Taro Pharmaceutical Industries Ltd.
Q2 2018 Earnings Call Transcript

Published: 8 Nov 2017

[Operator:]

Good morning, ladies and gentlemen. Welcome to the Taro Pharmaceuticals Second Quarter 2017/2018 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 over to Mr. William Coote. Mr. Coote, please go ahead.

[William Coote:]

Thank you. Good morning, everyone, and welcome to our second quarter 2016/2018 earnings conference call. Joining me today on the call are Mr. Dilip Shanghvi, Chairman of the Board of Directors; Mr. Uday Baldota, Taro’s CEO; and Mr. Mariano Balaguer, CFO. We hope you received a copy of the earnings 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. 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, please rejoin the queue. As a reminder, this call is being recorded and a replay and transcript will be available 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 reviewed in connection with the risks that our business faces, as detailed from time to time in the company’s SEC reports. I would now like to turn the call over to Mr. Dilip Shanghvi.

[Dilip Shantilal Shanghvi:]

Thank you, Will. Welcome all of you and thank you for joining us today for Taro’s earnings call after the announcement of the second quarter and six-month FY 2018 financial results. Taro along with the generic, entire genetic industry continues to face difficult headwinds in generic pricing. The result of more intense competition, new entrants to the market, consolation of buying consortiums, and higher FDA, ANDA rate. These factors are expected to continue into the foreseeable future. However, Taro is well-positioned to face these headwinds. I know that many of you are familiar with Uday Baldota through his many years of service for Sun. In August, Uday assumed his new position as Taro’s CEO. Uday has been involved in Taro’s development from the very beginning of Sun’s ownership seven years ago. So he’s very familiar with its products, markets, operations and people. I’m confident along with the entire Taro Board that Uday’s experience and leadership will benefit Taro and its shareholders, as the company navigates through a very tough and challenging environment. I will now hand over the call to Uday.

[Uday Vijaykumar Baldota:]

Thank you, Mr. Shanghvi, and welcome, everyone, and thank you for joining us today. I’m very pleased and excited to be at Taro. And as Mr. Shanghvi indicated, I have been involved sometimes from a distance with the growth and development of Taro since the acquisition back in September 2010. While the entire U.S. generic industry is facing a difficult environment, as all of you are – most of you are aware, Taro is well-positioned to meet this challenge using our strength. Let me briefly highlight our key trends. A strong leadership team in all areas, such as the commercial function, sales marketing, customer service, operations, R&D and all the other enabling functions. Strong customer relationships; quality products; in fact, if you look at Taro products in the U.S. generic business, more than two-thirds have a ranking of number one and number two based on market share; a good pipeline of 32 products are waiting FDA approval; a strong commitment of quality with all our facilities in good standing with the respective regulatory agencies; and of course, a strong balance sheet. We take a long-term view of R&D investments and we’ll continue to invest in R&D going forward. We are satisfied about the progress with the clinical studies that are currently on. With $1.5 billion cash on our books, we will continue to evaluate business development opportunities with appropriate target, whether it’s a product, multiple products or a business. However, as in the past, we will remain extremely disciplined in our approach ensuring that our financial and operational metrics can be achieved. A word about our share repurchases. Under the current authorization with the Board has extended by one more year. We have repurchased 930,000 shares, coupled with the 2013 Dutch auction and in March 2016 completed authorization. Taro has bought back 4.7 million shares of returning a significant value to shareholders with a large portion of our current authorization still remaining. To discuss the financial performance, let me hand over the call to Mariano.

[Mariano Balaguer:]

