Taro Pharmaceutical Industries Ltd (TARO) 2017 Q2 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the Taro Pharmaceuticals Second Quarter 2016-2017 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 second quarter 2016-2017 earnings conference call. Joining me today on the call are Mr. Dilip Shanghvi, Chairman of Taro's Board of Directors; Mr. Kal Sundaram, CEO; and Mr. Mariano Balaguer, Taro's new CFO. We hope you received a copy of the earnings press release, which can be found on our website at 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. 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 any more questions, please rejoin the queue. As a reminder, this call is being recorded, and a replay will be available on our website for the next 12 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 is based on reasonable assumptions, it can give no assurances that its expectations will be attained, and should be reviewed in conjunction with the risks that our business faces as detailed from time to time in the Company's SEC reporting.

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 second quarter fiscal 2016-2017 financial results. We will try to respond to most of your queries. However, we will not be able to share product-specific and commercially sensitive information, including pipeline details.

We've just completed six-year anniversary of Sun ownership in Taro. When Sun acquired Taro in September 2010, we recognized that there were two key challenges that needed to be addressed in order to profitably move Taro forward - low sales growth and R&D productivity. The R&D investment was below its theoretical requirement. Over the past six years, Taro's commitment to delivering quality products through R&D investment has doubled, with a healthy pipeline of 36 ANDS awaiting FDA approval. Building a strong pipeline will continue to be our focus.

As you are aware, we announced in July that Kal will be returning to India to assume an executive position in Sun Pharma's global headquarters. Before I turn over to Kal, I would like to thank him for his commitment, dedication, and for his contribution to Taro, its management, employees, and, most importantly, its shareholders. He has led the Company on a steady and consistent growth path through a very challenging period for both the Company and the industry. Thank you, Kal.

Thank you, Mr. Shanghvi. Welcome to everyone, and thank you for joining us today. We are pleased with our overall operating performance. Net sales gross profit and operating income have all increased for both the quarter as well as year-to-date compared to 2015 comparable periods. We recorded a 7% uptick in volumes in the quarter, which is a trend that we reversed compared to the previous period.

While our R&D spend is down slightly over last year, this is mostly due to the timing of the spend. We take a very long-term view of our R&D activities, including the planned clinical activities. All of them are on track. In fact, we've spent practically as much as in the first half of this year as we did in the entire year of 2010 compared to prior to Sun's purchase of Taro.

Our facilities are in good standing order with major regulatory agencies. Our customer services is outstanding, in my view some of the best in the industry. Taro recently received supply chain excellence award from Cardinal Health, and we also achieved RBC 2016 Manufacturer's award.

Finally, we successfully completed our $250 million of share purchase program in August, repurchasing 1.8 million shares. As a reminder, in 2013, the Company repurchased two million shares. With excess cash of over $1 billion, we continue to evaluate business development opportunities with the appropriate targets. However, we remain disciplined in our approach in the way we deploy the cash, ensuring that our financial and operational targets are met.

We continue to face broader industry challenges in the generic landscape, given the Company's competitive intensity as well as our customer consolidation. Nevertheless, we remain cautiously optimistic about our medium- to long-term growth on our new product sales. We have met, and in some cases have exceeded, our own expectations the first half of this year. This is helping us to offset some of the sales decline arising from income, price erosion of our existing products. We will remain focused on strengthening our R&D pipeline and other initiatives that will continue to keep us well positioned in the market.

In summary, I believe our long-term strategy is well balanced, with the leadership position in many of the key molecules, a good pipeline, solid pipeline, and effective new product launches, and a strong manufacturing and customer services capabilities.

Before I hand over the floor to Mariano, Mariano Balaguer, our new CFO who just joined, I'll give his background. Mariano has 20 years of experience in senior management roles with global companies, such as Novartis Consumer Health, Nestle, and most recently global strategy portfolio division of Henry Schein. In his previous roles, Mariano was responsible for the financial functions of the business, working to expand the investment and profitability of the Group, as well as furthering the capability of the finance teams.

