Taro Pharmaceutical Industries Ltd.
Q2 2015 Earnings Call Transcript

Published: 4 Nov 2015

[Operator:]

Good morning, ladies and gentlemen. Welcome to the Taro Pharmaceuticals' Second Quarter 2015/16 Earnings Conference Call. As a reminder, for the duration of this conference, all participant lines will be in a listen-only mode, and there will be an opportunity for you to ask questions at the end of today's presentation. [Operator Instructions]. Please note that this conference is being recorded. I would now like to turn the conference call over to Mr. William Coote. Mr. Coote, please go ahead.

[William Coote:]

Thank you. Good morning, everyone and welcome to our second quarter 2015/16 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 received a copy of the earnings press 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 restrict yourself to one question and if you have more question please rejoin the queue. As a reminder, this call is being recorded and a replay will be made available on our website for the next 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 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 would now like to turn the call over to Mr. Dilip Shanghvi.

[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 [ph] financial results. We have just completed five years of Sun's ownership in Taro. When Sun acquired Taro in September in 2010 we realized that Taro required a significant and sustained rebuilding effort and identified several issues that needed to be overcome in order to move the company forward. Key challenges at that time were low sales growth, R&D productivity that were below it potential and overall market shares. Over the past five years, sales have grown approximately at 18% CAGR while net profits have grown at about 56% CAGR. The annual run rate of R&D investment has doubled and Taro now has a pipeline of 54 [ph] ANDAs awaiting approval. This pipeline is likely to be commercialized over next few years. The recent approval of orphan drug Keveyis also reflects Taro's focus on R&D. I would like to congratulate the entire Taro team for these achievements. We continue to push on [ph] many challenges in front of us such as the ever changing competitive environment, pricing pressure, improving the overall performance and maintaining sustainable profitability. Taro continues to evaluate business development opportunities. However, we will remain disciplined in our approach for deploying this cash always keeping long-term shareholder value in mind. I would like to turn over the call to Kal Sundaram.

[Kal Sundaram:]

Thank you, Mr. Shanghvi. Welcome to everyone and thank you for joining us today. Our results reflect the impact on our business from the factors we have been cautiously speaking about in the past and why we are cautious about the long-term sustainability of these prices [ph] and therefore profitability as we move the company forward. Increasing pressure on our business from competition and customer consolidation and also this quarter results were affected by minor supply disruptions that we experienced at the beginning of the year. All the same, we remain cautiously optimistic about the short, medium and long-terms growth of the business and remains focused on our strategic plans and initiatives that continue to keep us well positioned in the market and create shareholder value. As Mr. Shanghvi said, our commitment to R&D and building a quality pipeline. In total since Sun's acquisition of Taro we have filed more than 40 ANDAs and currently 30 are awaiting approval. Our continuing increase in R&D investment and continuing success of such as recently approved orphan drug Keveyis which I will discuss later, continued to drive the cost and operating efficiencies in the organization and finally our business development efforts to seek growth opportunities. I know that some of you may ask, why hasn’t Taro been acquisitive. I'll say that we are slow to acquire. Let me say with extremely strong balance sheet which includes $1 billion in cash and substantial capacity to borrow, we have not and will not hesitate to evaluate the right acquisitions. However, I reiterate as we have said all along we remained disciplined in our evaluation of these opportunities to ensure we are creating long-term shareholder value. Now I'll hand over the floor to Mike Kalb for a further discussion on our financial performance. Mike?

[Michael Kalb:]