Thank you, Uday. Hello, everyone, and welcome. Let me discuss some of the key financial highlights. The comparisons that I will discuss are for the comparable prior year periods. First, second quarter highlights, followed by the six months comparison. Net sales were $170 million, a decrease of $59 million, as a result of continued increased competition and the challenging pricing environment with overall volumes for the quarter increased 1%. Gross profit of $125 million decreased $52 million, and as a percentage of net sales was 74% compared to 77%. Research and development expenses of $18 million increased $3 million compared to the same period of prior year. Selling, marketing, general and administrative expenses, SG&A decreased $3 million to $18 million, as we continue to actively manage and remained disciplined with our spending and seek efficiencies wherever is possible. Operating income of $89 million decreased $53 million as a percentage of net sales was 52%, compared to 62% in the prior year quarter. As a result of the above, second quarter EBITDA of $93 million decreased 36% with EBITDA margin of 55% compared to 62% for Q2 last year. Foreign exchange expenses of $33 million in the second quarter 2017/2018, compared to FX income of $13 million in the last year second quarter resulted in a $46 million negative impact on earnings. This impact is principally the result of the strength in our Canadian dollar versus the U.S. dollar. This FX is mainly balance sheet driven by the U.S. dollar denominated bank accounts and the intercompany AR balances on our Canadian subsidiary books. Tax expense decreased $29 million to $7 million, resulting in an effective tax rate of 11.5%, compared to 22.3% for the same period of last year. Net income attributable to Taro was $52 million, compared to $124 million, as the decrease in operating income and the increase in FX expenses was partially offset by the reduced tax expenses and $1 million increase in interest income, resulting in a diluted earnings per share of $1.30 compared to $3 from the same period last year. Let me now discuss six months performance in comparison to last year. Our net sales of $331 million decreased $131 million mainly due to a continued increase in competition and challenging pricing as previously pointed out, with the overall volumes increase of 4% across of – all of our principal market and businesses. Cost of goods decreased $13 million, mainly due to results and lower royalties. Gross profit of $242 million decreased $118 million, and as a percentage of net sales was 73% compared to 78% for the same period last year. R&D expenses of $33 million remain in line with prior year expenses with all of our activities, including clinical studies, proceeding according to plan. SG&A expenses remained relatively flat at $43 million. Operating income of $166 million decreased $118 million, and as a percentage of net sales was 50% compared to 61% in the prior year. EBITDA of $174 million with a decreasing margin from 63% to 53%. FX in the 2017/2018 six months period was at $60 million fluctuation from the prior period from $8 million income to an expense of $52 million. As pointed out before, this is principally driven by Australian or Canadian dollar versus U.S. dollar, and it’s mainly due to balance sheet. Tax expenses decreased $49 million, resulting in an effective tax rate decreasing to 13.6% from 22% in the prior year period. Net income attributable to Taro was $107 million, compared to $234 million, a $127 million decrease, as the decrease in operating income and the increase in FX expense was partially offset by reduced tax expense and $2 million increase in interest income, resulting in a diluted earnings per share of $2.65 compared to $5.59 in the prior period. Our cash flow and balance sheet remain strong with cash, including short-term bank deposit and marketable securities, both short-term and long-term of $1.5 billion increased $83 million from March 31, 2017, despite of the $40 million impact from the company share repurchase in the current fiscal period. Cash provided by operations for the six months ended September 30, 2017 amounted $139 million, compared to $193 million for the six months ended September 30, 2016. As Uday mentioned it, we’ll return value to our shareholders through our share repurchase program. Under the November 2016 authorization, during the quarter, the company repurchased 310,000 shares at an average price of $102 with $0.92. And given the current fiscal year through October 31, the company has repurchased 411,000 shares at an average price of $103 with $0.79. In total, under the November 2016 authorization, the company repurchased 930,000 shares at an average price of $104 with $0.22. There is a still $153 million remains under this authorization. And at the recent Board meeting, the share repurchase program has been extended for one more year. Please, let me now turn back the floor to Uday, thank you very much.

[Uday Vijaykumar Baldota:]

Thanks, Mariano. Before we open the floor to questions, I wanted to briefly address the Department of Justice investigation. While we have nothing new to report on this matter, we continue to work with our counsel to cooperate with the Department of Justice. We also remain committed to strong corporate governance and fostering a culture of compliance at Taro. I look forward to working with the entire Taro team and successfully overcoming the challenges we are facing in our business. We will continue to evaluate initiatives and opportunities which will add to the existing business and performance to build a stronger future. With this, I would like to open the floor up for your questions. Thank you.

[Operator:]

Thank you. [Operator Instructions] Our first question is from Elliot Wilbur with Raymond James. Your line is now open.

[Elliot Wilbur:]

Thank you, good morning and/or good evening. Just a point of clarification, I believe you said volume across the portfolio on a year-over-year basis was up around 4%, which would imply something close to 30% in terms of year-over-year price erosion, unless there were some new products in there. So I’m just wondering if you could allude a bit more clarity in terms of the price/volume metrics year-over-year and also sequentially would be helpful, thanks.

[Mariano Balaguer:]

Yes, hello. I think the volume increase is 4%, however I want you to take into consideration that we have different businesses into our portfolio and so you cannot do that type of linear calculation. Again, we have different increases in volume from the different portions of the business; however we do not disclose each business in particular. I confirm you, it’s 4% increase in the volume on a year-to-date basis. I will be cautious to do the correlation to the price erosion.

