Taro Pharmaceutical Industries Ltd.
Q2 2014 Earnings Call Transcript

Published: 10 Nov 2014

[Operator:]

Good day ladies and gentlemen, and welcome to the Taro Second Quarter 2014 Earnings Conference Call. At this time all participants are in a listen-only mode. (Operator instructions) I would now like to introduce your host for today’s conference, William Coote, you may begin.

[William J. Coote:]

Thank you. Good morning everyone and welcome to our second quarter fiscal 2015 earnings call. Joining me today on the call are Mr. Dilip Shanghvi, Chairman of Taro’s Board of Directors, who is joining us from India; Mr. Kal Sundaram, Taro’s CEO; and Mr. Michael Kalb, Group Vice President and CFO. We hope you received a copy of the earnings press release which was issued yesterday, which can also be found on our website at www.taro.com. This is our first earnings call. Therefore we anticipate that many of you may have questions concerning not only this quarter’s financial performance, but our markets, operations, strategies and other questions. We have scheduled this call for one hour. So as time permits we will take your questions. However, we ask that you restrict yourself to one question, and if you have more questions please rejoin the queue. As a reminder, this call is being recorded and a replay will be made available on our website for the next 10 days. A call transcript will also be placed on and remain on the 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 could give no assurances that the 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 2015 financial results. Over the past few quarters many of you have requested more interaction with Taro’s team for a better understanding of Taro’s business. This quarterly call is a step in that direction. While we try to respond to most of your queries we will not be able to share product specific and commercially sensitive information including pipeline details. I am pleased with Taro’s performance and would like to thank Taro’s management team for the company’s consistent performance thus creating value for all Taro’s shareholders. I would also like to thank Taro’s board of directors for their continued support. Sun acquired Taro in 2010. Post this acquisition Taro has tried to enhance its R&D pipeline. Taro’s present level of filings awaiting FDA approval is higher than at the end of 2010 and we expect that to continue. In the past four years, Taro has filed more than 35 ANDAs with the FDA, many of which involve complex clinical studies, and has cumulatively spent in excess of $200 million on R&D. There are many other milestones which Taro has achieved over the past four years. Kal will share some of these with you. Over to Kal.

[Kal Sundaram:]

Thank you, Mr. Shanghvi. Welcome everyone. Taro has achieved this significant accomplishment for the past four years. Let me highlight few of these achievements. Taro was listed in NYSE after a period of over five years on the pink sheet. Taro’s market capitalization has grown to $7 billion from $667 million in 2010. This is post a successful share buyback of $190 million. In 2010, as per IMS data, Taro was ranked third among the genetic dermatology companies in USA. In terms of sales, now it is ranked number one for the past three years. U.S. remains the dominant market for Taro. Taro’s earnings per share also has grown 50% CAGR, compounded annual growth, since 2010. Taro’s sales and earnings growth is attributable to upward price adjustments and the prudent life cycle management of our product portfolio while our overall volumes remain relatively constant and we remain cautious about the long-term sustainability of these prices. We are pleased to present this quarter’s results and with consistent progress that we have made. I will now hand over the floor to Mike Kalb for further discussion on financial performance. Mike.

[Michael Kalb:]

Thank you, Kal. Hello everyone and welcome. We are pleased with our second-quarter results and the comparisons that I will discuss are all with the comparable prior year periods. I will first discuss the Q2 highlights, followed by first half highlights. Net sales for Q2 were $251 million, up 22% over Q2 last year. As we anticipated in last quarter’s earnings release we are realizing the benefits of the previous quarter’s price adjustments in the current quarter. Gross profit increased 24% to $198 million year-on-year resulting in a 130 basis points expansion in our gross margins to 79%. R&D expenses as a percentage of net sales at 5.5% were lower as compared to Q2 last year. Our R&D spending is not evenly distributed across quarters. SG&A expenses as a percentage of net sales were at 8.6% lower than Q2 last year. Richer product mix and focus on cost efficiencies have driven the decline. As a result of the above, EBITDA for Q2 grew 32% year-on-year to 164 million. EBITDA margins improved to 66% as compared to 61% for Q2 last year. Net income increased 49% to $143 million driven mainly by top line growth and improved profitability. EPS for the quarter was $3.35 compared to $2.15 for Q2 last year. Let me now briefly discuss the half year performance. For the first half, net sales were up 6% to $381 million compared to $359 million for the first half of last year. Gross profits increased 6.5% to $283 million, while gross margins remained relatively flat at 75% over H1 last year. R&D expenses as a percentage of net sales were 7.6% in line with H1 last year. As a result of the above EBITDA for H1 grew 10% year-on-year to $223 million. EBITDA margins improved to 59% as compared to 56% for H1 last year. Net income for the first half increased 22% to $189 million resulting in EPS of $4.42 compared to $3.46 for H1 last year. While our volumes are relatively flat year-on-year, the levels of both our cost of goods and SG&A reflect the cost efficiencies and benefits realized as we actively manage and remain disciplined with our spending. Our cash flows and balance sheet remain strong with cash including marketable securities increasing $50 million to $683 million from March 31, 2014. I will now hand the floor back to Kal.

