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Edited Transcript of TARO earnings conference call or presentation 8-Nov-17 1:00pm GMT

Q2 2018 Taro Pharmaceutical Industries Ltd Earnings Call

HAIFA Nov 20, 2017 (Thomson StreetEvents) -- Edited Transcript of Taro Pharmaceutical Industries Ltd earnings conference call or presentation Wednesday, November 8, 2017 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Dilip Shantilal Shanghvi

Taro Pharmaceutical Industries Ltd. - Chairman of the Board

* Mariano Balaguer

Taro Pharmaceutical Industries Ltd. - VP, CFO & CAO

* Uday V. Baldota

Taro Pharmaceutical Industries Ltd. - CEO & Director

* William J. Coote

Taro Pharmaceutical Industries Ltd. - Assistant VP of Business Finance & IR and Treasurer

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Conference Call Participants

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* Alok Dalal

* Anubhav Aggarwal

* Elliot Wilbur

* Gregg Gilbert

* Kartik A. Mehta

Deutsche Bank AG, Research Division - Research Analyst

* Neha Manpuria

JP Morgan Chase & Co, Research Division - Analyst

* Nimish Mehta

* Prashant Nair

* Sameer Baisiwala

Morgan Stanley, Research Division - Executive Director

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen. Welcome to the Taro Pharmaceutical's second quarter 2017/'18 Earnings Conference Call. (Operator Instructions) Please note that this conference is being recorded. I would now like to turn the conference over to Mr. William Coote. Mr. Coote, please go ahead.

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William J. Coote, Taro Pharmaceutical Industries Ltd. - Assistant VP of Business Finance & IR and Treasurer [2]

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Thank you. Good morning, everyone, and welcome to our second quarter 2017/'18 earnings conference call. Joining me today on the call are Mr. Dilip Shanghvi, Chairman of the Board of Directors; Mr. Uday Baldota, Taro's CEO; and Mr. Mariano Balaguer, CFO.

We hope you received the copy of the earnings release, which can be found on our website at taro.com. We anticipate that many of you may have questions concerning not only this quarter's and year-to-date financial performance, but also our markets, operation 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 detail. We ask that you limit 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 and transcript will be available on our website.

Before we proceed, I must remind you that today's discussion may include certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Although the company believes the expectations reflected in such forward-looking statements to be based on reasonable assumptions, it can give no assurances that its expectations will be attained and should be viewed in connection with the risk 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.

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Dilip Shantilal Shanghvi, Taro Pharmaceutical Industries Ltd. - Chairman of the Board [3]

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Thank you, Bill. Welcome all of you and thank you for joining us today for Taro's earning call after the announcement of the second quarter and 6 month FY '18 financial results.

Taro, along with the generic -- entire generic industry continues to face difficult headwinds in generic pricing, the result of more intense competition, new entrants to the market, consolidation of buying consortiums and higher FDA ANDA approval rate. These factors are expected to continue into the foreseeable future. However, Taro is well positioned to face this headwinds.

I know that many of you are familiar with Uday Baldota through his many years of service for Sun. In August, Uday assumed his new position as Taro's CEO. Uday has been involved in Taro's development from the very beginning of Sun's ownership 7 years ago, so he is very familiar with its products, markets, operations and people.

I'm confident, along with the entire Taro board, that Uday's experience and leadership will benefit Taro and its shareholders as the company navigates through a very tough and challenging environment.

I will now hand over the call to Uday.

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Uday V. Baldota, Taro Pharmaceutical Industries Ltd. - CEO & Director [4]

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Thank you, Mr. Shanghvi. And welcome, everyone, and thank you for joining us today. I am very pleased and excited to be at Taro, and as Mr. Shanghvi indicated, I have been involved, sometimes from a distance, with the growth and development of Taro since the acquisition back in September 2010.

While the entire U.S. generic industry is facing a difficult environment, as all of you or most of you are aware, Taro is well positioned to meet this challenge using our strengths.