His experience covered all aspects of financial reporting, planning, expense control, tax, treasury, M&A, and other financial matters. His extensive financial background and international exposure will help us strengthen our management team and contribute to continuing growth and expansion of our business.

With this, I welcome Mariano. Mariano?

Thank you, Kal. Hello, everyone, and welcome. I'm very happy and excited to be at Taro, and I look forward to make a meaningful contribution to the Company and its growth. My goal is to provide strong financial leadership to the Company, keeping in mind that creating shareholder value and providing good quality products to the market is paramount to what we do.

The comparisons that I will discuss I would compare over prior year's period, first, the Q2 highlight followed by the full year comparisons. Q2 net sales were $229 million, an increase of $70 million, or 8%, driven by an increase in volumes mainly from the US business generics. And the 2015 net sales were negatively impacted by $19.6 million net charge taken to meet contractual obligation associated with price adjustment. On a pro forma basis, adjusted for the price protection provision, net sales would have decreased 1.2%.

Gross profit of $177 million increased $9 million, or 5% versus same quarter last year. R&D decreased $4 million to $15 million, and as Kal said, with all our activities, including clinical studies, proceeding according to plan. As you know, R&D spending is not evenly distributed across quarters.

Selling, marketing, general, and administrative expenses decreased $3 million, principally from the result of reduced Keveyis spend, and we continue to actively manage and remain disciplined with our spending and efficiencies wherever is possible.

Operating income increased $17 million to $142 million, an increase to 62% as percentage of net sales from 59% the same quarter last year. As a result of the above, Q2 EBITDA grew 13%, or $60 million quarter-over-quarter to $145 million. EBITDA margins improved to 63% compared to 61% for Q2 last year. Net income was unfavorably impact by a $22 million fluctuation in foreign exchange income, from $35 million in 2015 to $13 million in 2016. This was, first, principally due to the result of the strength of US versus Canadian dollar, an increase in US dollar cash, and inter-company balances. The FX is mainly balance sheet-driven by US dollar-denominated bank accounts and inter-company AR balances on our Canadian subsidiary books.

Tax expense increased $5 million to $36 million, resulting in an effective tax rate of 22% compared to 19% prior period. This increase is the result of geographical mix of where our profit are realized. Net income attributable to Taro was $124 million compared to $133 million as the increasing operating income was offset by the decrease in FX income and increase in tax expenses, resulting in earnings per share for the quarter of $3 versus $3.11 in Q2 last year.

Let me now briefly discuss the full year performance and comparison to last year. Net sales of $463 million increase $35 million, or 8%, with an increase in volumes principally due to our US generated business. On a pro forma basis adjusted for 2015 price protection provision, the net sales increase would have been 2%. Cost of goods sold increased $17 million, or 21%, the result of a higher volume as well as product mix.

Gross profit increased $20 million to $360 million, and as a percentage of net sales was 78% compared to 80% for the same period last year. R&D expenses of $33 million remain in line with prior year expenses, and SG&A expenses decreased $4 million to $43 million mainly from the result of the reduced Keveyis spend reduction.

Operating income increased $25 million to $284 million, or 10% versus prior year, where EBITDA grew 9%, or $24 million, to $292 million, and margins remain consistent at 63%. FX income decreased from $31 million to $7 million as the result of the strengthening of US dollar versus Canadian dollar. Tax expenses of $66 million increased $5 million, and the effective tax rate increased to 22% from 20% on the same period last year. Net income attributable to Taro was $234 million compared to $237 million, a $3 million decrease as the increases in operating income was offset again by the decrease of FX income and the increase of tax expenses, resulting in a diluted earnings per share of $5.59 compared to $5.54 in prior period.