[Elliot Wilbur:]

Okay, but the year-over-year price declined 25%, majority of that’s – the year-over-year sales declined 25%, the majority is price, that’s fair to say?

[Mariano Balaguer:]

I think that’s about right.

[Elliot Wilbur:]

All right, thank you.

[Operator:]

Our next question is from Neha Manpuria with JPMorgan. Your line is now open.

[Neha Manpuria:]

Just to take the question ahead, if I look on a quarter-on-quarter basis there has been an improvement in sales, so is this – how much did the volume go up quarter-on-quarter or was this related to certain charge backs et cetera that we had one-off in the previous quarter. Just some color on the quarter-on-quarter sales moment please.

[Uday Vijaykumar Baldota:]

So, Neha, I think the way we should look at it is that this is not an indication of the trend, if that helps.

[Neha Manpuria:]

You mean the current quarter?

[Mariano Balaguer:]

Yes, meaning the increase that you’re mentioning from Q1 to Q2 is not necessarily the indication of this trend going forward, we need to because cautious.

[Neha Manpuria:]

And what would the increase be because of this?

[Uday Vijaykumar Baldota:]

I think as Mariano explained, I think we have different businesses so we’ve seen an increase in some business and a decline in some other business. Overall if you look at Q-o-Q, there is a marginal increase that we’ve seen, but if you look at continuously Y-o-Y, I think both for the quarter and for the first half, there is a sharp decline that we’ve seen. So, the increase is marginal. I think we should not necessarily look at extrapolating this as a trend.

[Neha Manpuria:]

Got it sir, thank you so much.

[Operator:]

Our next question is from Anubhav Aggarwal with Credit Suisse. Your line is now open.

[Anubhav Aggarwal:]

Hi Uday, just taking from the last question. If you see in addition to cost of sales also, I’m taking sequentially here, cost of sales is absolutely flattish sequentially, you mentioned increase in marginal but it’s 5%. So, it tells us either the June quarter was one-off or is this quarter one-off, I think one has to be the case. To us, 5% is not marginal.

[Uday Vijaykumar Baldota:]

5% of what Anubav, if you can clarify.

[Anubhav Aggarwal:]

So sales increase sequentially is 5%, that is cost of sales absolutely flattish, so to us this indicates that either June quarter had some-off or as you were indicating this quarter has one-off.

[Uday Vijaykumar Baldota:]

I think Anubav you know that there are severe headwinds that the business is facing, now the result of that reflected in Q1, the result of that reflected in Q2, it would depend on at what stage, let’s say, our customer comes back us for a price decrease. And at what stage we are hopefully able to supply a new product to the market, so I think it’s a combination of a lot of these things Anubav. So necessarily seeing a 5% change quarter-over-quarter and attributing it to any specific one-off I think would be difficult. And there would be situations you know what would have happened in Q1 has not happened in Q2 or vice versa, but I don’t think all of this can be attributed to necessarily any one large one-off or anything.

[Mariano Balaguer:]

To complete the answer, as you go back and review our history and the gross margins, you will see that Taro gross margins has never been like a absolutely constant, we have up and down depending on the quarter, this is basically on the mix of probe, as Uday has mentioned, not only that, but also we have some mix on different customers. So once again I think we will be cautious trying to take too many conclusions out of the quarter-over-quarter evolution.

[Anubhav Aggarwal:]

Okay, thank you.

[Operator:]

[Operator Instructions] Our next question is from Gregg Gilbert with Deutsche Bank. Your line is now open.

[Gregg Gilbert:]

Yes, hi, good day. My question is about whether you plan to make any changes or at least tweak to the company’s strategy and/or capital deployment priorities? And secondly, how do you balance this new job with that as CEO of Sun North America? Thanks.