Thank you, Kal. Hello everyone and welcome. The comparisons that I'll discuss are with the comparable prior year periods. I will first discus the Q2 highlights followed by the year-to-date comparisons. Q2 net sales were $212 million decreased $39 million or 15.5%. This decline is principally due to the impact of net charges taken to meet contractual obligations associated with the price adjustments and the changing U.S. market dynamics on certain products. On a pro-forma basis, adjusted for the price protection provision, net sales would have decreased approximately 8%. As most of you are aware this price adjustment provisions are typical in the industry and we have incurred these types of charges in the past. However, we expect that we will realize the benefit of these adjustments in the coming quarters. Gross profit of $169 million decreased 15%, however gross margins expended slightly. Excluding the impact of the price adjustment and the impact of the $2 million impairment charge, gross profit decrease would have been approximately $8 million or 4% as opposed to $29 million. Both the quarter and year-to-date numbers reflect a $2 million impairment charge related to the discontinued sale of [indiscernible] drug [indiscernible] which we no longer market in the United States and Canada. R&D increased $5 million to $19 million as our R&D spending is not evenly distributed across quarters. SG&A expenses of $24 million were $2 million higher than Q2 last year principally the result of the marketing spend on our recently approved and launched product Keveyis. In the quarter we took an additional $1 million charge for the Utah AWP [ph] related matter, details of the company's AWP related matters were provided in our Form 20-F [ph]. Net income was positively impacted by foreign exchange income of $35 million compared to $6 million, the result of continuing favorable currency fluctuations particularly the U.S. dollar the Canadian dollar exchange rates. The U.S. dollar strengthened approximately 8% in the current quarter approximately 1% in the comparative prior year period. Net income decreased 7% to $133 million. EPS for the quarter was $3.11 versus $3.35 for Q2 last year. Let me now briefly discuss the year-to-date performance and comparison to last year. Net sales were up 12% $427 million compared to $381 million despite an 8% volume decline. On a pro-forma basis, adjusted for the previously mentioned price protection provision, net sales increased a little bit approximately $19%. Lower level of cost of goods reflects a better fit due to the strengthening of the U.S. dollar particularly against the Canadian dollar as well as our disciplined approach to spending and the decline in volume. Gross profit increased $57 million or 20% to $341 million while gross margin increased $530 basis points to $79.7%. Excluding the impact of the aforementioned price adjustment and the impact of the $2 million impairment charge, gross profit increase would have been $81 million or 29%. R&D expenses increased $4 million to $33 million as we continue to invest in building a strong pipeline of quality products. Selling, marketing, general and administrative expenses increased $3 million as a result of the marketing spend on Keveyis. Operating income increased $45 million to $259 million. Net income was favorably impacted by FX income of $31 million compared to $1 million last year. As I previously stated, this reflects the favorable impact primarily of the strength of the U.S. dollar versus the Canadian dollar, coupled with an increase in U.S. dollar-denominated intercompany and bank balances in our Canadian subsidiary. The income tax rate was 20% versus 14% last year the result of product mix. We expect our full year tax rate to be more in line with last year's. Net income increased $48 million to $237 million resulting in EPS of $5.54 compared to $4.42 last year. Our cash flows and balance sheet remained strong with cash including marketable securities increasing $142 million to $1 billion from March 31, 2015 with cash from operations of $129 million. I will now hand the floor back to Kal.

[Kal Sundaram:]

Thanks Mike. Before we open the floor up to your questions, I'd like to briefly talk about the recent approval of and launch of Keveyis. As Mr. Shanghvi articulated, to get an orphan drug approved is a great achievement. Keveyis is the first medicine approved by FDA for the treatment of primary periodic paralysis which is estimated to affect approximately 5000 people in the United States. Keveyis is an example of Taro's commitment to providing high quality much needed products. To ensure that people who may benefit from Keveyis can get adequate access to the product and at an affordable price, Taro has created Keys2Care patient support program. Our goal with this program is for the patients to have little or no out-of-pocket cost. While it is very early in the product lifecycle to discus about potential patent [ph] profitability, it is extremely gratifying to get positive feedback from the patients who in the past years have been in the hospital on a regular basis, have not been able to leave the house, diagnosis causes muscle twitches every 60 seconds, lung collapse, and needs emergency service on a regular basis. Start taking Keveyis these patients experienced a substantial improvement in their quality of life. Now back to our financials, as I previously stated, we remain cautiously optimistic about short, medium and long term growth opportunities of our business. With this, I would like to open the floor for questions. Thank you.

[Operator:]

Thank you. [Operator Instructions] And our first question comes from the line of [indiscernible] with Research Delta. Your line is now open.

[Unidentified Analyst:]

Yes, good morning everyone. So my question is related to Keveyis. There are lot of – there are few products which are false label therapy. So how you see the market going forward because as these products are already there to treat with so how you see the opportunity Keveyis?

[Kal Sundaram:]

According to – with this the clinical evidence that we have for the product, the product is efficacious in patients affected with periodic paralysis. It is left to the doctor to determine what is an appropriate treatment for the patient. What I know and understand is, Keveyis therapy is highly effective for patients who have been previously treated with other products and as such I would expect Keveyis to benefit patients who are either treatment naive or have been put on other product treatment before they were put on Keveyis.

[Unidentified Analyst:]

Okay, thank you.

[Operator:]

Thank you. And our next question comes from the line of Manoj Garg with Bank of America. Thank you, your line is now open.

[Manoj Garg:]

Yes, so very good morning and thanks for taking my question. Mr. Sundaram, in the press release you have indicated the changing circumstances which has affected your revenue in this quarter. Can you just elaborate a little more on that particular point?

[Kal Sundaram:]

Manoj, can you came back again? The line is not very clear.

[Manoj Garg:]

I think you have indicated in the press release that this quarter sale was impacted because of one [indiscernible] and secondly changing circumstances in the U.S. market, can you say more sir on that, but what do mean?

[Kal Sundaram:]

Okay, I'll sort of take probably, take your answer in two parts. As and when we change – effect any price change, we have customer obligations and that will require us to make provisions and as such that reduces the sales which would have been otherwise higher. So during this quarter also we made those provisions that naturally depresses the sales. Then talking about the changing U.S. market condition, naturally it will happen in any market anywhere in the world market is not going to be – market environment is not going to be stagnant. Then with our continued competitive pressure customer consolidation, regulations, lot of time have some form of effect. I am not saying it is going to be negative all the time. It can have positive effect, it can have negative effect. So some of the factors affecting this quarter performances about, certainly there is some continued pricing pressure not only on Taro for the sort of whole generic industry because the customers are also consolidating. So that coupled with we had a small supply disruption in the beginning of the year. Both of that have affected our sort of quarterly performance as well as full year performance, so not only our year-to-date performance so far. But all the same I want to reiterate what I said was, naturally we have two more quarters to go for the balance part of the year and both of this year as well as medium to long-term. The whole Taro team is cautiously optimistic about the continued business opportunities and the growth that we can achieve.

