of whether this really helps or not?

Like I mentioned, this is an ultra-rare disease. Starting from diagnosis by the patient and the doctors, it's a very poorly understood disease. And by epidemiology, we are talking about somewhere in the region of possibly 3,000 patients being affected by the disease.

So within that, the number of patients probably actively accessing or needing the product is much smaller. So a combination of a very small pool of patients accessing treatment and the disease being poorly diagnosed resulting in very, very few significantly smaller, even smaller number of patients being adequately diagnosed and prescribed.

Right, Kal. Just second question was on the onychomycosis product which recently completed the Phase 2 studies, if you could throw some comment on how that asset is developing and if any differentiation aspect you could share on that product.

When you say the study that we did, the signals are positive but we are going to be doing a larger scale Phase 2b study. When that study is completed only we can say with any confidence that the product will meet the expected efficacy and safety parameters. The initial results are, directionally speaking, seems to be encouraging.

That's helpful. Thank you.

Kirti Chopra, Arohi Asset Management.

Good morning. In your press release you mentioned about your cautious optimistic view on the medium- to long-term growth of the business. Could you please elaborate the sources of this growth?

Nothing other than our own pipeline, what do you say, and the fact that we are a specialty generic company, our product quality is, I will sort of say, flawless, almost flawless. Our customer service will be probably some of the best in the industry. So a combination of high-quality, good-quality services and a high-quality pipeline position us well, even in the face of sort of the increasing competition.

And also you know that we have a strong balance sheet also. This is a, what do you say, good acquisition opportunity that meets our financial strategy criteria that also will further strengthen our business.

Our base business as we see it today, we are confident that the growth should be more than good to offset the price erosion, the general price erosion in the industry?

Our belief is that, on one side, we will have continued pricing pressure; on the other side, our new products will enable us to grow. So at this stage, net-net, I still see a positive sales trend going forward.

See I don't want to speculate too much about how much pressure, how much pricing pressure, how much new product impact, etc. It's more a qualitative statement. Yes, we do see ongoing pricing pressure, but we believe that we have got a very good pipeline, increasing pipeline where we will continue to spend more on R&D to make sure that we strengthen our pipeline.

All right, thank you. Just a request, if you can consider -- holding the conference calls on a quarterly basis, it will be beneficial for all the investors.

Sorry, I missed it.

A request on conducting the conference calls on a quarterly basis.

Noted, noted. We'll discuss internally.

Thank you.

David Maris, Wells Fargo.

I apologize if you've already covered this, but I know there was a little bit of discussion on margins earlier. (multiple speakers)

David, the call is not very clear.

Okay, I'll jump back in then.

Manoj Garg, Bank of America.

Good morning and thanks for taking my question. Kal, congratulations on a good set of numbers. I would just like to understand, when we look at some of the competitors who are operating in the same segment like Perrigo and look at this, the gross margins in the generic regions, obviously Taro has a significant higher margin compared to those competitors. Even they're operating in the same segment.

So just would like to understand from you how confident we are in terms of maintaining that trajectory and what gives us that extra alpha in terms of those high gross margins?

If you are talking about people like Perrigo, I don't -- what do you say -- I have not gone through their 20-F for their annual accounts, but fact of the matter is they have a significantly stronger OTC business. OTC business by definition, the margins will be -- won't be as strong as pharma margins. And (multiple speakers) go on.

Yes. I'm talking about the generic division margins, excluding OTC division.

So, like I said, I haven't gone through that part of it and it's not appropriate for me to comment about them. All I can sort of say. We are a specialty generic company, so by definition, our portfolio will be obviously narrow but sort of focused. We operate in niche markets; smaller volumes, but better priced.

So a combination of that and when it comes to manufacturing quality functions, etc., we have a very efficient [missionary]. So capacities are well utilized; we turn around our stock fairly well. So a combination of the internal efficiencies and operating in a specialty market gives us this margin. Whether this will continue or not, it's speculation.

Our aim will be to continue to create shareholder value, but whether it's going to be through higher sales growth, diluted margin, etc., too difficult to say at this point.

Okay. And Michael, just a second question for you. We have seen significant reduction in the trade payables and other current liabilities in this year obviously come down from $309 million to $245 million. Any specific reason or you would like to give any color on that?

Principally it's due to taxes payable. Yes, the reduction is tax payable from prior year.

