Taro Pharmaceutical Industries Ltd. (NYSE:TARO) Q2 2021 Results Conference Call October 29, 2021 8:00 AM ET
William Coote - Assistant VP and Treasurer
Dilip Shanghvi - Chairman
Uday Baldota - CEO
Daphne Huang - CFO
Conference Call Participants
Ram Selvaraju - H.C Wainwright
Girish Bakhru - Bank of America
Shyam Srinivasan - Goldman Sachs
Good morning, ladies and gentlemen, and welcome to the Taro Pharmaceutical's Second Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded.
I would now like to turn the call over to your host today, Mr. William Coote, Assistant Vice President and Treasurer. Please go ahead, sir.
Thank you. Good morning, everyone, and welcome to our second quarter 2020-'21 earnings conference call. We hope everyone is healthy and safe during these trying times, and since safety is our top priority, we are conducting the virtual call.
Joining me today are Mr. Dilip Shanghvi, Chairman of the Board of Directors; Mr. Uday Baldota, Taro's CEO; and Ms. Daphne Huang, Taro's CFO.
We hope you have received a copy of the earnings press release, which can be found on our website at taro.com. We anticipate that many of you may have questions concerning not only this quarter's and year-to-date financial performance, but also our markets, operations, strategies, and other matters. 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. As a reminder, this call is being recorded and a replay and call transcript will be made 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 conjunction with the risks that our business faces as detailed from time to time in the company's SEC reports.
I will now turn the call over to Mr. Dilip Shanghvi.
Thank you, Bill. Welcome to all of you and thank you for joining us today for Taro's earning call after the announcement of second quarter and six-month 2020-'21 financial results. I hope that all of you remain safe and healthy.
Taro's results are a reflection of these challenging times we are facing. However, as the COVID pandemic continues to impact the globe, Taro remains focused on delivering quality products to patients and communities that depend on them, while continuing to take the necessary precautions to safeguard the health and well-being of our employees.
How the pandemic will evolve and what the long-term impact from COVID-19 will be, not only for Taro's business, but more importantly on people's health around the world, is difficult to measure and anticipate. And as we have said for some time, we believe that U.S. generic market will continue to be competitive for the foreseeable future.
On the positive side, September marks the 10th anniversary of Sun's majority ownership of Taro. During this time, the company has grown significantly and enjoyed many successes, including more than 70 filings with the FDA and over 65 approvals.
In addition, we have returned additional shareholder values in excess of $1.2 billion through a combination of share repurchases, tender offers, and as special dividend. On behalf of the entire Board of Directors, I want to thank all the Taro employees for their continuing dedication and commitment to serving our customers and patients during this unprecedented time.
I will now hand over the call to Uday.
Thank you, Mr. Shanghvi. Welcome, everyone, and thank you for joining us today. I hope you and your families are in good health. Apologies to participants on the call for the late start on account of last minute technical difficulty. As you are aware, the pandemic and its impact continue to drag on. In our key geographies, we have witnessed a second or even a third wave of infection. Even as we speak, infections don't show a definite trend of decline. On the external front, this pandemic has caused doctor clinics to close, though we have seen an opening in quarter 2.
As individuals and families spend more time at home, incidence of ailment has reduced, footfalls into pharmacies have significantly declined. Clinical trials have been delayed, though now we see a recovery. On the internal front, we have invested to make factories and offices as much COVID-proof as possible. Team Taro has stepped up to this challenge even as we continue to operate in a hybrid format, partly from home and office. Factories and DCs have operated for every single day through this time, a living testament of the commitment of Team Taro. Due to the safety measures we put in place and the dedication of our employees to follow these, we have been able to maintain a safe and healthy work environment and avoid any outbreak of COVID-19 related to our facility.
While our sales this quarter have improved over the previous quarter, these are still below previous year, principally as a result of reduced U.S. volumes that reflect the impact related to COVID-19. We are holding steady in our market share. In the first quarter, the major change we saw was reduced volumes being bought by the patients and pharmacies, both of generics and OTC products, which we believe is related to lockdown, less store traffic or fear of patients leaving their home. Our 6 months were also impacted by the customer stocking we experienced in quarter 4 of the previous year, which from a volume standpoint, was unusually high due to the initial response to the pandemic.
In quarter 2, we saw an increase in our overall volumes in the sequential quarter-over-quarter comparison. And while one quarter does not make a trend, it's encouraging. However, volumes have not completely normalized. As Mr. Shanghvi said, how the pandemic evolves during the rest of the year will dictate the future volume levels.
However, we have some accomplishments and are encouraged by some trends. As I previously indicated, our products continue to rank number 1 and number 2 by market share in over 70% of our portfolio in the U.S. generic market.