[Manoj Garg:]

Fair enough, wish you all the best, sir.

[Kal Sundaram:]

Thank you.

[Operator:]

Thank you. And our next question comes from the line of Prakash Agarwal with Axis Capital. Your line is now open.

[Prakash Agarwal:]

Yes, thanks. Good morning to all. Sir, question relates to the price protection charge, is it for new set of products versus last quarter that we saw or it is similar to last quarter and would this continue?

[Kal Sundaram:]

I'll ask Mike to answer this question on concerning which products.

[Michael Kalb:]

So, we'll not give product specific details. However, the quarter two price provision results from different set of products than the quarter one price protection provision.

[Prakash Agarwal:]

And would this continue sir?

[Michael Kalb:]

It would be impacted, the price protection provisions, we took that at the time we made the price adjustments. As to future price adjustments I won't comment. You know, we continue to evaluate each asset and remain disciplined.

[Kal Sundaram:]

What you are saying Mike is, for the adjustment that we made, you have made adequate provisions, so future quarters are not going to be affected by those [indiscernible]. If we make any other such changes in future what the impact of that in terms of approach is to be seen at the time of making a revision.

[Prakash Agarwal:]

Okay, can I ask one follow-up?

[Kal Sundaram:]

Go ahead.

[Prakash Agarwal:]

Yes, so the price protection that we took for quarter one, so we assume that this quarter it is fully reflected in the revenues, is that a fair assumption?

[Michael Kalb:]

So the impact of the adjustment would be in the top line correct, with the exception of a small amount in year-to-date that is still carryover from the Q1 provision. It takes some time for us to benefit from those - from the impact of those provisions.

[Prakash Agarwal:]

Okay, thanks and all the best.

[Michael Kalb:]

So the benefit of Q1, almost all realized not entirely, I mean Q 2 impact is not realized yet.

[Prakash Agarwal:]

Okay, thank you.

[Operator:]

Thank you. And our next question comes from the line of Girish Bakhru with HSBC. Your line is now open.

[Girish Bakhru:]

Yes, hi. A question on Keveyis, just considering at this molecule does not have listed patent, there is an orphan drug exclusivity till 2022, when do you think according to you a generic can be filed?

[Kal Sundaram:]

The product has got my understanding is seven years of data exclusivity during which time nobody can file a genetic version for the same indication. So even though we don't have a patent protection we have data protection.

[Girish Bakhru:]

All right, thank you.

[Operator:]

Thank you. [Operator Instructions] And our next question comes from the line of Chunky Shah with Credit Suisse. Your line is open.

[Chunky Shah:]

Yes, one question. What percentage of Taro sales comes from the Medicaid market and what could be the possible impact for Taro when price increase for Medicaid are capped by inflation?

[Kal Sundaram:]

Chunky, the line is not clear. Can you come back again?

[Chunky Shah:]

Yes, I was asking question that what percentage of Taro sales come from the Medicaid market, and what could be the possible impact when the price increase in the Medicaid market are capped by inflation?

[Kal Sundaram:]

Mike any estimate on how much [indiscernible] should have come from – it varies from product to product time to time. For us to take let's say a semi permanent view on the proportion of Medicaid business may not be appropriate. In total would it fair because I don’t have an accurate number in front of me, I'll sort of say less than 20% of our business would come from Medicaid.

[Chunky Shah:]

Less than 20%?

[Michael Kalb:]

It is probably even a little less than that may be and it is product by product we have to evaluate and we are evaluating the impact of fruition legislation.

[Chunky Shah:]

Thank you.

[Operator:]

Thank you. And our next question comes from the line of Sameer Baisiwala with Morgan Stanley. Your line is open.

[Sameer Baisiwala:]

Hi, thanks for this, and good morning everyone. A question on Keveyis, you mentioned in your press release that there are 5000 patients out there. So my question to you is, in such a large country, how do you achieve the patient reach and what kind of a drug penetration do you expect over next couple of years.

[Kal Sundaram:]

Sameer , in terms of creating awareness and reaching out to patients we have several initiative, through, and where you see the availability of data in the U.S. is a lot more granular and extensive than what we get in other parts of the world. So starting from say doctor level the number of the patients who are, who have indication for say periodic paralysis we get the data. And also there are number of patients associations who are very active about, what you say managing, treating their conditions, so reaching out to the doctors creating awareness, reaching out to the patients creating awareness and we have a plan to create a national registry which is going to be probably the first time sort of initiative in the U.S. for this condition. So there are several initiatives which will have more a medium to long-term effect in terms of creating awareness and the treatment options benefits, et cetera. So that’s my first response. In terms of what do you say in terms of patient treatment, what I’ll say will be the impact is going to be, is more a medium term effect. So I’ll have a expect a steady build up of patients who are seeing treatment as you would have seen in my sort of statement so far the feedback from the patients who have taken the product is extremely positive and the patients also through social media they interact with each other. So I’m anticipating steady build up of patients who are taking the product who will have access to the product in the coming quarters and in the next few years.