[Kal Sundaram:]

Thanks Mike. Taro’s Q2 and first half results reflect our continuing efforts to improve our business model and [processes] in order to supply high-quality products and maintain our customer service levels, together with continued focus on operating and cost efficiency. We are focused on successful execution of these important initiatives in order to remain well-positioned for the future. Our sales and earnings growth is attributable to upward price adjustments and prudent life cycle management of our portfolio, while our overall volumes remain relatively constant. We remain cautious of the increasing competition and major customer and industry consolidation and the potential impact of both which can have impact on our sustainability of our product sizes. These factors create additional challenges in maintaining our current performance given ever-changing market dynamics, in particular the creation of buying alliances between major wholesalers and retail pharmacy chains. As we have stated in the past, long-term sustainability of the growth achieved is uncertain given the unpredictable nature of our sales due to above mentioned factors. We have increased our R&D spend for the past four years and we expect to continue to spend significantly on R&D in order to improve and grow our pipeline of quality products in order to remain competitive in a highly competitive market. To some degree the products move at their own speed even if you want to move them faster. Year-to-date we have filed five ANDAs and received three approvals from FDA, the most recent of which is an approval for Desonide Lotion 0.05%. Taro has ANDAs representing 30 products awaiting FDA approval and 48 DMFs have been filed with FDA. As you may be aware, FDA has not reduced its approval timeline for ANDAs, which still remains at a magnitude of several years. We anticipate the benefits of our R&D efforts will provide long-term benefits to the company. Going forward, Taro continues to focus on building quality pipeline through R&D, improving [process change], increase speed to market and looking for business development opportunities. We are always looking for opportunities to strengthen the company be it either through organic growth or strategic acquisition opportunities. However, we are disciplined in our valuation in order to ensure that acquisitions meet both our business, as well as financial criteria. Before we move on to your questions, I would like to thank Mr. Shanghvi and the entire board of directors for their continued support and assistance in helping Taro to move forward. Wherever possible we continue to leverage Sun’s expertise and capabilities in areas such as procurement and other business imperatives in order to augment our own. We think this is good for all shareholders to benefit from Sun’s capability. With this, I would like to open the floor for questions. Thank you.

[Operator:]

(Operator instructions) Our first question comes from the line of Neha Manpuria from JP Morgan. Your line is now open.

[Neha Manpuria:]

Yes, hi. This is Neha Manpuria from JP Morgan. So one question on R&D, I understand that you don’t want to talk about what is in the pipeline, but just in terms we have seen R&D expenditure increasing by the company and we have a filing rate of about 10 to 11 ANDAs, how should we look at R&D spend overall for the company and this filing rate, on a next two to three year period?

[William Coote:]

So Kal, would you like to respond.

[Kal Sundaram:]

Sure. As I mentioned in my own text, we expect to maintain the current level of R&D spend, and depending upon the portfolio opportunities we will certainly maintain, if not we will even further increase the spend to further augment our pipeline. Neha is that what you asked?

[Neha Manpuria:]

Yes, sir. Thank you so much.

[Operator:]

Thank you. Our next question comes from the line of [Indiscernible]. Your line is now open.

[Unidentified Analyst:]

Hi, thank you. This is [Indiscernible] here. One question regarding the result, if I look at the results for this quarter cost of sales have moved up from a level of about 45, 46 which has been there for the quarter to 53, which is a jump of 18% quarter-over-quarter, just wanting to check that, have our volumes moved up to the same proportion or is there one off in cost of sales?

[Dilip Shanghvi:]

I think it is more relating to product mix. Our volumes have remained constant. So depending upon the product mix needless to say the cost of goods varies. So it is not due to volume. It is more product mix.

[Unidentified Analyst:]

Okay. Thank you very much.

[Operator:]

Thank you, and our next question comes from the line of Mitchell Sacks of Grand Slam Asset Management. Your line is now open.

[Mitchell Sacks:]

Yes, my question is related to accounts receivable. I see there was a jump in days for the quarter, is that a timing difference or what is causing that?

[William Coote:]

Mike, do you want to answer that?