[Uday Vijaykumar Baldota:]

Maybe I can second the – answer the second question first. I am not the CEO of North America for Sun, that’s Mr. Abhay Gandhi, who is the Vice Chair for the Taro Board and he runs the Sun U.S., North America businesses, not me. Taking your first question, I think historically Taro has continued to evaluate opportunities for deploying its cash. Taro has continued to evaluate opportunities as to what it can do to ensure that it continues to grow the business. I think from that perspective I would say we continue to do that, we continue to look at initiatives and opportunities so that we can put the business on a stronger footing even compared to what we are today going forward. So that way I think nothing changes. The idea is, we are seeing lot of industry changes that are happening as we speak. We’ve seen buyer consortiums over the last two, three years. We are likely to see regulatory changes that media keeps talking about, we are likely to see some change in the supply-chain industry as media keeps talking about. So I think we are truly in a state where we need to be cautious as to what is it that we will do, particularly when we don’t know very precisely the shape of things to come. So to the extent that we get more clarity and visibility on any of these aspects, I think we will need to continue to tweak our strategy, but overall looking at opportunities for growth in our core areas of strength and maybe some adjacent areas that we are interested in, I think that doesn’t change.

[Gregg Gilbert:]

And if I could just follow-up, and how about the relationship between Sun and Taro and sort of how business has done separately or together?

[Uday Vijaykumar Baldota:]

So, I think it’s appropriate for me to state that I think Taro evaluates the opportunities for product development as well as any business development opportunities and whatever Taro feels appropriate I think that’s something that we get, we worked was getting the Board approval and investing towards that. So that doesn’t change. I don’t think I can respond for Sun, but maybe we can – I would hand it over to Mr. Shanghvi if he wishes to respond.

[Dilip Shantilal Shanghvi:]

Uday, I think his question is more about what is that Taro plans to do? And so idea for us is to continuously – I’m responding for Sun and also to some extent also philosophically since we run Taro at Board level, that philosophy is also implemented through Board policies, is that – how do we create long-term value for all the stakeholders and identify businesses, which will either organically grow at a rate, which would be faster than the industry or will – whenever we look at acquisition then how do we get a kind of a post synergy return, so that we can get our money back in six plus years. And even for Taro, I think, we try and look at business opportunities in a similar way. I hope this answers your question.

[Gregg Gilbert:]

Thank you.

[Dilip Shantilal Shanghvi:]

Thanks.

[Operator:]

Our next question is from Nimish Mehta with Research Delta Advisors. Your line is now open.

[Nimish Mehta:]

Yes. Thanks for taking my questions. Can you just let us know – yes, hello, can you just let us know, hello?

[Uday Vijaykumar Baldota:]

Hello. Yes, Nimish, go ahead, we can hear you.

[Nimish Mehta:]

Yes, I’m sorry. Okay. Can you just let us know what would be the sales contribution from products that you would have launched in the last 12 months? I mean, a rough kind of ballpark would be?

[Uday Vijaykumar Baldota:]

Nimish, that level of granularity we would sort of avoid giving.

[Nimish Mehta:]

But some color would be essential. I’m just trying to understand that are we gaining with the new products. So where are we, some color would be helpful? As well, are we becoming meaningful enough or not?

[Uday Vijaykumar Baldota:]

I think, we would avoid. Maybe you can look at industry sources, which can give you some directional indication on that.

[Nimish Mehta:]

Okay, okay. Thank you.

[Operator:]

Our next question is from Anubhav Aggarwal with Credit Suisse. Your line is now open.

[Anubhav Aggarwal:]

Yes, thanks for taking question again. Uday I have a question on the balance sheet. Taro has a $1.5 billion cash, but I see consistently for lat five years in cash and cash equivalents, the company keeps almost $0.5 billion cash, why is that so? That much cash is not required for running the business certainly?

[Uday Vijaykumar Baldota:]

I think, I again, assure you and Mariano can give you more color on it that the way the cash is deployed, I think, we balance our risk and return on that cash. And I think, our internal guideline is that, you would like to ensure that we don’t lose the capital. But whatever is the highest return that we can get potentially without taking undue risk is what we are trying on. So I think, that’s been the operating philosophy and that doesn’t change. Mariano, maybe you can help him understand the classification.

[Mariano Balaguer:]

Sure, sure. We continue optimizing our cash management and allocating those cash in the best way possible. As you have seen there’s deeper in dynamics between the collection and the payments with a large consortium. So we’ve continued to optimize our cash management and treasury function as we move into this environment. But definitely, you can see it from a prior quarter to this quarter that our cash is outside, because we’ve been reduced. We’re increasing some other short-term maturity, some bank deposits, as we move into our best possible suited for that. You also have seen that we have had in some securities and we have some long-term investment as well or in a good diversification, so we don’t get into any risk. But even in the current economy, I think, it’s important to stay in a very gracious way.

[Uday Vijaykumar Baldota:]

I think, what Anubhav is attempting to ask is, why do we have such a large number here? So what all is included in cash and cash equivalent is, what he is attempting to ask, yes.