Let me briefly highlight our key strengths: A strong leadership team in all areas such as the commercial function, sales, marketing, customer service, operations, R&D and all the other enabling functions; strong customer relationships, quality products -- in fact if you look at Taro products in the U.S. generic business, more than 2/3s have a ranking of #1 or #2 based on market share; a good pipeline of 32 products awaiting FDA approval; a strong commitment to quality, with all our facilities in good standing with the respective regulatory agencies; and of course a strong balance sheet.

We take a long-term view of R&D investments and will continue to invest in R&D going forward. We are satisfied about the progress with the clinical studies that are currently on. With a $1.5 billion cash on our books, we will continue to evaluate business development opportunities with appropriate targets whether it's a product, multiple products or a business. However, as in the past, we will remain extremely disciplined in our approach, ensuring that our financial and operational metrics can be achieved.

A word about our share repurchases. Under the current authorization, which the board has extended by one more year, we have repurchased 930,000 shares, coupled with the 2013 Dutch auction and the March 2016 completed authorization, Taro has bought back 4.7 million shares, returning a significant value to shareholders, with a large portion of our current authorization still remaining.

To discuss the financial performance, let me hand over the call to Mariano.

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Mariano Balaguer, Taro Pharmaceutical Industries Ltd. - VP, CFO & CAO [5]

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Thank you, Uday. Hello, everyone, and welcome.

Let me discuss some of the key financial highlights. The comparison that I will discuss are for the comparable prior year period; first, second quarter highlights followed by the 6 months comparison.

Net sales were $170 million, a decrease of $59 million as the result of continuing increased competition and the challenging pricing environment, with overall volumes for the quarter increasing 1%. Gross profit of $125 million, decreased $52 million, and as a percentage of net sales was 74% compared to 77%.

Research and development expenses of $18, increased $3 million compared to the same period of prior year. Selling, marketing, general and administrative expenses, SG&A, decreased $3 million to $18 million as we continued to actively manage and remained disciplined with our spending and seek efficiencies wherever is possible.

Operating income of $89 million, decreased $53 million, as a percentage of net sales was 52% compared to 62% in the prior year quarter.

As a result of the above, second quarter EBITDA of $93 million decreased 36%, with EBITDA margin of 55% compared to 63% for Q2 last year.

Foreign exchange expenses of $33 million in the second quarter 2017/'18 compared to FX income of $13 million in the last year second quarter resulted in a $46 million negative impact on earnings. This impact is principally the result of strengthening of Canadian dollar versus the U.S. dollar. This FX is mainly balance sheet driven by the U.S. dollar-denominated bank accounts and inter-company AR balance on our Canadian subsidiary books.

Tax expense decreased $29 million to $7 million, resulting in an effective tax rate of 11.5% compared to 22.3% for the same period last year.

Net income attributable to Taro was $52 million compared to $124 million as the decrease in operating income and the increase in FX expense was partially offset by the reduced taxes expenses and a $1 million increase in interest income, resulting in a diluted earning per share of $1.30 compared to $3 from the same period last year.

Let me now discuss 6 months performance in comparison to last year. Our net sales of $331 million decreased $131 million, mainly due to the continued increase in competition and challenging pricing, as previously pointed out, with the overall volumes increase of 4% across all of our principal market and businesses. Cost of goods decreased $13 million, mainly due to the results and our lower royalties.

Gross profit of $242 million decreased $118 million, and as a percentage of net sales was 73% compared to 78% for the same period last year.

R&D expenses of $33 million remained in line with prior year expenses with all of our activities, including clinical studies, proceeding according to plan. SG&A expenses remained relatively flat at $43 million.

Operating income of $166 million deceased $118 million, and as a percentage of net sales was 50% compared to 61% in the prior year. EBITDA of $174 million, with a decreasing margin from 63% to 53%.

FX in the 2017/'18 6 months period was a $60 million fluctuation from the prior year period, from $8 million income to an expense of $52 million. As pointed out before, this is principally driven by the strengthening of Canadian dollar versus U.S. dollar and is mainly due to balance sheet.

Tax expenses decreased $49 million, resulting in the effective tax rate decreasing to 13.6% from 22% in the prior year period.