[Sameer Baisiwala:]

Thank you. This is very helpful and just a follow up on this Keveyis itself. You have priced it at a certain price point. The question here is that what would be the net realization for the company netting of EBIT, et cetera on your topline? So you would say if it is $100,000 per patient per year, so what does that mean, what percentage do we need to knock it out to have your realization?

[Kal Sundaram:]

First to be first I'll talk about specific price what I’ll want to emphasize is, given the very small number of patient pool, at 5000 patients I’ll sort of call this product more as an ultra open product than even an urban product and the significant benefit that the patients are getting. They way we have price the product is at the lower end the way the orphan products are priced in the U.S. Again it’s a bit premature for me to sort of talk about how much insurance rebates et cetera that we need to give because we are in the early stages of engaging with the payers. So probably we’ll need few more quarter experience for me to outline any sort of price rebate that have to give for the product.

[Sameer Baisiwala:]

Okay, thank you and good luck. Yes.

[Kal Sundaram:]

Sameer, if you would start building this in your projections I think it is important for you to keep in mind that there are mild form of disease patients will respond also to other treatments which are currently used. So these are many things that we have to factor and this is the reason why I think we are very, very cautious in say sharing information as we will learn more we will give you more.

[Sameer Baisiwala:]

Okay, sir this is very helpful. Thank you.

[Operator:]

Thank you. And our next question comes from the line of Chirag Talati with Kotak. Your line is now open.

[Chirag Talati:]

Yes, hi. Thanks for taking my question, just one question if you could help us understand the market for Keveyis in terms of hypo and hyper PP, particularly what would be the portion of patients with CAC [Ph] anyone is genotype?

[Kal Sundaram:]

I don’t have any medical people sitting in the room for me to give this one to what you are asking. While I have an overall idea about the response both for hyper as well as hypo, it would be appropriate for a medical person to answer your question, may be sort of that we’ll ask, we’ll take it offline sort of we'll provide you appropriated response.

[Chirag Talati:]

Okay.

[Kal Sundaram:]

Dilip, you want to add anything to it because my boss knows more about…

[Dilip Shanghvi:]

Yes I think, for that I think you take this offline.

[Kal Sundaram:]

Okay?

[Chirag Talati:]

Okay, thank you.

[Operator:]

Thank you. And we have a follow up question from the line of Chunky Shah with Credit Suisse. Your line is now open.

[Chunky Shah:]

Okay, thanks. One question Taro recently brought a product from Zalicus, a pain product. Is this of one off kind of opportunity that Taro is experimenting with or is pain now defined as a focus area for the company and we may see more such instances like that?

[Kal Sundaram:]

Instead probably more than therapeutic I mean what I will say will be now our willingness to look at early stage asset, this product is in sort of Phase II, have to go to Phase I, we have to start Phase IIa. So on one side, I will sort of say we are willing to look at these opportunities going beyond ANDAs to NDAs to even new molecules, so this is first of the initiative. And till we sort of get much better sort of feel for the Phase II outcomes, it’s too premature for me to say what the potential of the product is. So to answer what you are saying, I’m hoping this is one such sort of few new initiatives we will want to sort of see going forward, but all the same I will say our ability to handle number of new molecules will be limited every which way you look at it. So yes, we will continue to look at it, but are we going to be seeing every quarter, every year we are going to be doing this, certainly not every quarter, every year, lot will depend on the experience base that we gain from this initiative.

[Chunky Shah:]

Can I ask one follow-up question on that?

[Kal Sundaram:]

Yes please?

[Chunky Shah:]

On this, so when you choose products like this what is the key criteria in the sense that is a therapeutic focus in certain areas key criteria or you just saw that the product may have potential and the company thought that yes this maybe something that can be taken to the next stage?

[Kal Sundaram:]

Let me put it more this way, other things being equal, our comfort level should be significantly higher as far as dermatological products go. All the same, if there are such opportunities we looked at sort of the existing data available and as such we thought we should look at these opportunities too on a very selective basis look at opportunities beyond dermatologic assets.

[Chunky Shah:]

Okay. Thank you.

[Operator:]

Thank you. And we have a follow-up question from the line of Sameer Baisiwala with Morgan Stanley. Your line is now open.

[Sameer Baisiwala:]

Yes, thanks for the follow on. Just sort of a broad question on the numbers and if I look at your Q3 and Q4 for last fiscal, you’re doing the topline at roughly about $135 million, $145 million, $140 million and based on your Q1, Q2 this year disclosures if I were to do the adjustments that suggested in the press release, it looks like we are again back to roughly when you report in December hopefully. So it would be roughly about $240 million ballpark. So question here is that is this understanding correct that after what your price increases that you’ve taken and which was also reasonably meaningful through Q1 and Q2 we’re really back to pre-pricing fees topline levels and that is really the extent of hit that you’ve got from the changing market dynamics.