[Mariano Balaguer:]

We have a short-term operation cash there and before we deploy to any investment is what we have. But I would say that, you can go back to the previous quarter, when Q4 last year, we had $600 million and we bring it down now to $500 million, and we continue to actually manage our structure in this end.

[Anubhav Aggarwal:]

Okay. But Mariano is, I mean, I’m just trying to understand how much cash you actually need to run the business, because this appears the other peers that you track nobody requires that much amount of cash. I know that need has increased with bio-stating consolidated, that sense would be useful that how much cash is really needed to run the business?

[Mariano Balaguer:]

I don’t think we’ll go into that level of detail. We do set up our cash operation needs in a very detailed manner depending on the regions as well. But definitely, a scenario, you follow and you will see that our marketable securities are up and then more than $300 million, but.

[Dilip Shantilal Shanghvi:]

Mariano, maybe you can help break it into some kind of break up whether it’s cash or it is in high yield liquid investment. So I think that, what he is looking for is, why you have 500 million earning nothing.

[Mariano Balaguer:]

Yes, they’re earning. We have implemented as a company a whole cash pooling system. So everything that is in cash has been dealing interest overnight. So that with the every dollar that we have in our pocket is dealing different level of interest in it. And we do have that to money market funds and very AA, AAA type of allocations. So everything that you see in the balance sheet has been yielding interest in not only on a regular basis, but also overnight basis, as we deploy our cash. Again, the way we classify that all the cash pooling account, it is in spite of the cash and cash equivalent, that’s why you see that large balance there, also some of the short-term deposits are there. But I hope that help you to understand why do we carry that high balance in our cash and cash equivalent account. The type of instrument we use are very liquid and that’s why they also classify as cash equivalent.

[Anubhav Aggarwal:]

Okay. Thank you very much.

[Mariano Balaguer:]

You’re welcome.

[Operator:]

Our next question is from Cinderella Carvalho with Dolat Capital. Your line is now open.

[Cinderella Carvalho:]

Hi, thanks for taking my question. So want – just want to have a broader perspective from you over 18 to 24 months. On one side, we’re seeing challenging or evolving business dynamics. And on one side, we’re seeing that Taro is well-positioned to face it. You have listed down few strong volumes like a strong balance sheet and the ANDA pipeline. So how should we look at the 18 to 24 months going ahead? What could drive us and what could be unused debts that you’re having in mind, if you could provide some color to us would be really helpful? Thank you.

[Uday Vijaykumar Baldota:]

So, typically keeping in line with the fact that we generally don’t give a medium to long-term indication of anything specific as far as our performance is concerned. I think, it’s fair to say that, when you look at the market and I’m looking literarily U.S. generic market at the moment, which is sort of contributing the dominant part of sales and profitability to Taro. The pain that we have seen in terms of severe price eroding on account of several factors, I think, that’s something that is likely to continue is our best estimate today. The intensity may vary, but the pain is likely to continue. And I think that is something that will have an impact on the overall performance of Taro. And that is something that will be reflected in the numbers that you see going forward. Now, the question is, what is it that we’re doing to sort of mitigate that impact? As I said, we’ve invested in developing products and we have a reasonably good pipeline, and some these products will come to market over the next 24 months. The question is, whether they can make up for the loss that we see in the base business eroding, that’s difficult for us to really compare and comment. But if I go by, let’s say the – what we’ve seen over the last 18 to 24 months, the erosion has been quite severe. And to that extent, you see an impact on the overall sales and the profitability of the company.

[Cinderella Carvalho:]

So basically, you’re saying the ANDA pipeline is the first support that we should look at in terms of well positioning Taro?

[Uday Vijaykumar Baldota:]

That’s right, that we already have and we are continuing to work on additional products.

[Cinderella Carvalho:]

Okay, okay. Thank you.

[Operator:]

Our next question is from Sameer Baisiwala with Morgan Stanley. Your line is now open.

[Sameer Baisiwala:]

Hi, thank you very much. Uday. Just curious that for SG&A expense for the quarter, it was $18 million. If I look back, it’s probably one of the lowest in last many, many quarters, generally between $20 million to $25 million, just one of reporting, or is it something meaningful part of cost you’ve taken out?