Net income attributable to Taro was $107 million compared to $234 million, a $127 million decrease, as the decrease in operating income and the increase in FX expense was partially offset by reduced tax expense and a $2 million increase in interest income, resulting in a diluted earnings per share of $2.65 compared to $5.59 in the prior period.

Our cash flow and balance sheet remained strong, with cash including short-term bank deposit and marketable securities, both short-term and long-term, of $1.5 billion increased $83 million from March 31, 2017, despite of the $40 million impact from the company's share repurchase in the current fiscal period.

Cash provided by operation for the 6 months ended September 30, 2017 amounted $139 million compared to $193 million for the 6 months ended September 30, 2016.

As Uday mentioned, we return value to our shareholders through our share repurchase program. Under the November 2016 authorization, during the quarter the company repurchased 310,000 shares at an average price of $102.92. And during the current fiscal year through October 31st, the company has repurchased 411,000 shares at an average price of $103.79. In total, under the November 2016 authorization, the company repurchased 930,000 at an average price of $104.22. There is still 153 million remaining under this authorization. And at the recent board meeting, the share repurchase program has been extended for one more year.

Please let me now hand back the floor to Uday. Thanks very much.

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Uday V. Baldota, Taro Pharmaceutical Industries Ltd. - CEO & Director [6]

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Thank you, Mariano. Before we open the floor to questions, I wanted to briefly address the Department of Justice investigation. While we have nothing new to report on this matter, we continue to work with our counsel to cooperate with the Department of Justice. We also remain committed to strong corporate governance and fostering a culture of compliance at Taro.

I look forward to working with the entire Taro team and successfully overcoming the challenges we are facing in our business. We will continue to evaluate initiatives and opportunities which will add to the existing business and performance to build a stronger future.

With this, I would like to open the floor up for your questions. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from Elliot Wilbur with Raymond James.

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Elliot Wilbur, [2]

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Just a point of clarification. I believe you said volume across the portfolio on a year-over-year basis was up around 4%, which would imply something close to 30% in terms of year-over-year price erosion, unless there were some new products in there. So I wonder if you give a little bit more clarity in terms of the price volume metrics year-over-year and also sequentially would be helpful.

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Mariano Balaguer, Taro Pharmaceutical Industries Ltd. - VP, CFO & CAO [3]

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

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Elliot Wilbur, [4]

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But the year-over-year price declined 25%. Majority of that's -- year-over-year sales declined 25% and the majority is price. That's fair to say?

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Mariano Balaguer, Taro Pharmaceutical Industries Ltd. - VP, CFO & CAO [5]

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I think that's about right.

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Operator [6]

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Our next question is from Neha Manpuria with JP Morgan.

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Neha Manpuria, JP Morgan Chase & Co, Research Division - Analyst [7]

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

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Uday V. Baldota, Taro Pharmaceutical Industries Ltd. - CEO & Director [8]

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

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Neha Manpuria, JP Morgan Chase & Co, Research Division - Analyst [9]

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You mean the current quarter?

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Uday V. Baldota, Taro Pharmaceutical Industries Ltd. - CEO & Director [10]

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Yes, meaning the increase that you're mentioning from Q1 to Q2 is not necessarily the indication of the trend going forward. We need to be cautious.

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Neha Manpuria, JP Morgan Chase & Co, Research Division - Analyst [11]

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And what would be -- what would the increase be because of [this]?

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Uday V. Baldota, Taro Pharmaceutical Industries Ltd. - CEO & Director [12]

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

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Operator [13]

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Our next question is from Anubhav Aggarwal with Credit Suisse.

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Anubhav Aggarwal, [14]

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

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Uday V. Baldota, Taro Pharmaceutical Industries Ltd. - CEO & Director [15]

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5% of what, Anubhav? If you can clarify?

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Anubhav Aggarwal, [16]

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

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Uday V. Baldota, Taro Pharmaceutical Industries Ltd. - CEO & Director [17]

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

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Mariano Balaguer, Taro Pharmaceutical Industries Ltd. - VP, CFO & CAO [18]

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

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Operator [19]

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(Operator Instructions) Our next question is from Gregg Gilbert with Deutsche Bank.