[Michael Kalb:]

Sure. Yes, timing difference. If you look at the DSO, I think we’re still in the mid-60s, which has been consistent.

[Mitchell Sacks:]

Okay. Thank you.

[Operator:]

Thank you. Our next question comes from the line of [Indiscernible]. Your line is now open.

[Unidentified Analyst:]

Hi, thank you very much and thanks for doing this call first time in the last four of five years since Sun has acquired, again for the first time is – would Taro be taking up the practice of issuing the full year guidance the way Sun Pharma does, and if so what is that for this year?

[William Coote:]

So Kal maybe you can respond.

[Kal Sundaram:]

I don’t think we have plans to give forward guidance for the simple reason as we explained. Much of the [Indiscernible] sales increase is attributable to price adjustment. Given the uncertain nature of the market, it will be difficult for us to give guidance.

[Unidentified Analyst:]

Okay. Thank you very much. I will get back in the queue.

[Operator:]

Thank you. Our next question comes from the line of Matthew Furnas of Raging Capital Management. Your line is now open.

[Matthew Furnas:]

Hi, thank you for taking the question. Congratulations on the results. You talked about the pricing adjustments, can you walk through or explain your policy regarding reserves for those pricing adjustments that you have made and how much of them have been utilized and how should we look at that going forward?

[William Coote:]

Dilip, I will ask Mike Kalb to answer.

[Michael Kalb:]

Sure. The adjustments that we have had to take based on the customer contracts that we have entered into. Those reflect our contractual obligations to our customers and is standard industry practice.

[William Coote:]

Mike, maybe you can give a little bit more color so that there is greater clarity.

[Michael Kalb:]

Sure. So, based on each customer, each product has slightly different requirements as you probably are aware, and we have to take certain charges at the time we adjust prices. The payback varies on those price adjustments, but I think as I mentioned earlier we are starting to see the benefits from the first quarter price adjustments now.

[Dilip Shanghvi:]

Basically Mike we need to give what I say, these price adjustments reflect the need to give some form of price protection to the trader for the insurance catch-up for them to get high reimbursement. So like Mike said, the entire provision is on a built on by product, by customer and the nature of the contract we have with our customer.

[Operator:]

Thank you. Our next question comes from the line of [Indiscernible]. Your line is now open.

[Unidentified Analyst:]

Yes, see what I would like to understand is I’m looking for mainly the last two years a substantial portion of your growth has come from the price and given the fact that there is – the competition is increasing, it appears that this is not going to be sustainable, it is what you have been questioning us, but if you can give me a 2 to 3 year kind of horizon where do you see Taro, especially with the fact that you are building a pipeline and probably you have cash of about $650 million to $680 million or so, how do we plan for the next 2 to 3 years in terms of building the growth and building the profitability of your company?

[Dilip Shanghvi:]

Like I mentioned and as you would have seen a substantial amount of our sales we reinvest in R&D and build the pipeline. So, given that FDA takes let us say three years or so to give an approval for a given product, the impact of the pipeline that we have built will be felt in the future. As to what those opportunities will be, how the market will be, how each product will perform it is too soon for us to predict – predict that part. As to utilization of cash, as we mentioned we continue to look for opportunities. The opportunities need to meet both our sort of strategic needs as well as the financial criteria. So if and when a suitable opportunity comes, certainly we will use it.

[Unidentified Analyst:]

Thanks. I will join back.

[Operator:]

Thank you. Our next question comes from the line of Prakash Agarwal of CIMB. Your line is now open.

[Prakash Agarwal:]

Yes, good evening. Thanks for the opportunity. Just a clarification on the volumes, are these, you talked about decrease in volumes, so are these only YoY or also QoQ.

[William Coote:]

Mike.

[Michael Kalb:]

Sure. Quarter-on-quarter I think we are relatively flat.

[Prakash Agarwal:]

Okay. So finally –

[William Coote:]

Go on.

[Michael Kalb:]

So, quarter-on-quarter l would say we are relatively flat and we are down slightly H1 versus H1 a year ago.

[Prakash Agarwal:]

Okay, understood. Thank you.

[Dilip Shanghvi:]

You are welcome.

[Operator:]

Thank you. Our next question comes from the line of [Indiscernible]. Your line is now open.

[Unidentified Analyst:]

Hi thanks for taking my question. Just your thoughts ahead of Ranbaxy merger on – products the Ranbaxy brings into – if you could throw some color on how you plan [Indiscernible] that with your current sales force? And if possible also comment on possibility of taking price adjustment in those products?

[William Coote:]

Dilip you want to answer that?

[Dilip Shanghvi:]

What is the question?