Okay, thank you. That's all from my side. Wish you all the best.

Kartik Mehta, Deutsche Bank.

Just trying to understand -- can you throw some light on the number of ANDAs that we expect to file over the next year and some color on the existing 36 products that you have, which (inaudible)?

Kartik, you will have seen our spending R&Ds continuing to increase. So other things being equal, that continued increase in R&D spend should result in either more products being filed or more complex products being filed.

If I could talk on a trend line basis, I would expect -- anticipate to possibly maintain and hopefully improve the number of products that we file and the quality of products we file. And you asked something about the ANDAs are awaiting approval?

Yes, (inaudible).

What do you want to know about it?

Is there any color on this in terms of if there is anything else? Is it fair to assume that most of them are in derma? And if possible, what's the overall market size of all 36? I mean any color on this will be helpful, Kal.

Okay. Kartik, again, talking at a product level, even portfolio of products, will be difficult for me to give you quantified answer. Pretty much a significant portion of our pipeline is dermatology oriented. Outside of dermatology, I will say -- I am talking about the generic business -- we operate on, oral solids, narrow therapeutic index. So products which require very, very strict tolerance levels is what we focus on.

So our pipeline now, too, that we will continue to be focused on, both derma and solids, narrow therapeutic indexed oral solids. We'll have certainly some pure OTC product [starting], but I am talking more about the generics.

And on the $1.2 billion cash that we have on the books, you had mentioned in the earlier earnings call that acquisition was actually one of the (inaudible). You actually spoke about the valuations being expensive. So would you be fine if there is a benchmark for payback or if there is an opportunity to go outside (technical difficulty) or assets, also?

Just to understand your part, would it be primarily in derma, or if anything like your Keveyis or you would be interested it?

Kartik, in the US, a number of companies paid, what do you say, bought assets at valuations probably we would not have bought. And when you analyze number of those companies in terms of share price we experienced significant decline. That again confirms our belief in the operating principle that whatever we buy it has to have the ability to create additional shareholder value, even after the premium that we will pay to acquire the assets.

Again, that's a directional principle. Again, what will we buy? I will probably quantify that in two terms: our familiarity, our comfort level, etc., significantly with US, so anything US. Again, it has to be largely specialty oriented. Or when it comes through it that has to have some sort of significant new geography attraction. So through a combination of this we will continue to evaluate available opportunities in the market.

David Maris, Wells Fargo.

Actually my question on margins was answered, but just to be clear, you mentioned that maybe you could just talk about the sustainability of that. Not so much quarter to quarter; this was a high quarter, the next quarter lower. But just in general, relative to other generic companies, your margins are much higher and they have been for a while, so can you just talk about the sustainability of that and the business model scalability?

Then separately, the question on the balance sheet and use of cash, is there any thought on just returning a lot of that cash to shareholders relative to keeping a lot of dry powder to do deals?

Okay. I'll take your question in twofold. The first one relates to what is the sustainability of margins; largely depends on competitive intensity which is not in our hands.

My own tolerability is that this being a specialty business and the products require complex formulation, clinical development, so to a degree that by itself has an ability to limit competition. But within that, how many competitors will come for which product when, difficult to predict.

So that's the reason we have been extraordinarily transparent and we have been cautious. We have been continuing to caution the shareholders about that, what you say the vulnerability of our ability to sustain these margins. So beyond that it will be difficult for me to say.

Then as far as cash is concerned, you will have seen -- again, we have put $250 million to buy the shares back two years ago. Mike, I think we spent close to $200 million to buy the shares back. I think given -- so, number one, we are effectively returning cash to the shareholders and then I'll still say we've got to keep cash.

If there are good opportunities that arise we've got to have the ability to step in and buy. We are in the business of creating both short- and long-term value to the shareholders. So it is a fine balance and I strongly believe that we are maintaining the balance.

Yes, thank you very much.

Sameer Baisiwala, Morgan Stanley.

Thank you so much. Kal, just on Keveyis, it looks like it is an in-market failure where you have not been able to convert the patients. I would have thought you would have done -- before putting capital to work behind this molecule, you would have probably done groundwork, would have met opinion leaders just to identify the size of the market and the potential to convert the patients into -- for actual treatment. But it looks like you tried to do all this after the launch and did not get the desired results.