[Kal Sundaram:]

So, what you are saying Sameer is on an ongoing basis you’re sort of reading about $240 million of projected sales.

[Sameer Baisiwala:]

Yes roughly about and the idea is just to say that what is the gain in plus and minus and they properly both cancel each other rather than getting at a number specifically so.

[Kal Sundaram:]

Like we mentioned on the existing products, competitive pressure as well as sort of pricing pressure from the customers, so naturally that cancels out any gains that we’ve made through adjustment with other products. That is sort of state of play as it stands now.

[Sameer Baisiwala:]

Okay, so you’re confirming what I said, so two are canceling each other?

[Kal Sundaram:]

Roughly speaking.

[Sameer Baisiwala:]

Okay. This is it, thank you.

[Operator:]

Thank you. And our next question comes from the line of Gregg Gilbert with Deutsche Bank. Your line is now open.

[Gregg Gilbert:]

Yes thanks. Can you talk about how you expect the competitive landscape to change in the generic topical space over the next one to two years there obviously others filing topical out there and FDA that is perhaps becoming more efficient? And secondly, sorry if I missed this earlier, I got on but given your large cash position, could you update us on your capital deployment priorities from here? Thanks.

[Kal Sundaram:]

As far as dermatological space is concerned by generics, at one level I will say, yes we are likely to see new competition. All the same what I will want to point out will be to develop a typical dermatological product. It is not only formulation, you've got to do clinical studies. So number one, it makes the development more expensive and also it takes more time. And in terms of segment opportunity for a given molecule, the size of the opportunity is not going to be similar to any sort of other larger molecules either in oral solids or injectables and all. So all in all you are looking at limited sales opportunity from each ANDA coupled with higher development expenses and it takes longer time. As such, overall, I would say the competitive intensity for this phase will be comparatively less than what we see with other presentations. But at the same time would we see more competition? I'll probably sort of say yes. How many et cetera, is going to be difficult for us to predict? But this is the nature of this phase. So if I have anything you want me to answer more on the competitive landscape?

[Gregg Gilbert:]

I understand the difficulty and what makes the topicals unique, I was just asking more specifically about other companies that have already announced that they have several filings at the FDA on topicals. So we’re expecting approvals in the next year or too, I guess my question is do you think the market is ready to behave in a rational way as the average number of players per module rises slowly over time?

[Kal Sundaram:]

Once again I will say for let’s say a large, large volume oral solid you may see some eight to 10 players type of stuff. Well so here it is what the play is. So I don’t think that fundamental dynamics is going to change in the medium term. But all the same there will be increased competition, probably yes and also what I will say will be not much as sort of we are, we are conscious about the fact that we will have more competition for our existing products. That is why all the more we are developing our own pipeline, new products pipeline which should start producing phase over medium term.

[Gregg Gilbert:]

Thanks and then the capital deployment question?

[Kal Sundaram:]

I think that what you see in my own earlier read out I went on to CSBS [ph] we have a billion dollar cash and we can borrow more. But whatever that we acquire we got to make sure that we can create additional value which will sort of further enhance the shareholder value. So we are looking at every available opportunity, but at this point for the set of value that is being demanded in the market. Actually some of this propositions haven’t met our requirements. So we will continue to look and any opportunities that we get that meets our requirements, certainly we will go for acquisitions. Other things being even near equal, our sort of preference will be to deploy the cash to further expand business.

[Gregg Gilbert:]

Thank you.

[Operator:]

Thank you and our next question comes from the line of [indiscernible] with MK. Your line is now open.

[Unidentified Analyst:]

Yes, thanks for taking my questions, sir. So I just wanted to ask on a more holistic level of how is it decided that when you are in licensed products certain products go into Taro or certain products go to Sun. So for instance Zalicus is in-licensed into Taro, but Sun has done some deals in the past so how is that decided, is there a segregation of certain therapeutic areas or some other way of thinking?

[Kal Sundaram:]

Okay. I exactly can’t answer in this call as to how Sun decides what they will in-license. As far as Zalicus is concerned to start with this is basically a Canadian company. In Canada we have a substantial manufacturing R&D investment. Therefore our own sort of level of familiarity comfort levels are high. And some of the work that has been done on the product is in Canada and in the U.S. So it is more familiar, a territory familiarity and the initial data that we saw we also sort of consulted their experts that gave us confidence to try it out in the space. Again if I got to go back if a similar asset was available in dermatology certainly Taro's sort of preference will be to look at that then other.

[Unidentified Analyst:]

Okay, thank you.

[Operator:]

Thank you and our next question comes from the line of Saion Mukherjee with Nomura. Your line is now open.

[Saion Mukherjee:]

Hi, thanks for taking my questions. Sir can you talk about deployment of capital MNDA [ph] opportunities that you are looking at, is it possible to share some thoughts on whether you are looking generic specialty, any therapeutic segment, how should we think about this deployment strategically?

[Kal Sundaram:]

Good question Saion. So once again everything else being equal, U.S. will be have preferred geography U.S. kind of expanding it and with sales kind of say probably Canada. And other things being equal derm space is where our comfort levels lie. Beyond derm space U.S. generics that doesn’t require lot of what you say manufacturing complexities beyond dermatologicals will be our preferred opportunity. Having said that, if there are value creating opportunities in other therapy areas inside of other geographies, we will remain open then that is yes.