Our cash flow balance remains very strong. Cash from operations for the six months ending on September 30, 2016, at $193 million compared to $129 million for the six months ended in September 30, 2015. Cash, including marketable securities, decreased $319 million to $909 million from March 31, 2016. This was mainly due to the $241 million impact from the Company's share repurchases as well as the $251 million increase in long-term bank deposits. As Kal mentioned before, we successfully complete our $250 million share repurchase program. The Company bought back $1.8 million shares in open market transactions in accordance to its 10b5-1 program at the average price of $138.8 per share.

Now, let me hand back the floor to Kal.

Thanks, Mariano. Before we open the floor for your questions, I want to briefly address the recent announcement concerning Department of Justice investigation.

While we do not comment on any specifics concerning that active legal matters, I can tell you that the Company and two of its senior members received subpoena from the Department of Justice relating to pricing and communication with Company's competitors. Our understanding is that the subpoenas relate to the same industry-wide investigations into the generic industry that has been going on since 2014.

As far as we are aware, the Department of Justice has not brought any legal action against the Company in connection with the investigation to date. We take this matter seriously, and are working actively with our counsel to cooperate with the Department of Justice. We also remain committed to strong long-term corporate governance and fostering a compliance culture at Taro.

Finally, I want to thank Taro Board of Directors, Taro management team, and our Taro employees, our customers and shareholders, for the support that was extended to me during my tenure at Taro. I'm confident Taro will continue to grow, and it's well-positioned for the future.

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

(Operator instructions.) Saion Mukherjee, Nomura.

Kal, on your comment on being cautiously optimistic from a medium-term perspective, given the pricing environment and the competition, particularly in product segments that you represent, and the fact that we have a very large base of around $900 million sales with the 36 ANDA spending, I find it quite surprising, actually, because the noise we hear about pricing competition, so many companies are developing and planning to launch derm products, for instance, there would be increasing competition. What makes you feel optimistic? Are you factoring any acquisition given the cash balance that you have when you say you're optimistic about growth going-forward?

Saion, probably I'm going to give you a two- or three-fold answer. The first answer is, as we have always been emphasizing, my visibility are long-term strength comes from our pipeline. We will continue to invest in R&D. And as you know, we have some of the best quality reputation and service reputation in the industry. So, in such a scenario, actually everything is sort of competitive when (inaudible) company to advantage or over competitor, so in that aspect we have well positioned with good pipeline, as well as very good quality service record. That is our first point.

The next is, maybe I will ask my boss, too, Mr. Shanghvi, to comment.

This is a genetic industry, [what you say], it has its own cycles. So, inasmuch as we enjoyed good sales growth in the recent past, naturally we'll come under pressure. And that's what we are seeing, and we are already seeing some competitive pressures, and that has effect on sales, which we are offsetting with our future products. Well, on a medium- to long-term, I'm of the belief that we'll ride out these ups and downs.

The last point is, like you are saying, we have very healthy balance sheet. If a very sort of suitable, attractive acquisition opportunity which can create further shareholder value comes, of course we'll capitalize on it. So, I [know what] you say. I don't get too nervous about one quarter, two quarter, one-year, two-year performance. And if you go back three, four years, [there will] also be a caution then, that there'll come a time we'll be subject to pricing pressures, so it was anticipated.

Prakash Agarwal, Axis Capital.

So, my question is, in the past we've talked about that the growth has been largely due to the pricing, higher pricing. And this quarter, after long time, you talked about pricing erosion in the existing portfolio. And now there are two things playing out. One is the channel consolidation, and new players adding up. So, what has really impacted us more? And if you could share what's the near-term outlook?

Okay, so in basis of a given product, if the product comes under pricing pressure, it is very difficult for us to determine how much is due to customer consolidation, how much is due to competitive pressures. As more players come into the market, it will certainly have the effect on both the price volume as well as market share. So, that's what we have experienced.

So, sorry, Prakash, what's your second question? You had a follow-on question to what you asked in the beginning.