[Uday Vijaykumar Baldota:]

I think, that is a constant effort on our part to find ways by which we can sort of optimize costs. And I would say, to a certain extent, this also is an impact by creating shared services kind of function across the two organizations in Taro. And to that extent, we are operate at lower cost. So some of these – a result of that, I’m not sure how much of that is on account of that. But the idea is going forward what is that we can sort of optimize on the costs and that is something that is an effort to control the overall cost of the operation.

[Mariano Balaguer:]

And to complete that answer for SG&A….

[Sameer Baisiwala:]

Okay.

[Mariano Balaguer:]

I will consider that year-to-date basis as, you will have timing when we will set up this plan that can what is by quarter versus the other. But on a year-to-date basis, you can see the impact, I’m hoping you could continue that for maintaining our costs flat or below what has been in prior year.

[Dilip Shantilal Shanghvi:]

Yes. Uday and Mariano, my view is that, it’s also possible that some areas looking at numbers that included marketing costs for [indiscernible] which we then we discontinued, we would have discontinued all those activities.

[Mariano Balaguer:]

That is correct, Dilip, where we discontinued and we had the final quarter in Q2 because of [indiscernible] as well.

[Sameer Baisiwala:]

Okay, this is very helpful. Mariano, the other point here is that, I think if I see the U.S. dollar versus Canadian dollar, the trend that you are seeing the preceding six to eight months, which was Canadian dollar was strengthening and you’re reporting FX losses, that has altered in October and November. I think Canadian dollar has weakened 5% already, so now we should see the reversal of FX trend, which is you should be booking the gains in Q3 onwards?

[Mariano Balaguer:]

In principal, yes. However, I will be closer to go back and compare what has happened in the prior year quarter, where the Canadian dollar was weakening Australia that time. And once again, as I pointed out before, this FX situations are mainly balance sheet driven. So our deposit and cash deposits are in U.S. dollar denominations that get comparing to Canadian dollar and that’s where we have to recognize a loss. So it’s all mainly balance sheet driven in that case. But you’re right if you see a trend going in the other direction, once again, go back and review what has happened a year ago in the same quarter and you can get the impact that you will have.

[Uday Vijaykumar Baldota:]

So I think, Sameer, what Mariano is saying is, there is no cash impact of us.

[Mariano Balaguer:]

At all, yes.

[Sameer Baisiwala:]

Okay. Okay, now I get the point. Fair enough. And finally, one more, given your philosophy – sorry, given your commentary on the business for Taro, some call account it looks like it’s a very tough environment out there. And in this such an environment why – what’s the philosophy behind company allocating $250 million in share repurchase, which is buying shares of our company, which is finding very, very hard to keep it side of a water. And I think, given commentary for the next 12, 18, 24 months, it’s going to continue like that?

[Uday Vijaykumar Baldota:]

Sorry, Sameer, maybe you can explain the question once again?

[Sameer Baisiwala:]

Why are – what’s the thinking behind putting $250 million to share repurchase program, which is buying shares of our company, which is finding very, very tough environment?

[Uday Vijaykumar Baldota:]

I think, partly it’s also linked to the fact that, we said that Taro is facing lot of headwinds. But I think, internally, when we look at the organization, we believe that we are reasonably strong to face some of these headwinds, not to say that, we are not going to face the – not going to have the impact. But I think, we are reasonably strong to sort of manage through these headwind and that’s the challenge for us. So I think, we can’t necessarily buck the trend, but I think we will come out stronger and the other side is the intent. So I think, what we are doing in terms of the share repurchase in a relatively low liquidity stocks helping the shareholders sort of liquidate, investing in our own stock, because we believe in the long-term story. I think, it’s a mix of all of these things.

[Sameer Baisiwala:]

Okay, thank you very much.

[Operator:]

Our next question is from Alok Dalal with CLSA. Your line is now open.

[Alok Dalal:]

Yes, good evening. Uday, you mentioned about significant industry changes in the future. At the same time, are you seeing any tailwinds in the U.S. generic market, anything that maybe people are missing with all the challenges around?

[Uday Vijaykumar Baldota:]

I don’t think anyone is missing any specific, meaning all the bad news, the challenges that the industry is facing is sort of by and large known to people. And we discussed some of these things. We did mention the intense pressure that we are facing from our customers, the continued approval of new products, particularly for products which have relatively low competition. We are seeing an increased pace of approval from the FDA for re-filing still remain probably ahead, but increased pace of approval from the FDA. We are looking at regulatory changes on the pricing front that now have been talked about. As I said, there are lot of media reports about the changing dynamics likely in the supply chain industry. So I think all of these are already known and probably there may be a few more, but we are seeing the kind of changes that are happening in the industry which not necessarily we have – we’ve seen the end of it, so to that extended I think all of the moving parts are still there for everyone to see.