[Unidentified Analyst:]

The question is ahead of the Ranbaxy merger, if you could just kind of comment on the topical dermatology products that Ranbaxy brings into this portfolio and how actually Sun plans to integrate just the Taro products with Ranbaxy products if you are using the same sales force or expanding it, and if you could also throw color on if there is a possibility of taking price adjustment in those products?

[Dilip Shanghvi:]

We haven’t studied the Ranbaxy products. It is difficult to respond, but there is no plan to what you call rationalize field force because both the products – products of both the companies will require to be promoted, and when the – I don’t think that it is feasible for us to run both the product promotions through a common field force. So there is no – there is also a separate field force of [Indiscernible]. Even that will continue to operate independently.

[Unidentified Analyst:]

Thank you, sir. I will join the queue.

[Operator:]

Thank you. (Operator instructions) Our next question comes from the line of [Indiscernible]. Your line is now open.

[Unidentified Analyst:]

Yes, hi, thanks for taking the question. One of your competitors alluded that the full impact of price increase is likely to be felt in the next quarter, so did we see the full impact in this quarter or we likely to see some impact also coming in next quarter?

[Dilip Shanghvi:]

I think I would say a lot depends on the – I don’t know which competitor you are talking about and I don’t know the product. I don’t know when they took the price increase. So therefore comparing them with us may not be appropriate. If you ask me we have felt pretty much the entire benefit of the price impact in this quarter.

[Unidentified Analyst:]

Okay. Thank you.

[Operator:]

Thank you. Our next question comes from the line of [Indiscernible]. Your line is now open.

[Unidentified Analyst:]

Yes. Thanks for taking my question. I just wanted to know about any update on the product that you acquired from NovaBiotics, it was supposed to be in Phase II, so any color on that will be very helpful?

[Dilip Shanghvi:]

We are still in early stages of clinical development. As things stand it is premature for us to talk about what the future for the product holds. As and when we get any major data at that point probably we will share with you.

[Unidentified Analyst:]

Okay, and if I may ask another question can you just reveal the addressable market for the newly –

[William Coote:]

Can we – excuse me, let me – I think please join the queue. Thank you.

[Unidentified Analyst:]

Okay, fine.

[Operator:]

Thank you. Our next question comes from the line of Abhishek Sharma of IIFL. Your line is now open.

[Abhishek Sharma:]

Yes, just some color on competitive intensity within the derma genetic space as it is building up would be helpful, is the competition coming from within the existing players as they expand their ANDA portfolio or do you see new competitor from horizon, is it product specific or is it all across the board?

[William Coote:]

Remember in the beginning we said that we are not going to share commercially sensitive information.

[Abhishek Sharma:]

Okay, sure. Okay.

[Operator:]

Thank you. Our next question comes from the line of Matthew Furnas of Raging Capital Management. Your line is now open.

[Matthew Furnas:]

Hi, thank you. Can you just talk more generally about the pipeline of filings that you have and obviously they have increased significantly since Sun has become involved, but can you just talk maybe generally about the size of those opportunities and maybe how many competitors generally there are within each of those?

[Dilip Shanghvi:]

Again the pipeline at product specific level is commercially sensitive. Not appropriate for us to share it. I’m sorry.

[William Coote:]

But I think – I think he is asking for overall indication. So I think you can talk of focus on products, which would have relatively less competition because of complexity of development. So maybe some color would help.

[Dilip Shanghvi:]

Being in dermatology naturally [Indiscernible] dermatology and also in oral solid narrow therapeutic index type of products. So to start with the product has to have some level of complexity and most of the dermatological products also will have need for clinical development. Given this basic both in terms of timeline, certainty of the product meeting endpoint and the cost of development will be higher than most of the other ANDAs in other generic segments. Much of our focus is we are very strong in steroids. So anything sort of to do with where steroids can treat could be sort of atopic dermatitis, psoriasis, et cetera, and we also have a portfolio of acne, and somebody spoke about NovaBiotics. That will be for onychomycosis. So relatively speaking one can generalize to say at this stage our focus is dermatology between atopic dermatitis conditions, acne, and things like onychomycosis. Did we answer you?

[Matthew Furnas:]

Yes. I guess what is the size of those opportunities, are they $50 million opportunities or $100 million, generally can you kind of provide a range for how we should think about how those opportunities contribute to revenue growth going forward?

[Dilip Shanghvi:]

Number one, that depends on the product and then if you got to say about talk more at a granular level, then we will be talking probably commercial sensitive information.

[Matthew Furnas:]

Okay. Thank you.

[Operator:]

Thank you. Our next question come from the line of [Indiscernible] your line is now open.