[Saion Mukherjee:]

Okay, okay thank you.

[Kal Sundaram:]

Thank you.

[Operator:]

Thank you. And our next question comes from the line of Prakash Agarwal with Axis Capital. Your line is now open.

[Prakash Agarwal:]

Yes, hi thanks for the opportunity again. I just wanted to understand on this Forex income of $34.9 million for the Canadian resulting in this strength. So how big, such a big delta on a sales base if you could help us understand?

[Michael Kalb:]

Sure. This is primarily driven by U.S. dollar denominated bank accounts and U.S. dollar denominated intercompany than the impact of the Canadian strengthening U.S dollar against the Canadian dollar, the Canadian subsidiary functional currency is Canadian dollar. So we've taken U.S dollar accounts converting to Canadian and back to U.S dollar for financial reporting. So that’s – sorry.

[Prakash Agarwal:]

I'm trying to understand the underlying base there because, sir I’m trying to understand the underlying base here because the delta itself is $35 million. My understanding was U.S. versus others has a mix about 85, 15 so is it balance sheet item?

[Kal Sundaram:]

Yes, Prakash this is not arranging from sales transaction. You are right our Canadian sale is substantially sort of compared to U.S. substantially less. What Mike was explaining is it is more balance sheet driven instead of cash intercompany reduced. So on and so forth. A - Kal Sundaram Sorry, go ahead.

[Prakash Agarwal:]

So the money is lying in Canada now?

[Michael Kalb:]

The money is primarily U.S. dollar denominated. However, the Canadian subsidiary function of currency is Canada, Canadian dollar. So for reporting purposes we’re taking U.S. dollar denominated balances at a point in time converting them to Canadian dollar and then back to U.S. dollar.

[Kal Sundaram:]

So Prakash, it took some time for me to understand this, now I understand it better. So it's more the assets instead of currencies intercompany currency translations that happen on a quarterly basis and the swing is captured in the form of a loss or a gain in the accounts.

[Michael Kalb:]

Right and then if you look at point in time March 31, I think FX was similar around 124 and then at 9, 30, number 30 it was somewhere around 134, so that’s roughly be 8% and I guess could promise to have, but there is a lot – there is you know continued increase in our cash balance in the Canadian sub.

[Prakash Agarwal:]

And if the currency goes the other way around [indiscernible].

[Michael Kalb:]

If the currency goes the other way around then we'll have different discussion in reference. And then one piece to just add to that on the Canadian books the Canadian subsidiary transacts with the U.S. subsidiary in the U.S. dollar.

[Prakash Agarwal:]

Okay, thanks.

[Michael Kalb:]

Again the receivables, so the receivable the intercompany receivables are in U.S. dollar.

[Prakash Agarwal:]

Mike, I think he has understood, so maybe that something that…

[Michael Kalb:]

Okay, Prakash, are you fine with what we told you?

[Prakash Agarwal:]

Yes sir, thank you so much.

[Kal Sundaram:]

Yes, thanks.

[Operator:]

Thank you and our next question comes from the line of Sunil [indiscernible]. Your line is now open.

[Unidentified Analyst:]

Hi, thanks for taking my question. I just wanted to understand that even though your core strength is in derma we have this approval of an orphan drug from – I am not a medical person, but looks like a different area, similarly you acquired a drug in pain. So, if I just connect the dots would it be fair to say that you are trying to explore non-derma areas more because of whatever issues derma has?

[Kal Sundaram:]

You are partly right, we are exploring areas beyond derma, but I wouldn’t say we are exploring that more than derma. This opportunities came naturally, this [indiscernible] we have been developing it for several years now. So, there was already a better understanding of what the drug is about and what we need to do to get it approved.

[Unidentified Analyst:]

Yes.

[Kal Sundaram:]

So, we enter in to that. And similarly, will be the sort of case at this point about that pain drug that we have taken from Zalicus for development.

[Unidentified Analyst:]

Kal, I think you may also like to clarify about the focus on R&D and all our current filings.

[Kal Sundaram:]

Much of our focus is on the R&D side, I will say substantially stacked towards dermatologicals. So, all in all if you ask me what is our sort of core capability in the U.S. is more dermatology given and we do have, I don’t have the numbers in front of me, the range of narrow therapeutic indexed products, where the product specifications, tolerance, et cetera needs to be very well fine tuned. We have some expertise. So other things being equal we do see ongoing opportunities in this area for us to continue to develop our portfolio.

[Unidentified Analyst:]

I have a follow-up question QSS can I?

[Kal Sundaram:]

Yes, please.

[Unidentified Analyst:]

My question was that again based on publicly available information, there are 5000 patients around 70% is undiagnosed estimated and about 30% is diagnosed, so that is around 1500 and out of this 1500 you are also going to provide rebate and support to people who cannot affords, so how many of this 1500 you actually can do you think you'll be able to sell too at the market price not at…

[Kal Sundaram:]

Again, early days Sunil, so we are doing everything possible to sort of reach out to the patients who are already seeking treatment as well as patients who require treatment, but it will be very difficult for me to tell you at this stage precisely as to even a range of patients so that we will get, I'd sort of say even if half of those are patient if you can capture or paid up x number of years, that will be a good achievement.