Yes, the outlook in the near-term. As we just started to see the pricing pressure, both from new players and the (inaudible) channel consolidation, so what's the near-term outlook?

I think, what we see, we were in the first quarter first to have the pricing pressure, what we faced we made up from the sales impact from new products. My own personal expectation is we should be in a position, given our good pipeline recently, in a position to offset any kind of pressure that we will get on the existing products through launch of new product.

So, first (inaudible) reflection on what we see in the future?

That's what I'm saying. I would really say our objective will be to, and will be to offset near-term pricing pressures through launch of new products.

And any color in terms of launches that you can give us?

Prakash, come back again?

So, any color on the launches for the next six, 12 months you can give us on the Taro portfolio?

Prakash, a lot depends on when the FDA will give the approval, so that's not in our hands. We have some very good quality products which we are anticipating approval. So, depending upon the timeline, once we get the approval, we will immediately launch the product. So, if you ask me that next couple of quarters will be come under more pricing pressure, the answer is certainly yes, once those quarters will be pick up. Assuming that we get the FDA approvals that we are anticipating, we will generate healthy sales from those new products.

Neha Manpuria, JPMorgan.

Just to clarify, you mentioned that we are likely to see more pricing pressure versus what we are seeing now in the next two quarters. Is that correct? So, should we assume further deterioration in pricing for Taro?

Well, look, a lot depends on what the competitive intensity in the market, where it will be very difficult to, what do you say, crystal ball-gaze. But, I can say the competitive intensity continues to be the way we are seeing. In the next quarters, we'll sort of see possibly some more business. But, what I want all of you to take into account, just given our sales base of $1 billion, the pricing pressures at the percentage of the total base will not be -- I can't say it won't be insignificant, but it's not going to be something that is too big for us to be worried about, largely, once again, [I'm banking my statements] on our pipeline, too.

Because if I look at our numbers for the quarter, so adjusted for last quarter, the prior quarter one-off, we grew by 1%. You said the volume growth was about 7%. That implies a high single digit sort of price erosion. And my concern, it could probably grow double-digit on a $1 billion base where the competition in the term of products are increasing. It would be difficult to offset that, at least for the next -- even if we get new product launches. Is that the correct assumption?

That's a possibility, but what I also want you to take into account, please, but it's a given in the first half, some of our base prices have come down, and with that we are able to offset the larger through product launches. So, it will be a combination of price erosion, some of it. What is going to be further? It would be really difficult for me to predict at this point.

On R&D, what will be a normalized level of R&D? I understand it could be lumpy quarter-on-quarter, but on an annualized basis, are we comfortable with the run rate that we've been spending in the past in terms of an absolute number, or would that number increase?

I think if you look at our last three, four, five years, there has been a steady increase. So, I would expect the momentum around the increase will continue on a year-on-year basis.

Anubhav Aggarwal, Credit Suisse.

Mr. Shanghvi, how do you measure the R&D efficiency at Taro? What parameter, let's say, payback period? And how is Taro tracking against that? Because if I see the number since we acquire Taro, you almost paid more than $320 million in R&D. In the past you mentioned that the payback period for acquisitions that we have looked at Sun is about six years, so is that kind of number that we -- similar number we look at here? And how does this parameter compare against when we compare the R&D of efficiency of Sun Pharma?

Actually quite happy with the overall productivity and the type of products that we are able to file out of Taro. And also, I think the degree of complexity, normally clinical studies which are required for doing the filing. I think I'm quite happy with what they are able to deliver.

But, Mr. Shanghvi, how do you measure that performance? In the acquisitions you mentioned, the best metric is the (inaudible) payback period?

No, I think we have to have a different metrics about measuring return on investment in R&D, because there is a lead time between which the R&D will start producing. So, you have to factor that delay. And ultimately, R&D needs to produce return with a significantly higher than the original spend. So, that philosophy needs to be kept for deciding on the investment in R&D.