[Unidentified Analyst:]

Yes, hi. My question is in continuation to the previous one essentially on the R&D cost. Somewhere Dilipbhai mentioned that over the last four years, 35 ANDA have been filed and total R&D costs have been $200 million. So just wanted to understand on an incremental basis, product filing cost would be close to $6 million to $7 million or should it be trending higher?

[Kal Sundaram:]

I think probably you are talking in excess of $5 million for a standard dermatology product.

[Unidentified Analyst:]

Okay and also in terms of products other than the generics side, would you be developing more NDAs in the future? Is that also in the work?

[Kal Sundaram:]

Certainly what you say, where the opportunity exists that will be considered.

[Unidentified Analyst:]

But the thing that is currently under development?

[Kal Sundaram:]

Again you are getting to be too specific here.

[Unidentified Analyst:]

Okay. Okay. Final question just on product…

[Michael Kalb:]

If you could get back in the queue please we have other callers on the call, thank you.

[Unidentified Analyst:]

Okay. Sure.

[Operator:]

[Operator Instructions] Our next question comes from the line of Sonal Gupta of UBS Securities, your line is now open.

[Sonal Gupta:]

Thanks for taking my question. Good morning everyone. Just on – could you highlight what exactly are the strategic imperatives that you are looking at in terms of M&A when you are talking about and would the branded space really be of interest to you or are you looking into some generics as well?

[Kal Sundaram:]

Dilip, do you want to answer that?

[Dilip Shanghvi:]

What was the question?

[Sonal Gupta:]

Sir my question is that I mean basically you briefly mentioned that the usage of cash will depend on M&A, it would depend on meeting strategic and financial objectives, so could you just elaborate on exactly what sort of strategic objectives you have and would you be interested in really the specialty space, how do you…

[Dilip Shanghvi:]

So I think one of this trends of Taro has been dermatology so clearly one area of interest would be that space. Also, the other focus is to find their way to create consistent and stable revenue stream and profit streams so that would be the focus. So this is related to the strategic business interest. Related to the financial discipline, I think generally we look at post-synergy and value creation, looking at 20%+ kind of annualized rate of return. So we are looking at a more. So that operating discipline we want to continue to maintain.

[Unidentified Analyst:]

Fine. Thank you so much.

[Operator:]

Thank you. Our next question comes from Nimish Mehta from Research Delta; your line is now open.

[Nimish Mehta:]

Yes, thanks for taking my question. If you can highlight the addressable market that we are addressing for the three ANDA that we have got an approval this year, that would be great.

[Dilip Shanghvi:]

Kal, may be.

[Kal Sundaram:]

Dilip sort of I’m wondering is the question a bit too, does it take…

[Dilip Shanghvi:]

No, I think what he is asking, is the size of the brands for which you got approval. So which is a public domain he is asking. He is not asking you how much you expect to sell.

[Kal Sundaram:]

Sure. Okay, give us a minute, probably we need to –

[Dilip Shanghvi:]

Okay. So maybe that something which you can send it to him direct.

[Kal Sundaram:]

Alright.

[Dilip Shanghvi:]

So this is public domain information.

[Kal Sundaram:]

Yes, Dilip, I think we need to compute that. Probably, I’ll go on to talk about maybe $30 million to $50 million in total for the market?

[Dilip Shanghvi:]

Right. Okay.

[Nimish Mehta:]

I am sorry, is it $30 million to $50 million you said?

[Kal Sundaram:]

Yes.

[Nimish Mehta:]

So all the three ANDAs put together?

[Kal Sundaram:]

That's correct.

[Nimish Mehta:]

Okay, okay. Thank you.

[Dilip Shanghvi:]

And what Kal is explaining is the size of the market, not Taro’s potential here.

[Nimish Mehta:]

I understand. Fully understand. Thanks.

[Operator:]

Thank you. Our next question comes from line of [Bob Garvin] of Credit Suisse your line is now open.

[Bob Garvin:]

One clarity on the discontinued products, just from the FDA perspective and FDA reviews this discontinued products, players who we have got there in market have discontinued them, do FDA start from the first step or is it a much shorter in process?

[Dilip Shanghvi:]

What is the question?

[Bob Garvin:]

Question is for example in several of the products that TARO sells, in each of the product they were players who have existed the market and are not yet back into the market, let's say if anyone of those players who want to get back into the market does it requires the same amount let's say if FDA average approval time line is three years, so if that player wants to come back to the market does FDA starts from the first step and it takes three years or it could be just a very shorted process as well?