No, no. Sameer and I, we know each other for some time. We did all that you mentioned premarket, what did you say? The search to understand the patients' expectations and requirements and research the doctors, research the payors; everything was done.

Having said all that, we're talking about there is 100 million patients. Probably they are first getting 10% of that, 20% of that will be very different from which you are talking 200 patients. So the tolerance levels here are fairly small.

So despite -- number one, we knew that the number of patients are not going to be large, but nobody anticipated that what you are going to get is even much less than what we anticipated; that's what happened. We have been working on this product for years and as of three years, five years we have been providing free access to patients within the regulatory framework and constraints. So if at all anybody in the country will have, from a manufacturer's point of view, will have a better understanding of this disease, that will be Taro.

Do you think at some point in time in the future you can revive this product in terms of commercialization or --?

We have no plans at this point, Sameer.

Okay. And just one final point on guidance, Kal, this is a request. If your parent company, Sun, gives some sort of guidance, top line, etc., if Taro too can do, that would be wonderful. Many other American pharma companies do that, so just a thought for you.

Sure, sure, Sameer. Leave it to this; we will think through that.

Okay.

(Operator Instructions) Anubhav Aggarwal, Credit Suisse.

Yes, the question is on cost of sales. Now cost of sales, I'm just looking sequentially December to March quarter. It has declined by 8%. Now if you see on the currency side what Canadian dollars and Israeli shekel has been adverse to us, and despite that, cost of sales had declined by 8%. Can you just help with that -- what would have resulted in this?

Mike?

Again, I would say primarily some volume decline and continued efficiencies.

Anubhav, why don't you -- what do you say, good question; give us a little bit of time till we will study and then revert.

Okay, sure. So let me ask then another question. One question the balance sheet to Mike. On the inventory side, Mike, the inventories are like up $12 million quarter on quarter, which is almost a 10% increase, like 127 going to 139.

Given the gross margins that you guys have almost 80%, 85%, if this is the stocking up of products for the launches in the future quarter, that potentially means very large amount of stocking that we are going to see in the sales conversion. Can you just tell what would this inventory increase be leading to?

Sure. A portion of it is our raw material and a portion of it is finished goods. Some of it is, quite honestly, some timing; if we have a product with some longer dating, we will build some inventory. And some new products as well.

Anubhav, on the early basis, when you look at it, my recollection, you are talking about, give or take, about 10% increase in inventory levels. And given that means half continued new products have growth also, I wouldn't think the inventory will (multiple speakers).

Okay, sure, sure.

The other aspect that we forgot to mention is, as how would you say, as a risk management backup process we also tried to add newer sites to what we make so that that process also will require us to make, how do you say, building inventories at two levels: maintain safety start till the other sale comes on stream, etc. But that also adds cost, some level of inventory buildup.

Sure. That's very helpful. Thank you.

Kartik Mehta, Deutsche Bank.

Yes, I just wanted to know is there any expenses on account of Keveyis which was discontinued which would have been booked in FY16, which would not be there in FY17, on the profit and loss account?

The top line was insignificant and (multiple speakers).

(multiple speakers) expenses, yes.

As far as expenses, I would expect, what do you say? Some level of savings that we would have spent last year which won't recur going into the current year.

Would you quantify that or will you --?

No, no, Kartik. Product level information we don't provide.

Okay. And if I can, on the share repurchase, Kal, how does Taro decide on this? In 2013 we had about $600 million of cash; now we have about $1 billion. So is it a function of the business condition or is it surplus cash where you feel that there is no asset that you can acquire and then you allocate just same amount?

I just want to understand how do you decide on the timing of the repatriation.

Yes, Mike, why don't you --?

Yes, I think, Kartik, it's a variety of factors, many of which you just mentioned; given our relative float, things like that.

I think we generate right about $400 million-plus annually in cash.

Correct.

So while we have enough to go for acquisitions and, at the same time, any surpluses we will feel that we can safely return to the shareholders, which we are doing.

Is it fair to assume that the next two years if you have no assets to acquire at a value that you would want, you would continue to do a share repurchase because that might be one of the only ways to add the value to the overall shares, apart from the (inaudible)?

Sure, okay, Kartik. We will evaluate all options, including buying assets, including returning cash; whatever is appropriate for us to create value. We'll look at all those options.

Okay.