[Unidentified Analyst:]

Of that half how many are going to be paying, non-paying?

[Kal Sundaram:]

Lot of things will be known. So overall I think what you should be, only into three months into this, give us a little bit more time for us to get a better feels for the market dynamics.

[Unidentified Analyst:]

So thank you so much and good luck.

[Kal Sundaram:]

Yes, thank you.

[Operator:]

Thank you. And our next question comes from the line of Chirag Dagli with HDFC. Your line is now open.

[Chirag Dagli:]

Yes, so thank you for the opportunity. Sir you alluded to part of the 5000 patients on Keveyis being on the mild form of disease, would you have the split of this 5000 as to how many suffer from the mild forms of the disease and otherwise?

[Kal Sundaram:]

Actually we have not Chirag.

[Chirag Dagli:]

So, we don’t have the data or we don’t want to disclose it?

[Kal Sundaram:]

No, no, no. Even getting the data will be difficult, these are all sort of more epidemiological derived numbers and what is mild and what is moderate, what is severe, let’s say it is a continuum. So to answer your questions, we don’t have the data.

[Chirag Dagli:]

Okay and sir, when you discussed with the formularies, is this how we should think that the formularies will certainly not want Keveyis prescribed for the ones who suffer from mild assuming that we have the data?

[Kal Sundaram:]

It depends a lot on even if it mild how frequent it is and how much it affects sort of patients quality of life or ability to sort of work et cetera, et cetera. So there are lots of factors surrounding.

[Chirag Dagli:]

So you are still focused from a marketing efforts standpoint on the ones that even have mild, so okay?

[Kal Sundaram:]

Our focus will be make the products available to all patients requiring the product.

[Chirag Dagli:]

Okay. And if I may there is a follow-up on the foreign exchange gains, so does – do cash balances through the year move between Canada and U.S. or is it like a static amount which is sitting in Canadian subsidiary which keeps getting mark-to-market?

[Michael Kalb:]

So it turns the community and subsidiary manufacturers largely they are manufacturing for the U.S. markets. So as the U.S. pays down its intercompany balances those cash balances will continue to should continue to rise in Canada.

[Chirag Dagli:]

So generally speaking the assets will increase, okay. Fair points. Thank you so much.

[Michael Kalb:]

You’re welcome.

[Operator:]

Thank you. And our next question comes from the line of [indiscernible] with Philip Capital. Your line is now open.

[Unidentified Analyst:]

Yes thanks for this opportunity. Just wanted a clarification, the pipeline what we have stated that 30 odd products are there in the pipeline pending ANDA approvals. So whether that include any FDA opportunities or [indiscernible] or whether that includes any 505 b2 kind of profiling also?

[Kal Sundaram:]

Yes in addition to what we say is we will probably have limited number of opportunities. Yes go on…

[Unidentified Analyst:]

Can you just…

[Kal Sundaram:]

We are not – our ANDA, and within that we'll have probably what you say handful first to file, very few first to file. You have got to assume predominantly that anti portfolio is ANDA.

[Unidentified Analyst:]

Okay. And do we have regional to R&D spend is something like 9% of the revenues now and we have created the pipeline over last couple of quarters or few quarters and going ahead what is the kind of R&D initiatives that we would be taking, whether it would be a generic oriented or something different or we would be just trying to have acquiring some licensing or acquiring kind of approach for our R&D pipeline?

[Kal Sundaram:]

I think it will be mix of ANDAs, NDAs and we have been here looking at our product like Zalicus even some of them new molecules. One thing and if you got to put by number the number will be what you say, the number of filings could be more ANDA oriented, but in terms of quality of impact the ANDAs or rather 505 (b) 2 will have better longer term for molecule based we will have better longer term impact.

[Unidentified Analyst:]

But our R&D spend will be elevating to this level only, 9% or sort of?

[Kal Sundaram:]

No, no that is not no, you asked me about where is going to be our focus so I was trying to tell you what it is going to be depends on certainly go back to sort of what Mr. Shanghvi said and what I said, our continued efforts are to invest developed products for medium to long-term growth. So we will continue to invest assets as our topline improves as our product opportunities improves, we will continue to evaluate and if you can we will strive to sort of further improve the quality of our pipeline and the spend if that is required to support that spend is going to higher of course we will go for it.

[Unidentified Analyst:]

Oh that's great. Thank you sir, thanks a lot.

[Operator:]

Thank you, and our next question comes from the line of [indiscernible]. Your line is now open.

[Unidentified Analyst:]

Thanks for taking my question. My question is that, cash generation appears to be lagging earning over the last few quarters because of increased working capital investments, quite a lot of material change in sales, so when do we see cash generation pick up?

[Michael Kalb:]

Yes I think we, I'd be interested in seeing what really you are you referring to, but generally when you look at timing and the year when certain customers seek annual sense of rebates and things of that nature will have an impact on our cash tax payments of course will have an impact on our, our cash accumulation if you will.