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Gregg Gilbert, [20]

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My question is about whether you plan to make any changes or at least tweaks to the company's strategy and/or capital deployment priorities? And secondly, how do you balance this new job without a CEO of Sun, North America?

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Uday V. Baldota, Taro Pharmaceutical Industries Ltd. - CEO & Director [21]

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Maybe I can second the -- answer the second question first. I am not the CEO of North America for Sun. That's Mr. Abhay Gandhi, who is the Vice Chair for the Taro board and he runs the Sun U.S., North America business. So it's not me. Taking your first question, I think historically Taro has continued to evaluate opportunities for deploying its cash. Taro has continued to evaluate opportunities as to what it can do to ensure that it continues to grow the business. I think from that perspective, I would say we continue to do that. We continue to look at initiatives and opportunities so that we can put the business on a stronger footing even compared to what we are today going forward. So that way, I think nothing changes. The idea is: We are seeing lot of industry changes that are happening as we speak. We've seen buyer consortiums over the last 2, 3 years. We are likely to see regulatory changes that media keeps talking about. We are likely to see some change in the supply chain industry as media keeps talking about. So I think we are truly in a state where we need to be cautious as to what is it that we will do, particularly when we don't know very precisely the shape of things to come. So to the extent that we get more clarity and visibility on any of these aspects, I think we will need to continue to tweak our strategy. But overall, looking at opportunities for growth in our core areas of strength and maybe some adjacent areas that we are interested in, I think that doesn't change.

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Gregg Gilbert, [22]

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

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Uday V. Baldota, Taro Pharmaceutical Industries Ltd. - CEO & Director [23]

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

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Dilip Shantilal Shanghvi, Taro Pharmaceutical Industries Ltd. - Chairman of the Board [24]

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Uday, I think his question is more about what is it that Taro plans to do and -- so idea for us is to continuously -- and I'm responding for Sun and also to some extent also philosophically since we run Taro at board level. That philosophy is also implemented through board polices, is that do we create long-term value for all the stakeholders and identify businesses which will either organically grow at a rate which will be faster than the industry or will -- whenever we look at acquisition, then how do we get a kind of post synergy return so that we can get our money back in 6-plus years. And even for Taro I think we try and look at business opportunities in a similar way. I hope this answers your question.

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Operator [25]

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Our next question is from Nimish Mehta with Research Delta Advisors.

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Nimish Mehta, [26]

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Can you just let us know what would be the sales contribution from products that you would have launched in the last 12 months? I mean a rough ballpark would be…

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Uday V. Baldota, Taro Pharmaceutical Industries Ltd. - CEO & Director [27]

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

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Nimish Mehta, [28]

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But some color would be essential. I'm just trying to understand whether are we gaining with the new products. So where are we? Some color would be helpful as to whether are they becoming meaningful enough or not?

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Uday V. Baldota, Taro Pharmaceutical Industries Ltd. - CEO & Director [29]

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

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Operator [30]

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Our next question is from Anubhav Aggarwal with Credit Suisse.

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Anubhav Aggarwal, [31]

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Uday, one question on the balance sheet. Taro has a $1.5 billion cash, but I see consistently for last 5 years in cash and cash equivalents the company keeps almost $0.5 billion cash. Why is that so? That much cash is not required for running the business certainly.

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Uday V. Baldota, Taro Pharmaceutical Industries Ltd. - CEO & Director [32]

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

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Mariano Balaguer, Taro Pharmaceutical Industries Ltd. - VP, CFO & CAO [33]

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Sure, sure. We continue optimizing our cash management and allocating those as in the best way possible. As you have seen, there is different dynamics between the collection and the payment with a large consortium, so we continue to optimize our cash management and treasury function as we move into this environment. But definitely -- you can see it from a prior quarter to this quarter that our cash as such it has been reduced. We're increasing some other short-term maturities, some bank deposits as we move it toward being best possible suited for that. You also have seen that we have added some securities and we have some long-term investment as well, all in a good diversification, so we don't get into any risk. But given the current economy, I think it's important to save in a very cautious way.