[Kal Sundaram:]

Depending…

[Dilip Shanghvi:]

It depends on the reason why the player has got out of the market. Let's say if it was very unattractive then they can come back very fast. If their product stability problems then they have to solve the problem before they can come back. If they are transferring the product with new site, it will take the kind of time that the site and servile require. So I think very difficult to respond to this in a – there is no single answer.

[Bob Garvin:]

But Dilip, just a clarity on that question, if let's say they took the product out of the market…?

[Dilip Shanghvi:]

I think if we are following some discipline better to follow that. So maybe you can come back in the queue.

[Bob Garvin:]

Sure. Thank you.

[Dilip Shanghvi:]

Thank you.

[Operator:]

Thank you. Our next question comes from the line of Sudarshan Padmanabhan of Sundaram, your line is now open.

[Sudarshan Padmanabhan:]

My question is mostly on what’s happening in the U.S. right from the congress level where the congress had hand letters to various companies, what I would like to understand more broadly as well as specifically to TARO, where do you see this going forward and would that inhibit probably TARO tomorrow to take price hikes if we see some kind of an opportunity to do so?

[Dilip Shanghvi:]

I don't know where you got this information. I don't think TARO has received any letter.

[Sudarshan Padmanabhan:]

No, no I am talking more generally in a sense that would companies, other companies be inhibited to take price hikes because now the congress is talking about pricing, I mean which more generally not specifically from TARO any specific company I would say?

[Dilip Shanghvi:]

Kal, you want to respond?

[Kal Sundaram:]

Sure. Generics still remain lot more -- what do you say value for money or cost competitive and it comes to the peers and patients and genetic companies by and large will have a larger portfolio and some of the products depending upon the competitive intensity prices will be lower, some of them, I mean they say short term opportunity prices go up. As I understand, U.S. is basically a free market and our own evidence is what you say with change in prices, with increase in the prices competitive intensity also increases, that's also better for the market. But it would be very difficult for anybody to predict what the congress will do. There is a very strong market mechanism which we believe is set of fully in operations and the generics continue to accrue value to the patients and peers.

[Sudarshan Padmanabhan:]

In short, do you believe that it will remain a free pricing kind of a system?

[Kal Sundaram:]

Difficult, these are all difficult questions to answer, isn’t it? You’re asking me to do crystal-ball guessing.

[Sudarshan Padmanabhan:]

Sure, sure, sure. Yes, that's just I wanted the perspective from your side.

[Operator:]

Thank you. Our next question comes from the line of the Nimish Mehta of Research Delta. Your line is now open.

[Nimish Mehta:]

Thanks again for taking my question. Please correct me if I am wrong but I assume in TARO we have branded generics as well pure generics, in terms of the product portfolio. If yes, it will be great if you can provide us split and also some color as to what kind of products we need to launch as standard generic and what as pure generics?

[Dilip Shanghvi:]

Mike, do you deal with these?

[Kal Sundaram:]

Yes. Probably too specific question by for us to answer.

[Nimish Mehta:]

But whether you have branded generics or pure generics?

[Kal Sundaram:]

We have both.

[Nimish Mehta:]

Okay and any color what kind of products do we follow for branded. I mean for branded generics that may not be so specific?

[Kal Sundaram:]

Like I mentioned, we are focused on dermatology within that sort of three or four areas, I mentioned bit psoriasis, atopic dermatitis, acne and onychomycosis, these are other type of, what you say therapy areas in which both or generics as well as for brands that we will be developing products for.

[Operator:]

Thank you. Our next question comes from the Bob Garvin of Credit Suisse, your line is now open.

[Bob Garvin:]

Yes, just one question that your facility in Israel was last inspected in December 2012, I just wanted to check that has that been recently inspected by the FDA?

[Kal Sundaram:]

After the 2012 inspection, it has not it is yet to be inspected.

[Bob Garvin:]

Okay. Thank you very much.

[Operator:]

Thank you. Our next question comes from Sonal Gupta of UBS Securities. Your line is now open.

[Sonal Gupta:]

Hi. Thanks for taking my question again. I just wanted to understand given that there are products where you have taken significant price increases, are you seeing some sort of substitution by the peers in terms of tier levels or the cope requirements for these to make them less attractive, I mean has there been any sort of thing which is happening from the market side from the peer side which is happening if you could throw some light on that.

[Kal Sundaram:]

Again market to volume fluctuations can happen for very different reasons as and when a new generation product comes, it will have impact on the older generation product. And once again I am saying generics remain to be sort of, what do you say cost value for money and competitive. I don't think there will be any significant -- we have seen any significant impact of volume shifting because of price adjustments.

[Sonal Gupta of UBS Securities:]

Great. Thank you so much.