We experienced an increase in overall volumes in the sequential quarter-over-quarter comparison. We launched Deferiprone, a product with orphan indication that expands our capabilities to include specialty products. We have received a number of approvals in Canada. And our investments in R&D continue to help us add to our portfolio. We have successfully launched a number of products in recent months. And since the beginning of the year, we have received 7 approvals from the FDA. Currently, we have 18 ANDAs awaiting U.S. FDA approval with 5 tentative approvals.
We continue to look at opportunities to strengthen our portfolio, either through organic growth, through strategic partnerships, or through strategic acquisition. Let me emphasize, we will continue to be disciplined in our evaluation in order to ensure that any opportunity meets both our business as well as financial criteria.
With this, I will now hand over the call to Daphne to discuss the financials.
Thank you, Uday. Hi, everyone, and welcome to the second quarter Taro earnings conference call. Let me discuss some of the key financial highlights, which are in comparison with the comparable prior-year period. First, second quarter highlights, then followed by the 6-month comparison.
For the second quarter ended September 30, 2020, our net sales were $143 million, a decrease $18 million. However, on the sequential quarter-over-quarter comparison, our net sales increased 21% over first quarter.
Our gross profit was $82 million, decreased $20 million, and as a percentage of net sales was 57% compared to 63% in the prior-year quarter, but improved from sequentially 55% in Q1. Our R&D and expense was $17 million, increased about $1 million as we remain committed to our R&D investment. R&D expenses are not evenly distributed across quarters in our case and primarily vary due to the timing of R&D activities, including clinical studies and certain other expenses.
Our SG&A expenses was $24 million and that was in line pretty much with the prior-year quarter. As a result of the above, EBITDA was $47 million with EBITDA margin of 33% compared to 42% in the prior-year quarter. When compared to first quarter, excluding the impact of the first quarter settlement and loss contingency charges, EBITDA increased from 30% pro forma in the first quarter to 33%.
Based on the above, operating income of $41 million, decreased $22 million, and as a percentage of net sales was 29% compared to 39% in the prior-year quarter. On a sequential quarter-over-quarter comparison however, excluding the impact of the Q1 settlements and loss contingency charges, operating income increased $11 million and as a percentage of net sales, increased from 25%.
Interest and other financial income decreased $3 million to $6 million as a result of the low global interest rate environment. Income tax expense of $4 million decreased $13 million, resulting in an effective tax rate of 7% compared to 23% in the same period last year. Net income attributable to Taro was $45 million as compared to $56 million as the decrease in operating income and interest revenue were partially offset by the decrease in tax expense, resulting in diluted earnings per share of $1.18 compared to $1.46 for the second quarter of last year.
Now let me turn to discuss the 6-month performance and comparison to last year. Net sales was $261 million, decreased $62 million. As Uday indicated, the customer stocking we experienced in fourth quarter of FY '19-'20 came at the expense of the FY '20-'21 of first quarter. In the second quarter, as previously stated, we realized a 21% bounce back in net sales over first quarter. Gross profit was $147 million, decreased $57 million and as a percentage of net sales, was 56% compared to 63%. R&D expenses of $30 million, slightly increased. SG&A of $46 million, increased $3 million, principally due to higher legal and professional fees as well as higher freight rates and some COVID related costs. Excluding the impact from the first quarter settlement and loss contingency charges, EBITDA was $82 million, with the EBITDA margin of 32%.
Operating loss of $408 million compared to operating income of $131 million in the prior year. However, excluding the settlement and loss contingency charges, operating income pro forma was $71 million and as a percent of net sales was 27% compared to 41%. Interest and other financial income was $13 million, decreased $6 million from the same time prior year, that primarily was the result of the lower global interest rate environment. FX income of $1 million was $7 million less compared to the same period last year.
Our income tax expense for the first half decreased $24 million to $12 million. Excluding the impact from the settlement and loss contingency charges, the effective tax rate was 14% compared to 23%. Net loss income attributable to Taro was $390 million of loss compared to $122 million of income in the prior period, resulting in diluted loss per share of $10.19 compared to $3.17 of EPS of the prior year same period. Excluding the impacts from the settlement and loss contingency charges, our net income for the first half of fiscal year was $74 million, resulting in diluted earnings per share pro forma of $1.94.
Now turning to our cash flow and balance sheet. Our cash flow and balance sheet remain strong. Cash and cash equivalents, including short-term and long-term marketable securities decreased $50 million to $1.5 billion from March 31, 2020. That cash reduction was primarily due to the partial payment to the DOJ settlement. There is a payment plan in place, and we're paying according to the plan.