With your permission, in Taro portfolio, number of products, most of the products will require clinical development. So, you've got to build in that additional timeline. Also on one hand, what do you say, you're putting more time. On the other hand, a clinical development, a complex product by [itself] also has the potential to create larger value. That's the balance.

Then when you compare, let's say, $1 spent on Taro R&D was $1 spent on Sun Pharma R&D, based on any parameter that you track performance of two companies, would you say that efficiency would be similar in two company in last five years that we see?

Actually, I haven't done this comparison, so it's a good point. We should find a way to do that comparison, but we haven't. So, I think it's good for me to internally do this before I share it publicly.

Kartik Mehta, Deutsche Bank.

Is it possible, Kal, to give a rough idea on the price and the volume spread for the first half of the year for Taro?

What do you mean by that, Kartik? Can you amplify your question?

In terms of overall revenue growth in that, what would be roughly the volume, and what would roughly be the overall increase from the new products that we have launched, a broader (inaudible)? Would it be like half of it would have contributed to this?

Kartik, [I would say it will be], as I understand your question, what's the sort of split of new products versus existing products. Is this what you're asking? (Inaudible) good try. In the beginning I told you I don't get into specific details on product level discussion. All I can tell you is the product that we launched performed quite well, and they helped to substantially offset the pricing pressure that we came under. So, there are two ways you can look at it. Maybe we didn't have a lot of pricing pressure and the low sort of new product sales, or we had good pricing pressure but a good new product sale. So, very healthy new product performance is what I emphasize.

(Inaudible) long-term, or maybe you are -- so there is some (inaudible) in which we have (inaudible)? So, philosophically, would you think that you would keep some cash on the books and do a share repurchase or an asset acquisition? I mean, would that play on your mind when you would do that? I'm just trying to understand--.

I hear your question. Like I said in my readout, to date, we have no evidence, or we have not received any specific -- we have not been charged with anything by the Department of Justice. So, (inaudible) [part of this] (inaudible) think about the approach et cetera is premature. Again, I want to emphasize, we have good -- we follow sort of good practices, good training process within the Company. And to the best of my knowledge, we have not done anything wrong. But, at the same time, naturally there's been [an] inquiry, we have an obligation to respond and cooperate with the government.

Nimish Mehta, Research Delta Advisors.

Just (inaudible) level understanding on the 36 pending approvals, (technical difficulty) Can you hear me?

No, the line was a bit (inaudible). Come back again?

So my question is on the 36 pending approvals. I know you cannot give me the year-by-year launch calendar but, broadly, how many years will it take for you to launch this 36 ANDAs?

It's a combination of some (inaudible) longer-term horizon. But, for the rest of the product, if (inaudible) if we get the approvals that we are (inaudible) (technical difficulty). So, for the rest of the products, you should ask me probably in the next three years or so, I probably should be in a position to launch and capitalize on what we have been so far.

I'm sorry, there was, again, line breaking, but if you can please repeat? I'm really sorry for that.

So, we've got to split the 36 products into some products are a powerful challenge with the longer-term horizon. So, if you put those ahead of the rest of the products, if they are talking about 18 month timeline, even if it takes 18 months, 24 months, I cannot say. Probably in the next three years or so we should be in a position to capitalize on, if not all of them, most of them. We are seeing steady increases towards -- for the product that we have filed in the past.

And we have seen some (inaudible) gross margin decline sequentially, as well as the year-on-year. So, is this all related to the pricing pressure? Is that a fair understanding?

Some of the volumes have gone up and are very different on the product mix, too, isn't it? So, it's a combination of product mix and the volumes.

It's not only because of pricing pressure, okay. On the CEO -- appointment of the CEO, we understood earlier that (technical difficulty).

Abhishek Sharma, IIFL.

I just wanted to know, does Taro have a sales force in the US which is used to detail products to prescribers?

We do have a field force to detail products to, particularly focusing on dermatologists, yes.