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Uday V. Baldota, Taro Pharmaceutical Industries Ltd. - CEO & Director [34]

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No, I think what Anubhav is attempting to ask is why do we have such a large number here. So what all is included in cash and cash equivalents is what he is attempting to ask, yes.

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Mariano Balaguer, Taro Pharmaceutical Industries Ltd. - VP, CFO & CAO [35]

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We have short-term operation cash there and before we deploy it to any investment is where we have it. But I will say that you can go back to the previous quarter, where, in Q4 last year, we had $600 million and we bring it down now to $500 million. And we continue to actively manage our treasury in this sense.

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Anubhav Aggarwal, [36]

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But, Mariano, is -- I mean I'm just trying to understand how much cash you actually need to run the business, because, the other peers that we track, nobody requires that much amount of cash. I know the need has increased with buyers getting consolidated. That sense will be useful that how much cash is really needed to run the business.

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Mariano Balaguer, Taro Pharmaceutical Industries Ltd. - VP, CFO & CAO [37]

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I don't think we'll go into that level of detail. We do set up our cash operation needed in a very detail manner depending on the regions as well. But definitely it's an area -- if you follow it, you will see that our marketable securities are up more than $300 million. But…

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Dilip Shantilal Shanghvi, Taro Pharmaceutical Industries Ltd. - Chairman of the Board [38]

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

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Mariano Balaguer, Taro Pharmaceutical Industries Ltd. - VP, CFO & CAO [39]

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

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Operator [40]

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Our next question is from [Sintra Agarwal] with [Sterling] Capital.

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Unidentified Analyst, [41]

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Just wanted to have a broader perspective from you over 18 to 24 months. On one side, we are seeing challenging or evolving business dynamics, and on one side, we are seeing that Taro is well positioned to face it. You have listed down a few strong points like a strong balance sheet and the ANDA pipeline. So how should we look at the 18 to 24 months going ahead? What would drive us and what could be ideal steps that you are having in mind? If you could provide some color to us, it would be really helpful.

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Uday V. Baldota, Taro Pharmaceutical Industries Ltd. - CEO & Director [42]

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

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Unidentified Analyst, [43]

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

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Uday V. Baldota, Taro Pharmaceutical Industries Ltd. - CEO & Director [44]

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

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Operator [45]

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Our next question is from Sameer Baisiwala with Morgan Stanley.

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Sameer Baisiwala, Morgan Stanley, Research Division - Executive Director [46]

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Uday, just curious that for SG&A expense for the quarter, it was $18 million. If I look back, it's probably one of the lowest in last many, many quarters. Generally between $20 million and $25 million. It's just one-off reporting or is there something meaningful part of cost that you have taken out?

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Uday V. Baldota, Taro Pharmaceutical Industries Ltd. - CEO & Director [47]

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I think there is a constant effort on our part to find ways by which we can sort of optimize costs and I would say to a certain extent this also is an impact by creating shared services kind of function across the 2 organizations, Sun and Taro. And to that extent, we are able to operate at lower costs. So some of these are a result of that. I'm not sure how much of that is on account of that. But the idea is going forward what is it that we can sort of optimize on the costs. And that is something that is an effort to control the overall cost of the operation.

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Mariano Balaguer, Taro Pharmaceutical Industries Ltd. - VP, CFO & CAO [48]

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And to complete that answer for SG&A, I will consider the year-to-date basis, as you will have timing when we set up this plan that can probably spike one quarter versus the other. But on a year-to-date basis, you can see the impact. And we will continue in that course to maintaining our costs flat or below what it has been in prior year.

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Dilip Shantilal Shanghvi, Taro Pharmaceutical Industries Ltd. - Chairman of the Board [49]

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Uday and Mariano, my view is that it's also possible that Sameer is looking at numbers that included marketing cost for Keveyis, which when we discontinued we would have discontinued all those activities.