Sumant Kulkarni, Bank of America Merrill Lynch.

Thanks for taking my question. Other than asset prices remaining high, how would you characterize the availability of US assets and what capabilities in specialty generics do you have -- that you do not currently have would you think makes sense to buy not build?

So we are going beyond pricing to see what we will buy, what we will not buy. It will be easy for me to rule out things that we are unlikely to buy. Suppose an asset that's requiring some 700, 800 field force, certainly we are not in that business. So, what do you say, a branded mass-market product, even if it becomes available.

I don't think at this point -- I'll never say never to anything, but if you look at our focused capability, that won't suit us. Suppose something becomes available, very good value, potential to grow, we can add to create value. If it is dermatology, of course we will go for it.

Almost everything else is going to be in the gray zone. Depends what it is, depends what the value is, depends what the product additive is.

As far as generic market is concerned, we say we understand the US market quite well. If it gets too branded, certainly we will be a lot more focused.

Thank you.

Chirag Dagli, HDFC Mutual Fund.

Thank you for the opportunity. So when you look at your US generic dermatology market share, and you look forward, how do you see that number? Do you see that number improving, increasing, or decreasing, or remaining flattish?

Again, largely for -- it's not only us, it depends on how many competitors are going to be entering. What I'll say will be given a set of, given a set of products, a set of competitors, I will say we are very well positioned.

Our market share tends to be much better than the -- one has to talk about the average share or fair market share our market share will be probably. Most of the time we will be better off than what, I'll say, one can say we deserve. That's because customers have very good confidence in our product quality. There is some level of loyalty.

So how much market share we can maintain depends on how many more players come and how much they are willing to undercut us.

Just to get my numbers right, the way I understand the generic dermatology in the US is about $5 billion to $6 billion and we have a shade less than $1 billion in the US. So we have roughly about 20% market share?

I think if you look at the IMS numbers probably, like-for-like, the numbers will be higher than what you are suggesting.

The market share will be higher?

Higher.

Okay. And this we hope to maintain going forward?

Our aim will be to maintain that or improve that.

Are there substantial number of patent expires in dermatology going forward, say, next three, five years?

Unlike with the blockbuster products, dermatology is an area where you are not going to see $1 billion -- I am talking about small molecules, dermatology product going off patent. It's slow and steady, and because it's slow and steady and being complex, the number of players will be -- on day one you're not going to see some 15 players entering; it's not that type of business.

So a smaller market, smaller number of competitors, higher level of spend. And I'll say it will take between three to five years from the time you start developing to the time you file the product for approval. And depending upon how long it takes, then you are talking about upwards of five years, six years, seven years before you launch the product.

David Maris, Wells Fargo.

So question -- and I apologize if you answered this, because I had to dial back in. The quarter, this quarter you just reported, was there any buy-in during the quarter or any inventory destocking or anything that might make this quarter more of an anomaly?

I don't think -- it's not an unusual quarter.

Okay. So if we talk about weeks of inventory on hand or in the channel at the start of the last quarter versus the end of this quarter was there any --?

No, David. No. Again, I go back to what Mike said, if you look at our, what do you say, data levels that also will give you an idea of -- that will be quite in line with (inaudible) portions of sales of previous quarters, so nothing unusual.

Great. Thanks very much.

[Rohan Deuskara], private investor.

Hi, this is [Rahul Deshmukh] actually. First of all, congratulations to the Taro team for having the spectacular quarter.

The question I had was regarding this asset buybacks and the potential acquisition of assets, and Mr. Shanghvi in his opening remarks said that the asset prices are very inflated at this time.

But what I would like from -- to hear from you is if you can reconcile; as far as Sun Pharma goes over the last three years, they have made purchases $4 billion, $5 billion from Ranbaxy to DUSA to InSite, the Novartis portfolio, the GSK and the Merck biologic. Whereas Taro, the only acquisition they made was in a preclinical molecule where Taro does not have any expertise for $3.8 million, and they wanted to invest $250 million in a wind energy project at some point.

So there is a big disconnect in terms of how Mr. Shanghvi the Chairman of Taro and the MD of Sun thinks about asset prices. Why do we see this disconnect between how Sun evaluates their asset prices versus how Taro evaluates asset prices, given the fact both the managements are similar?