[Operator:]

[Operator Instructions] Our next question comes from the line of [Sumant Govani] of Bank of America Merrill Lynch; your line is now open.

[Unidentified Analyst:]

Thanks for taking my question. On your cautionary comments on pricing, are those more need of financial prudent just from the modeling standpoint or have you seen pricing come in on some products already?

[Kal Sundaram:]

I think it’s prudent every which way you look at it, financially prudent. And also the level of margins that is being generated, it will attract competition. It’s laws of economics.

[Unidentified Analyst:]

Thanks.

[Operator:]

Thank you. Our next question comes from the line of [Indiscernible] of Goldman Sachs. Your line is now open.

[Unidentified Analyst:]

Thank you. The charge that was taken in the first quarter, was it non-cash charge or cash charge?

[Michael Kalb:]

The price adjustment charge?

[Unidentified Analyst:]

Yes.

[Michael Kalb:]

Yes, the price adjustment charge is typically the customers will take it in the way of deductions. So if you are asking specifically for your checks in many cases, no. But it will reduce the cash inflow for a period of time.

[Unidentified Analyst:]

So essentially a non-cash charge, right?

[Michael Kalb:]

Essentially. It depends on how you want to look at it.

[Kal Sundaram:]

It’s not like [Indiscernible] for example.

[Dilip Shanghvi:]

It's a cash charge.

[Kal Sundaram:]

It is a cash charge.

[Dilip Shanghvi:]

Because we will receive that much less money.

[Michael Kalb:]

Okay.

[Unidentified Analyst:]

So in June quarter, did you actually pay that much money to the distributors? Or would you adjusted in future sales?

[Michael Kalb:]

I didn’t understand the question.

[Unidentified Analyst:]

Was there an actual cash outgo from your side to the distributors then you need to charge in the first, or was it just P&L charge and there was an adjustment that later on happened in the future quarter sales.

[Michael Kalb:]

I think, I understood the question. Essentially, the customers who are taking those deductions and again contractually there is timing on when they are allowed to deduct.

[Kal Sundaram:]

As per now, it won't have any future impact on the P&L. As to the cash flow, depending upon the timing of their deduction, it will have impact on the cash flow.

[Operator:]

Thank you. Our next question comes from the line of Amar [Indiscernible] of Morgan Stanley; your line is now open.

[Unidentified Analyst:]

Thanks. Dilip, just have a quick clarification in the context of business development opportunities you mentioned that one of the option is to find a ways to have consistent revenues and profits, are you referring to specialty products, branded products?

[Dilip Shanghvi:]

Both. I think difficult to make products with you can, for a company which is those kind of products and technology, also branded products.

[Unidentified Analyst:]

So we can have a more kind of deal late phase candidates?

[Dilip Shanghvi:]

Theoretically yes, only thing is that with Taro’s profitability, it could have a much bigger financial impact. So we have to trade options. But I am looking at equal sites but there will be smaller opportunities.

[Unidentified Analyst:]

Okay. Got it. Thank you.

[Operator:]

Thank you. [Operator Instructions] Our next question comes from the line of Lalit Kumar of Nomura Securities. Your line is now open.

[Unidentified Analyst:]

This is [Indiscernible] here from Nomura. Just one question, do you have any outstanding forestry issues or regarding your [Indiscernible] facility?

[Kal Sundaram:]

I think all of them have been addressed. I don't think there is anything outstanding.

[Unidentified Analyst:]

Okay. Thank you.

[Operator:]

Thank you and our next question comes from the line of Mitchell Sacks of Grand Slam Asset Management. Your line is now open.

[Mitchell Sacks:]

You are setting nearly $700 million of cash in the balance sheet; do you have thoughts in terms of how to deploy that in terms of either maybe paying dividends or is it really more for acquisitions?

[Kal Sundaram:]

Like we mentioned much of those earlier, we say cash is being built for future opportunities, I will probably set in terms of returning cash last year we returned about $190 million in the form of share buyback which is probably one of the most efficient way of returning cash to the shareholders. On top, even in terms of sort of share price appreciation, you would have seen more like a tenfold increase for the past four years. So we need to keep some cash for business opportunities which we are building and from time to time sort of we have evaluate and then sort of return cash to the shareholders in the form of buyback.

[Mitchell Sacks:]

Thank you.

[Operator:]

Thank you. Our next question comes from the line of [Indiscernible] HDFC Asset Management. Your line is now open.

[Unidentified Analyst:]

Yes. Sir, thank you for the opportunity. Sir, can you indicate the size of our field force?

[Kal Sundaram:]

A typical dermatology field force in the U.S. probably for branded segment could be in the region of about 70.