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Mariano Balaguer, Taro Pharmaceutical Industries Ltd. - VP, CFO & CAO [50]

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That is correct, Dilip, where we discontinued and we've had the final quarter in Q2 because of Keveyis as well.

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Sameer Baisiwala, Morgan Stanley, Research Division - Executive Director [51]

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Mariano, the other point here is that I think if I see the U.S. dollar versus Canadian dollar, the trend that we were seeing in the preceding 6 to 8 months, which was Canadian dollar was strengthening and you were reporting FX losses, that has altered in October and November. I think Canadian dollar has weakened 5% already. So now we should see the reversal of FX trend, which is you should be now booking the gains in Q3 onwards?

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Mariano Balaguer, Taro Pharmaceutical Industries Ltd. - VP, CFO & CAO [52]

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

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Uday V. Baldota, Taro Pharmaceutical Industries Ltd. - CEO & Director [53]

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So I think, Sameer, what Mariano is saying is that there is no cash impact of this at all.

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Sameer Baisiwala, Morgan Stanley, Research Division - Executive Director [54]

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And finally one more. Given your philosophy -- sorry, given your commentary on the business for Taro, from all accounts it looks like it's a very tough environment out there. And in this -- such an environment, why -- what's the philosophy behind company allocating $250 million in share repurchase, which is buying shares of a company which is finding it very, very hard to keep its head above water? And I think given your commentary for next 12, 18, 24 months, it's going to continue like that.

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Unidentified Company Representative, [55]

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

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Sameer Baisiwala, Morgan Stanley, Research Division - Executive Director [56]

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What's the thinking behind putting $250 million to a share repurchase program which is buying shares of a company which is finding a very, very tough environment?

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Uday V. Baldota, Taro Pharmaceutical Industries Ltd. - CEO & Director [57]

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

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Operator [58]

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Our next question is from Alok Dalal with CLSA.

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Alok Dalal, [59]

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

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Uday V. Baldota, Taro Pharmaceutical Industries Ltd. - CEO & Director [60]

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

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Alok Dalal, [61]

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So we've recently seen companies consolidate in the U.S. We've seen some units on the block. Are these things of -- or are these signs of things to come about the changes that one can expect in the industry?

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Uday V. Baldota, Taro Pharmaceutical Industries Ltd. - CEO & Director [62]

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

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Alok Dalal, [63]

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

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Uday V. Baldota, Taro Pharmaceutical Industries Ltd. - CEO & Director [64]

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

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Alok Dalal, [65]

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

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Uday V. Baldota, Taro Pharmaceutical Industries Ltd. - CEO & Director [66]

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Difficult for us to sort of predict that.

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Operator [67]

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Our next question is from Kartik Mehta with Deutsche Bank.

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Kartik A. Mehta, Deutsche Bank AG, Research Division - Research Analyst [68]

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Is there any outlook -- or is there any R&D cost that you could assign? And any plans to file outside derma?

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Uday V. Baldota, Taro Pharmaceutical Industries Ltd. - CEO & Director [69]

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Sorry, Kartik, your question -- your voice broke up. Can you repeat?

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Kartik A. Mehta, Deutsche Bank AG, Research Division - Research Analyst [70]

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

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Uday V. Baldota, Taro Pharmaceutical Industries Ltd. - CEO & Director [71]

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

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Kartik A. Mehta, Deutsche Bank AG, Research Division - Research Analyst [72]

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The reason I ask is, in fact with the share repurchase being extended by a year, fair to assume that cash may not be used for that -- till you exhaust that? And then with cash pile there, would you not need to look at something which is a late Phase III candidate outside derma also, just to use that amount and something which actually fits in your payback overall?

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Uday V. Baldota, Taro Pharmaceutical Industries Ltd. - CEO & Director [73]

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So at the moment, Kartik, we are not looking at that, as I said that we would look at all initiatives and opportunities that we will have to sort of strengthen the business going forward. So as and when we sort of sharply define our -- or modify our strategy going forward, if and when we do it, we will look at it. Not at the moment.