And how big would that sales force be, given the fact that you're a predominantly generic product portfolio?

I think it's more to the number of doctors that we call on than the number of, what do you say, whether it's generic or brand. (Inaudible) the 60 people or so it should be. Normally, (inaudible) is adequate to cover key dermatologists.

And they basically use this opportunity to detail your other generic portfolio, as well?

They focus on, when we talk to the doctors, we largely focus on the brands. So, where are you coming from?

Saion Mukherjee, Nomura.

You mentioned about new launches, but in the IMS data, it doesn't indicate much contribution from new launches. And so, (inaudible) seen significant pricing pressure. And we have seen in the last couple of quarters, right, the Company reported IMS numbers have -- the ratio has turned more in favor of the Company reported number. So, what do you think about? Are there any comments that you would like to make?

I think we'll need to look to see the channels IMS captures and the channel IMS is not good at capturing. IMS will be [become] more you'll go through the conventional channels, closer you will be to IMS. Actually deviate from that, the delta will increase.

Is it a phenomena with the new launches that you have, or even your older products, this kind of difference in the channel mix as (inaudible)?

I would clarify it's not product-dependent. It's more channel-dependent.

On receivable days, you know over a period of time, we have seen that increasing quite a lot, the receivable days, less over the three, four-year period. Now, is this a phenomena in the US market, or if you can throw some light on how you see that, going forward?

Maybe later on I'll ask Mariano to provide more color that's required. Naturally, the receivables is a function of your sales, isn't it? So, one of the factor in the last few years is our sales have been going up, the receivables go up. For the rest, I'll sort of say it's more a timing difference. Other things being equal, how do you say, assuming it's at a constant sales, your results should be corresponding to that. So, as of now, we're collecting our bills on time. We have no contentious matters with our customers. We have an excellent system which captures our sales accounts receivable, et cetera.

Mariano, you want to comment anything on it?

Sure. Thank you, Kal. Basically, as you clearly say, our accounts receivable has no credit issues. Our DSO is driven mostly by our largest customers in term of what they have. In any given period, DSO can be impacted by factors such as customer mix or the amount of charge-back due to customers. So, as Kal said before, we haven't seen any issue in our accounts receivable so far, and this we consider to be a normal fluctuation of the business.

Yes. actually, I was referring to receivable days. If you see that has gone up almost like (inaudible) days two years back to 200 days, and even if you go back, it used to be closer to 100 days. So, there seem to be a steady increase in receivable days over years, actually.

Saion, I don't know what you say. I don't have those numbers today right in front of me. All I'll say is the industry norms will be somewhere in the region of 100 days or so, I think. So, very broadly speaking, we'll be in that range. One thing that you've got to take into account will be that, in the customer consolidation, that depending upon the change in that mix and the resultant consolidated customer base, what the terms with us can have an influence on the number of days.

For example, customer A is a 30-days customer, customer B is 90 days. The customer B starts buying for customer A. That also can reflect in an increase. But, you think about 150 days, et cetera, again, I don't have actual numbers in front of me, but I'm fairly confident that we have nowhere near yet the (inaudible) number.

Kal, if I can give you some numbers there, we were above 110 days two quarters ago. We dropped down below 100 days last quarter, and now we are under 100 days. So, as I say before, we do not see any issue in our credit. This is a part of a normal fluctuation of the business. And if you go back in history, you will see the same fluctuation. Even more, if you -- market trend, there is something going down there. So, basically, we are in good shape.

And we have (multiple speakers). Go on.

Yes. On the balance sheet, you report accounts receivable, other receivables. What is the other receivable? What are those?

Other receivables would be what deferred tax and things like that. Sorry, I was an accountant long time ago, so I will ask -- Mariano can answer that.

Yes. Other receivables include some of it deferred [tax], so I want to take that into consideration to the measure that is.

(Inaudible), other receivables had nothing to do with trade.

(Operator instructions.) Manoj Garg, Bank of America Merrill Lynch.