[Alok Dalal:]

Okay, so we’ve recently seen companies consolidate in the U.S., we’ve seen some units on the block, are these things of – or are these signs of things to come about the changes that one can expect in the industry?

[Uday Vijaykumar Baldota:]

I don’t know if I can make a specific comment on what others are doing, but if I look at the classical trend when times get tough and when margins fall quite dramatically, I think some companies probably will take a decision to stop their products or stop the business because they just don’t make money and they don’t want to continue to sell it, they lose money on every additional unit that they sell. So, at some point in time we may see this. I don’t know if I can say we have – as an industry, we have – whether we have reached that point, but probably you have more anecdotical evidence on that compared to me.

[Alok Dalal:]

Sure, okay. And last question is on M&A transactions. Have you witnessed any correction in valuations for M&A transactions, something that Taro has been looking to buy for some time, but was not able to do so because of lofty valuations?

[Uday Vijaykumar Baldota:]

I think interestingly what we’ve seen is that, overall with the deterioration in the overall market situation, I think the profitability of a lot of players have got impacted and of course valuations have got corrected on account of that. If you look at multiples or expectation of multiples in the event someone wishes to sell, probably that hasn’t changed much.

[Alok Dalal:]

Okay, maybe over the next year or so if things remain like this, one could expect maybe PE valuations or whatever numbers to come down?

[Uday Vijaykumar Baldota:]

Difficult for us to sort of predict that.

[Alok Dalal:]

Okay, okay thanks for taking my questions.

[Operator:]

Our next question is from Kartik Mehta with Deutsche Bank. Your line is now open.

[Kartik Mehta:]

Is there any outlook or is there any R&D cost that we could assign? And any plans to file outside them?

[Uday Vijaykumar Baldota:]

Sorry, Kartik, your question – your voice broke up, can you repeat?

[Kartik Mehta:]

Any number on the R&D cost or in terms of the number of filings that we would continue to do? And with competition in dermatology, would Taro consider to file for ANDAs outside dermatology?

[Uday Vijaykumar Baldota:]

No, there is no specific spend or number for R&D that we can give. I think it’s appropriate for us to say that, no, there is a constant evaluation of the portfolio and only those products which are – which are sort of viable and have a strong business case we invest in and other products are dropped promptly, if they don’t make sense and particularly in the changed environment we continue to evaluate what makes sense standing today. I think Taro continues to work primarily on the dermatology segment, but we do have a few products outside as well. And that’s been the historical mix of products that Taro has worked on, but primarily it is dermatological first.

[Kartik Mehta:]

Yes, the reason I asked is that with the share repurchase been extended by, is it fair to assume that cash may not be used for that and you exhaust that and then with cash pile there, would you want to look at something which is a later history candidate outside of them also just to use that amount and something which actually fits in your payback overall?

[Uday Vijaykumar Baldota:]

So at the moment, Kartik, no, we are not looking at that. As I said that, we would look at all initiatives and opportunities that we will have to sort of strengthen the business going forward. So, as and when we sort of sharply define or modify our strategy going forward if and when we do it, we will look at it not at the moment.

[Kartik Mehta:]

And one last question if I may, would you say that the pricing pressure in dermatology portfolio or in the entire U.S. derma market is, I would say, near its peak or would you – in terms of the products that’s used for – you [ph] and then competition that you have seen in the last two years, would you feel that there is more to come in terms of products where you are or what you filed? Thank you.

[Uday Vijaykumar Baldota:]

I’m not sure if I heard the question correctly, but let me try and respond to what I heard. I think when I said that in the next 18 to 24 month in response to a question asked by someone else, I think the pain that we’ve seen, I don’t see the pain going away, as I said the intensity may vary. The price correction that we’ve seen or the reductions that we’ve seen in the last 18 to 24 month, I don’t know whether we will see the same going forward, but clearly that’s something that’s not going away. And that’s applicable to the dermatology portfolio as well.

[Operator:]

Our next question is from Prashant Nair with Citigroup. Your line is now open.

[Prashant Nair:]

Yes, hi, good morning. So, on your pipeline of ANDAs, can you give us some sense on the timeframe over which these could be commercialized? I mean, say if ballpark would be the, say, within the 12 to 18 months or a bit longer than that, where would the bulk of the filing lie?