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Kartik A. Mehta, Deutsche Bank AG, Research Division - Research Analyst [74]

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And one last question if I may. Would you say that the pricing pressure in dermatology portfolio or in the entire U.S. derma market is, I would say, near its peak? Or would you in terms of the products that you are in -- competition that you have seen in the last few years -- would you feel that there is more to come in terms of the products that you are or what you have filed?

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Uday V. Baldota, Taro Pharmaceutical Industries Ltd. - CEO & Director [75]

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

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Operator [76]

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Our next question is from Prashant Nair with Citigroup.

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Prashant Nair, [77]

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

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Uday V. Baldota, Taro Pharmaceutical Industries Ltd. - CEO & Director [78]

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I would say, Prashant, difficult to give a specific timeframe. But I think some products, as I said, will come to market in the next 24 months. But I think we would have products even beyond that. And to a certain extent, Prashant, it's difficult to give a very precise timeline on approvals on account of several variables and some of these are clearly not in our control.

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Prashant Nair, [79]

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But would you have, say, specific target action dates or [vision] dates for a larger part of your filings currently?

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Uday V. Baldota, Taro Pharmaceutical Industries Ltd. - CEO & Director [80]

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I would say -- I think to a certain extent whichever is near-term. I think we have -- we would have that. But as I said, we have longer term products also and to that extent some of these we may not have.

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Operator [81]

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(Operator Instructions) Our next question is from Nimish Mehta with Research Delta Advisors.

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Nimish Mehta, [82]

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In your comment you mentioned that heightened approval rate from the U.S. FDA has been an issue. But when we look at Taro, the number of products approved -- I don't know the exact counts for the first half, but let's say this quarter there was only 1 approval. So why do we not feel that happening with Taro? Correct me if my understanding is wrong.

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Uday V. Baldota, Taro Pharmaceutical Industries Ltd. - CEO & Director [83]

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

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Nimish Mehta, [84]

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So if you can help me understand this. How much time does it generally take after the filing is done for you get an approval? And also I understand from your comment that because you are most likely the first one to file an ANDA on the product, which is why you take longer. Is that right? Is that what you are going to say?

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Uday V. Baldota, Taro Pharmaceutical Industries Ltd. - CEO & Director [85]

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No, what I'm trying to say is that there are -- I think looking at what Taro has been able to achieve in the past years, I think there is a catch-up that's happening by the competition, looking at Taro's performance. So some of these approvals that you see for competition are catch-up approvals to a certain extent. And logically Taro already has those approvals, so Taro can't get fresh approvals for those products. So I think to that extent, the comparison is probably not appropriate. What I am also saying is that products that Taro is filing and whatever is Taro's expectation in terms of approval, by and large I think we are able to get approvals in line with that expectation. Responding specifically to how much time it takes, now, Nimish, you know it's very difficult for us to sort of use this data because there will be some products on which patent expiry is sort of a bit distant, there are some products on which we may have other challenges. So it's difficult for us to average out a specific time, saying that "I file on this and I get it approved."

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Nimish Mehta, [86]

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Leaving aside the patent, and I am just talking about the approval process. I mean you may not launch after the approval is granted because of the patent issue. But generally how much on an average, just for the understanding? I don't want an exact figure, but like 1 to 2 years, 2 to 3 years after the filing has been made? That would be very helpful for us.

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Uday V. Baldota, Taro Pharmaceutical Industries Ltd. - CEO & Director [87]

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I think, Nimish, I would sort of not get into the numbers here. But you know that if I file a Para III for something, I can't get an approval till the patent expires and it could be 4 years, 5 years, we don't know. So I think averaging out these things will probably not help, Nimish.

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Nimish Mehta, [88]

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You can always give a tentative. Okay, instead of that, if you can just then tell me the branded sales that this pipeline represents as of now, the 32 ANDAs that is pending approval?

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Uday V. Baldota, Taro Pharmaceutical Industries Ltd. - CEO & Director [89]

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

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Operator [90]

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

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William J. Coote, Taro Pharmaceutical Industries Ltd. - Assistant VP of Business Finance & IR and Treasurer [91]

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

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Operator [92]

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