[Unidentified Analyst:]

So you expect the cash generation?

[Michael Kalb:]

I'm sorry?

[Unidentified Analyst:]

So just a clarification let's say you would expect the cash generation for the full year to be in line with the earnings largely?

[Kal Sundaram:]

See, this is not a capital intensive industry. So adjusted for what would you say, I'm not a finance person so I don't want to talk too much finance, give or take one or two quarters lag this way or that way.

[Unidentified Analyst:]

Got it.

[Kal Sundaram:]

Your cash what do you say more movement should reflect your earnings.

[Unidentified Analyst:]

Got it. And just a clarification if I may, on a point that you made earlier, on Keveyis, you mentioned that if you get to 50% of patients over the next few years here are you referring to 50% of the 1500 number?

[Kal Sundaram:]

Yes, yes it is more towards that 5000 yes.

[Unidentified Analyst:]

Got it. No I'm saying 50% of 1500 that is 750 right?

[Kal Sundaram:]

That's correct Kunal, but what I'm saying, yes please…

[Michael Kalb:]

The thing is that we share numbers only when we are confident.

[Kal Sundaram:]

That's what I'm saying.

[Dilip Shanghvi:]

We are at, I think don't we should not give, I mean my request to all the participants is that do not push for a numbers because whatever number we give you today is not accurate. Give us time till we develop better understanding and if we think it needs to be shared with investors we will share them.

[Unidentified Analyst:]

Thanks for the clarification.

[Kal Sundaram:]

Thanks for the clarification Dilip.

[Operator:]

Thank you and ladies and gentlemen as time is short we will be taking two more questions. Our next question comes from the line of Chunky Shah with Credit Suisse. Your line is now open.

[Chunky Shah:]

Yes a basic question on Keveyis, when the drug is prescribed by physicians how is it given to patients? I mean, let's say it is to be taken twice a day, but for what duration? Is it typically prescribed for three to six months and seeing the response does the patient actually end up taking it for the full year or does he take it in spurts and he takes it effectively only for six months in one year period?

[Dilip Shanghvi:]

No this is the chronic treatment. So as such if the patient is sort of responding positively to the drug, I would anticipate the doctor recommending to the patient to take the drug as long as the patient requires it. So this is not an acute case, three months, six months sort of you take it and then go away.

[Chunky Shah:]

But Kal, if I understand this disease the Keveyis does not cure the disease right? It just reduces the frequency, so effectively the patient never gets cured right?

[Kal Sundaram:]

It treats, you are right. So that's the reason I am saying this is a chronic condition. So the patient will be required to take the drug as long as the patient has the condition.

[Chunky Shah:]

Okay. That’s helpful. Just one more question about are Israel and Canada's facility is there any outstanding [indiscernible] or at both the facilities [indiscernible] have been resolved.

[Kal Sundaram:]

Both the facilities have held up high quality and they remain highly compliant audited by a BA U.S. and BA, Canadian authorities is really how it is everyone. All, everybody is here for [indiscernible] we did not have many [indiscernible] to start with all of them have been satisfactory addressed.

[Operator:]

Thank you and our next question comes from the line of Manoj Garg with Bank of America. Your line is now open.

[Manoj Garg:]

Yes, thanks and thanks for follow-on. Kal like on your comments you have mentioned that derm, [ph] something which is you are comfortable with in terms of specialty. So, but I allude that when you are talking about derm [ph] it is primarily retro generic assets or even you are open to look at [indiscernible] also in this specialty?

[Kal Sundaram:]

See what I meant on to say, while in terms of number of filings that we will do will be probably more generics. We are filing, we are developing more NDAs 505 (b) 2s and we are also what we say started working on very, very selected few including this [indiscernible] asset on even earlier stated development.

[Manoj Garg:]

Well, my question was more specific and why I am asking this question, because Sun Pharma has clearly indicated that derm [ph] is going to be a key focus area in terms of their specialty focus business. So given the fact that they already have a presence in the branded segment and they do have a sales force in the U.S. market, how probably you are going to take care of the interest of these two entities as to different arms in terms of your focused business.

[Kal Sundaram:]

See, once again I can't answer for Sun Pharm from a Taro's point of view. Within the capabilities that we can create we will continue to focus on dermatology including NDAs.

[Manoj Garg:]

Fair enough, sir. And I have just last one question if I can ask you?

[Kal Sundaram:]

Yes please? I think since you asked a question related to Sun I think it is good for me to clarify. So when Sun is saying dermatology, it includes the dermatology and sets of Taro also. So the idea is to including Taro products develop a global business around dermatology also is what we are saying.

[Operator:]

Thank you. And ladies and gentlemen due to time constraints that was our last question. I now hand the floor back to Mr. Coote for closing comments.

[William Coote:]

Thank you. Thank you everyone for joining us today and taking the time to be on this earnings call. We look forward to speaking to you again on our next semiannual earnings call which will be after our March full year 2015/16 financial results are published. This concludes the conference. Again, thank you.