Okay. That one, a good question. Number one, I can't answer percent, so that question probably better taken with Mr. Shanghvi when you talk to him. What I'll say you think are -- compare the differences between Sun and Taro. Sun is a global company, so if you look at -- I'm saying what all I'm saying with the information that's available in public.

So Sun has a huge presence in India; Taro is absent in India. Sun has a significant presence in emerging markets and we have next to no presence. And if you look at Ranbaxy, these are the areas where the strength lies.

So if Taro has to go to acquire Ranbaxy, in all honesty, with a lot of modesty, I'll say we don't have the management bandwidth to manage such an acquisition. So I think it is not what you say, it is not like-for-like what Sun can do sort of Taro can do. Or on the reverse what is in the specialty area in which we are operating what Taro can do, I can't say whether Sun can do it or not.

Yes, I appreciate that. If I may interject, like DUSA, for example, is a pure dermatologic company. Merck psoriasis drug is a pure dermatologic drug. So you have the capability with $1.2 billion on your balance sheet, which is not earning much, you are not returning that money to the shareholders. It's a genuine request that you evaluate your options more carefully.

And also with regards to volume decreases, there is this agreement of cash agreement on conformity and assessment between Europe and Israel, specifically to allow drugs to be sent to the European region and Taro is not doing that either. They are not shipping any drugs to Europe, are not trying to create new markets, even with their current portfolio.

We are not even talking about acquisitions; we are talking about expanding your market based on the rights that Taro has, because it is an Israeli company, so I would very much appreciate if you would consider doing -- taking these initiatives, expanding into the European markets, just like Teva has, to bring more shareholder value.

Rahul, once again, I appreciate what you are saying. I'm going to probably give twofold answer. As far as assets that Sun acquired, you have to ask -- a number of these are not -- to my knowledge, I don't think Merck did a public process to divest the asset. The relationship Sun has -- enjoys with Merck, Taro does not.

Again, I'm saying from public information. My recollection is Sun and Taro, Sun and Merck had a joint venture. So all in all you've got a number of these things come by invitation. What all we get invited on, I can assure you that we actively review that.

Then your point about our expanding geographies, and it's a good point. If you go back in the last five years, we have strengthened our base. My recollections are when Sun acquired Taro we were struggling even in the US, so from that we are in a strong position and we are improving our pipeline.

And Europe market -- again, to the best of my understanding, both in terms of size, average price, competitive intensity, all economy of scale is certainly not same as what you see in the US. So much of our focus has been to see how we can consolidate and strengthen our sales in the US. But all the same, your point is a good point. We will continue to evaluate expansion into other known regulated, sophisticated markets.

Sameer Baisiwala, Morgan Stanley.

Thank you, thanks for taking me. Just a quick question, Kal, when you invest behind R&D -- and I'm looking at the $70 million spend in about 10 ANDA filings -- it looks like per filing is a meaningfully higher cost. Now when you do your product selection, do you have some threshold minimum revenue expectation? And if you can share that with us.

Yes, it's a very well-structured process, Sameer. First, in terms of technology department capabilities, how does it marry with what we have internally? And you are also right, less than $70 million in 10 products -- not all the $70 million was solely spent on US but, substantially speaking, spent on US.

Remember bulk of our products will require clinical development. So that's an additional cost that you wouldn't see when you file an oral solid, so the investment levels are high. We have a very structured process in terms of financial evaluation size of what we will get.

We forecast, what do you say, we do market forecasts in terms of our sales, so on and so forth. And to ensure that, and as Kal just said, we'll still come cash positive, meeting our internal return on investments on R&D, yes.

Okay, okay. And any number that you want to share? Is $20 million, $30 million per product revenue targets, or is it materially above or below?

Varies, varies. Varies, Sameer. If it is (multiple speakers).

Thanks.

It varies depending upon whether you are starting from clinical Phase 1 or if it is an ANDA, a sizable scale Phase 3 studies.

Thank you so much.

Thank you. Ladies and gentlemen, that was our last question. I now hand the call back to Mr. Coote for closing remarks.

Thank you, everyone, for joining us today and taking the time to be on our FY16 earnings call. We look forward to speaking to you again on our next earnings call.

This concludes our conference. Again, thanks for joining us.

Ladies and gentlemen, thank you for participating in today's conference. That does conclude today's program. You may disconnect. Have a great day, everyone.