[Uday Vijaykumar Baldota:]

I would say, Prashant, difficult to give a specific timeframe, but I think some products that I said no will come to market in the next 24 months, but I think we would have products even beyond that. And to a certain extent, Prashant, it’s difficult to give a very precise timeline on approvals on account of several variables and some of these are clearly not in our control.

[Prashant Nair:]

Right, but would you have, say, specific target action dates or bridging dates for a larger part of your filings currently?

[Uday Vijaykumar Baldota:]

I would say, no, I think to a certain extent whichever is near term, I think we have – we would have that, but as I said, we have longer-term products also and to that extent some of these we may not have.

[Prashant Nair:]

Okay, yes, thanks a lot, that’s it from me.

[Operator:]

[Operator Instructions] Our next question is from Nimish Mehta with Research Delta Advisors. Your line is now open.

[Nimish Mehta:]

Yes, thanks again for giving me the opportunity. In your comments you mentioned that generic heightened approval rate from the U.S. FDA asking the issue. But when we look at Taro, the number of products approved, I don’t want the exact count for that first-half, but let’s say, this quarter there’s only one-off growth. So why do we not seeing that, not happening at Taro correctly, if I may, just a needle?

[Uday Vijaykumar Baldota:]

I think the key question, Nimish is that, what is that we filed and when is that we are – we would like to get an approval? And that is a question for all the companies. So, someone who is doing a catch up to what Taro already has, logically, they will get an approval, but Taro already has that product in the market. So, whatever we are – we filed and are waiting an approval, by and large, I think, we are able to get approvals in line with our expectations. So I don’t think there’s any major difficulty there.

[Nimish Mehta:]

So, if you can help me understand this. How much time does it generally take after the filing is done for you to get an approval. So and also I understand you’re coming back, because you are most likely the first one to file an ANDA on the product, which is where you take longer, is that right? Is that what you’re going to do?

[Uday Vijaykumar Baldota:]

What I’m trying to say is that there are, I think, looking at what Taro has been able to achieve in the past years, I think, there is a catch up that’s happening by the competition looking at Taro’s performance. So some of these approvals that you see for competition, our catch up approval to a certain extent. And logically, Taro already has its approval, so Taro can’t get fresh approvals for those products. So I think, to that extent, the comparison is probably not appropriate. What I’m also saying is that, product that Taro is filing and whatever is Taro’s expectation in terms of approval, by and large, I think, we are able to get approvals in line with that expectation. Responding specifically to how much time it takes, Nimish, you know, it’s very difficult for us to sort of use this data, because there will be some products on which patent expiry is sort of a bit distant. There are some products on which we may have other challenges. So it’s difficult for us to average out a specific time saying that, I file and I get it up.

[Nimish Mehta:]

No, no, leaving outside the patent challenge, just talking about the approval process. I mean, you may not launch after the lower advantage because of the patent issue. But generally, how much, on an average, just from the understanding, I don’t want the exact figure, but like one to two years, two to three years after the filing has been made, that would be very helpful for us? Thanks

[Uday Vijaykumar Baldota:]

I think, Nimish, I would sort of not get into the numbers here. But you know that, if I file a Para 3 for something, I can’t get an approval till the patent expires, and it could be four years, five years, we don’t know. So I think, averaging out these things will probably not help, Nimish.

[Nimish Mehta:]

Okay. You can always get it negligible. Okay, if – and instead of that, you can just then tell me the branded sales that this pipeline represents as it looks now the 32 ANDA that is pending approval?

[Uday Vijaykumar Baldota:]

That’s something that, again, will not sort of make much of a meaning, Nimish, because you know and probably with the years of tracking that everyone has done of the generic industry, 100 million branded product could probably be a 10 million generic product next day, we really don’t know. So if I was to give you a number of the branded sales, it probably will not make much of a meaning in terms of any indication as to what a generic company or what Taro can get. So I would also avoid sort of giving any branded number to them.

[Operator:]

Thank you, ladies and gentlemen. That was our last question. I will now hand the floor back to Mr. Coote for closing comments.

[William Coote:]

Thank you, everyone, for joining us today, and taking the time to be on our call. We appreciate your comments and questions and look forward to speaking to you again after the issuance of our full-year results. Again, thank you, and have a great day.

[Operator:]

Ladies and gentlemen, thank you for participating in today’s conference. You may all disconnect. Everyone, have a great day.