Kal, if you look at in the last few quarters, our sales have been no more or less in the vicinity of around $230 million to $250 million kind of range. While you alluded to be that the new products are something which are going to drive the growth, going forward, but if I look at even the R&D spends over the last two years and in the first half of this fiscal year also, I think it has been more or less, I would say, steady kind of things, like it's not growing despite being a billion-dollar base, and obviously we are seeing the pressure in terms of pricing and all those things. So, just would like to get your comments in terms of maybe mid- to long-term kind of growth prospects for the business.

Manoj, in the beginning I mentioned, particularly in dermatology, the development timelines are longer than, let's say, oral solids, because they are -- for most of the products, we have through clinical development. So, in a period of time, we have been accumulating a pipeline. So, if you study historically in the last two, three years, the new product contribution have been insignificant. So, that's why I said, you've got to take into account when you look (inaudible).

Another thing is also, if you start -- if you look at the FDA, they were taking approximately 36 months on the average to approve a product. Now, we are talking about 18 months, somewhere in that region, let's say. So, then, when (inaudible) of approvals, and that also benefits for us in terms of our pipeline, I feel it also will have effect on Companies' ability to bring their product. So, I'm sort of summarizing what you are asking me. There is a timeline between the R&D spend and the product approvals. So, in the past, whatever that we have filed, we'll see the benefit of that in the next one, two, three years timeframe.

So, just continuing with this question only, so are we fairly confident that, despite the base business price erosion, we should be able to grow our top line as we move forward over the next 12 months?

I think, what do you say, we still are guessing quite a lot here. All in all, the companies are, [what do you say], the underlying strength of the Company will depend on our portfolio and the quality and the service. On all fronts, I am very confident that we are doing, what do you say, by all comparisons, a good job based on the time say, medium- to long-term we look healthy. And I also said earlier on, in genetics, it's a cyclical business. We'll have sort of competitive pressures, price goes down sort of been a gross-up. One has to take a fairly long-term view of the Company

Sameer Baisiwala, Morgan Stanley.

Kal, would Taro look to therapeutically diversify out of derma, or do you think there is ample opportunities out there for you to continue to work your R&D engine?

I think what you say, we'll continue to look for opportunities in derm and beyond. But, by and large, we are a specialty generics, specialty generics focusing on derm, or we have a good portfolio of narrow therapeutic index products where the product complexity, tolerance levels are more demanding. So, anything sort of that fits that criteria, we'll continue to look. Even in the derm space--.

--(Inaudible) opportunities there?

I'm (inaudible) in the specialty space, it will have reasonable opportunities.

On the DoJ investigation, I don't want to be specific about what's going on with you, but, theoretically speaking, on what kind of a roadmap do such investigations take broad timelines? Does it go through the court route? How should we think about it? Is it one year? Is it five-year thing here from?

Again, good news is that I don't have a lot of experience in this. If you look at other companies, some of the other companies, the investigation started in 2014, nothing has been done. We are not aware of any charges. But, the investigations are going on. So, I think it will be -- it's not going to get over in a month or two. It will be for a longer period.

What's your capacity utilization at Israeli and Canadian facilities?

We have ample capacity to take all our new products.

Shyam Srinivasan, Goldman Sachs.

Just probing again on the DoJ, I know you're not giving us any detail. Some of your competitors have filed products which you sell, so can you give us any color on -- any additional color on the DoJ probe? I know there is less detail now, but anything that you can share additionally would be very (inaudible). Any (inaudible) think provisioning now ahead of that? I know that the charges have not been framed, but any kind of a conservative provisioning that we can, as a company, do? Do you think it makes sense, or you think it's too early?

It's too early. And what I'm saying is we have good processes. At this point, we have no reason to believe that there is going to be any damage. Depending upon the way the investigation dialogue, et cetera, goes, there's a requirement in future, of course we will consider that at that point. As of today, we don't have any reasons to believe that we need to make any provision.