[Unidentified Analyst:]

And that is where we would be?

[Kal Sundaram:]

Yes.

[Unidentified Analyst:]

Okay. Thank you so much.

[Operator:]

Thank you. [Operator Instructions] Our next question comes from the line of [Indiscernible] HDFC Asset Management. Your line is now open.

[Unidentified Analyst:]

Thanks for the opportunity. When you look at M&A opportunities between Sun and TARO, is there a called out sort of area of interest of both these companies? Or is there any element of tangibility between these two from a strategic merit standpoint?

[Dilip Shanghvi:]

Yes, Kal would you like to respond?

[Kal Sundaram:]

I think both the companies have independent evaluation process. As and when any opportunity comes, it seems they internally evaluate it. And the proposals, warranting review by the board it’s taken up to their respective board. That's the process we have been following.

[Unidentified Analyst:]

So then deals in the past, wouldn't they have been more appropriate for Taro than for Sun outside of the financial, the size of the deal per say whether it is a more compounded Sun has in licensed or DUSA that Sun has acquired, would they not have been more -- better for Taro than for Sun?

[Kal Sundaram:]

Dilip, do you want to?

[Dilip Shanghvi:]

Okay, Kal let me respond. I think what Kal indicated is that say the process in which whichever company accesses the opportunity, if it is a opportunity available to that company then it would evaluate that opportunity directly. And then if it is not something that they wish to pursue then they would share it with the other company. Now let's say that both these cases, Merck transaction – this was a very limited process that Merck rent and that technology and product was available to Sun because of existing Sun relationships. And the size of the transaction would have made it very difficult for Taro to take that kind of cost in its annual profitability. Also, technology of biologics would have made it very difficult and I mean for it Sun has in-house expertise. Technology also and then the product was also was global and Taro has only presence in the U.S. predominantly, let's say North America and a small presence in Israel. So that's related to Merck proposals. The second proposal which you talk of Sun. Sun has other products using photodynamic therapy in development and it has in-house understanding and capability of photodynamic therapy and that was the reason why it was able to pay significant premium over other players who were competing because it was a competitively rent process and the reason why it could pay that kind of premium is because of potential outside that Sun has been introducing future product using these technology platform and capability. And this is something which Sun shared with the investors post the announcement at that point of time. But to summarize, I think a typical dermatology asset of Sun which Taro can manage could be something which Taro would look at much more closely but if it becomes a $5 million opportunity then it may become beyond Taro's capability to look at that opportunity.

[Unidentified Analyst:]

But such smaller opportunities are available in the market?

[Dilip Shanghvi:]

Valuation, I think challenge is the valuation, not opportunity.

[Unidentified Analyst:]

Okay sir. Thank you so much.

[Operator:]

Thank you. Our next question comes from the line of [Indiscernible] private investor, your line is now open.

[Unidentified Analyst:]

I have the very simple query and I have got this queue from the response that you just gave, Taro basically has presence in say North America, what about geographical expansion of Taro are you looking at it?

[Dilip Shanghvi:]

Kal, would you like to respond?

[Kal Sundaram:]

Yes. So our main focus has been U.S and Canada, if you look beyond U.S. and Canada, I will set a probably if you thinks into few components here up in Japan, advanced markets then the rest of them are emerging markets. For emerging markets we don't have anything set of specifics to offer as the portfolio, most of these products are available in these markets. Those markets are fairly competitive. Japan's regulated requirements will require us to totally redevelop the products if we decide to go down that road so what remains is only Europe. We will continue to evaluate opportunities in Europe.

[Unidentified Analyst:]

How soon could that be your expansion into Europe?

[Kal Sundaram:]

Probably difficult to predict at this time.

[Unidentified Analyst:]

Would you like to set any time length?

[Kal Sundaram:]

It’s difficult to give any time lines on that.

[Unidentified Analyst:]

Okay.

[Unidentified Analyst:]

Can you give a time line on, what do you say anything we will [Indiscernible] in Europe?

[Dilip Shanghvi:]

It's difficult to give any predictable time.

[Operator:]

Thank you. Our next question comes from the line of [Indiscernible] your line is now open. Our next question comes from the line of [Indiscernible] your line is now open.

[Unidentified Analyst:]

Thanks for taking my question. Kal, how is the capacity utilization at Taro? Would you have enough capacities over the next two years or so?

[Kal Sundaram:]

Yes. Sure. That's not an issue.

[Unidentified Analyst:]

Okay. Thank you.

[Operator:]

Thank you. Now I am showing no further questions at this time. Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You all disconnect. Have a great day everyone.

[Kal Sundaram:]

Bye.