Just following up again, do you think, just from your conversations with the department, is there a case that they could -- now, I know we are speculating here, but is there a case that they could set this as an example to prevent future price increases in the industry because they're just probably upset that (inaudible)?

I think you yourself said that we are speculating here.

Chirag Dagli, HDFC Asset Management.

So, on the M&A front, we've seen both generic, as well as specialty, company valuations coming off. Does this change the environment in terms of what is available for Taro? Or in terms of assets now sort of falling into your overall criteria?

If you're asking me philosophically, the answer will be yes. So, naturally, any value correction makes the opportunity more attractive than it was in the past. So, if it cannot meet our business strategic or sort of financial criteria, yes, of course we'll go for it.

But, is the correction adequate enough for it to sort of fit into your criteria versus will it not be?

Depends on the company, depends on the product isn't it. All I can tell you, we are continuing to monitor. We are continuing to monitor. And then, the opportunity sort of is [right] at that point, believe me, we will take to act on it.

What would be the tax rate that we should build in for Taro, the effective tax rates that we should build in?

What do you say? if this is futuristic, so I don't want to comment on it.

But, this current number is sustainable? There is no one-off or there is no quarterly skew in this?

Mariano? There is no skew for (inaudible) that rating.

Anubhav Aggarwal, Credit Suisse.

There is certainly a very sharp increase in cost of sales for last two quarters. The average cost is to be over $45 million a quarter. Now we are doing 15% higher. I know you have said that volumes are higher, but I doubt volumes are 15% higher. What I'm trying to say is that, of course, there is some currency element. Volumes are higher, but the 15% move is very high to be explained by just product mix or just volumes.

I think you saw even what we said, the volumes are up by some 7% or so. Also, I mentioned about the product mix. Not all products carry their same margin. So, depending upon the product mix, the cost of goods are [totally very] (multiple speakers).

But only the cost of goods, right?

Yes. What else?

So, you're saying the volume where we have got the higher volume, the cost of those goods are much, much higher. That's the point you're trying to say.

Correct, relatively speaking, higher than that, [the average]. (Multiple speakers.)

If I can give you some color here, we're already saying, given the script where we presented to you two impact in here. One is the volumes were going up, the mix are different, as well as we do outsource some of the product. I explained that also in the tax impact, so you have to consider that, and that is impacting our cost. So, when you factor all these three component into the cost, that's why you see an increase. I hope that's helping to answer your question.

You mentioned that you outsource it, as well, from outside. That would have been another component also for this to go up?

Like I mentioned, we consider this more as a product mix. As to why, how, et cetera, the reasons can be very many.

Can you give, do you want to share, roughly? We have 36 pending ANDAs with the FDA, but on the products that you're working right now, not the product names or the areas, but roughly how many products are under development right now, and how many trials are you running? I'm just trying to get some idea about, other than the products that you filed, if not in quantitative terms, let's say, I'm trying to see that what kind of progress are we seeing? Are you working on two extra molecules now that you were [looking at] two years' back, or one and a half time molecules, or are we doing two extra trials right now? So, some kind of color will be very helpful, because we have zero idea about other than Taro doing R&D spend of $75 million a year and 36 pending ANDAs. We have no idea, other than clinical trial, where we can see some (inaudible) clinical trials is on right now.

Number one, I don't have the numbers in front of me, but if you go to the arithmetics of what I mentioned, it can take anywhere upwards of three years for a dermatological product from start to filing. So, honestly, I don't have the numbers in front of me. But, given the longer timeframe to file, one can assume an accumulation of products in the pipeline.

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

Thank you, everyone, for joining us today and taking the time to be on our Q2 2016-2017 earnings call. we look forward to speaking to you again in the future. This concludes our call and our conference. Again, thank you for joining us.

Ladies and gentlemen, this does conclude the program, and you may now disconnect. Everyone have a great day.