Our investment policy of our marketable securities remains very conservative, and our marketable securities are of high quality with little to no exposure to distress industries or securities and continue to outperform the benchmark.
Cash flow from operations for the 6 months ended September 30, 2020, was negative $48 million. However, excluding the impact from the settlement and loss contingency, cash flow provided by operations pro forma was $55 million compared to $123 million for the 6 months ended September 30, 2019.
I will now hand the floor back to Uday.
Thanks, Daphne. As we announced in July, Taro Pharmaceuticals USA has resolved all cases involving the company in connection with the multiyear investigation by the Department of Justice Antitrust Division and Civil Division into the U.S. generic pharmaceutical industry. At the same time, the company agreed with the civil division of DOJ to settle all claims related to alleged federal program losses associated with anti-competitive conduct related to the generic drugs that were subject of the DPA and were purchased or subsidized by these programs. The company is in the process of finalizing the agreement with the DOJ civil with the material terms including the settlement amount and the releases are settled.
Concerning the remaining state antitrust investigations and multi-district civil litigation, we continue to work with our counsel to defend these claims. Furthermore, we remain committed to strong corporate governance and fostering an ongoing culture of compliance.
Finally, I want to say thank you to the 1,500 Taro employees for their contributions throughout this pandemic, demonstrating their commitment and dedication every day to keep our products flowing to customers and ultimately the patients who depend on our medicine.
With this, I would like to open the floor up for your questions. Thank you.
[Operator Instructions] Your first question comes from the line of Ram Selvaraju with H.C Wainwright.
Curious if you intend to continue to avoid the branded space in the U.S.?
I think what we've said in the past is that we continue to look for opportunities, which will sort of help us participate in the branded space. So, our evaluation continues. We haven't yet necessarily committed ourselves to doing anything. I think our work is on, on this front.
[Operator Instructions] And we do have a question from the line of Girish Bakhru with Bank of America.
The current status of the clinics, how many percentage, let's say, recovery have we seen in the quarter? And if you have simultaneously a number of patient visits, particularly in the derm side?
Sorry, Girish. We could only hear part of the question. Can you repeat?
So my question was, one, you said that there was some recovery you saw in quarter 2 in terms of clinics have started to open up, and I do take note of the second wave and third wave that you mentioned in certain geographies. But is there a trend that is indicating that there can be more opening up? And is patient, inpatient visits are increasing?
I think we see that the trend is positive. But as I also said that with the numbers, what they are, it is a bit of an uncertainty as we go forward.
And second question was on this acquisition that you had announced, if you could detail some color on that? What does that company have?
You mean Aquinox?
Yes. So Aquinox is sort of a development stage company, products at a very early stage. So what we've done is we've acquired the company, and we would sort of take those products further, develop those further. That's the intent.
And these products are in which therapy area, if you could indicate?
[Operator Instructions] We do have a question from the line of Shyam Srinivasan with Goldman Sachs.
My first question is on the R&D. Just looking at slightly longer term, we've been spending about between $60 million to $70 million every year. Just trying to see in terms of the pipeline, what we have kind of built towards and given the kind of price erosion we are seeing in the dermatology space, are there newer therapy areas that you would like to highlight where incremental R&D is going towards, which will kind of diversify this high dependence on dermatology topical products? If you could share some qualitative aspects around this.
So I think, Shyam, we continue to look for products where, I would say, we have capabilities, products which we believe have a good potential in the marketplace. So that's, I would say, an ongoing effort. And that's what we use to develop our portfolio. At the moment, I wouldn't want to sort of give any leading indicator as to which other areas are we looking at. But that, I would say, is an active work that we continue to do.
My second question is on the, some of the comments in the press release around the competitive intensity in the dermatology space as well as the weakness in the underlying demand. But Taro, as you said, has maintained market share. So how are we enabling this, maintaining our market share? If you could also highlight some of the competitive activities that you have seen in the derm pocket as stated.
So I think as I mentioned in my readout that ensuring that we continue to have good product supply and we continue to serve our customers in the best possible way, I think that is what has helped us keep our market share where it has been. In fact, in some cases, probably increase it as well. So even while we see the overall market demand falling or compressing with good supply chain, I think we have been able to keep our shares.
Uday, last question. I know the volumes have been declining this year. But if you could help us disaggregate the price versus any volume trends that you could disaggregate for us? And we have seen signs of the oral space, actually seeing a lot of stability in terms of price erosion this year. Have you seen something similar on your portfolio as well?
I think similar to what we've said in the past and no different, the price erosion that the company sees is typically dependent on the product portfolio that the company has. And at least in our experience, the price declines that we've seen in the past and probably even in these 6 months, I think it gives us a sense that the price declines are here to stay. We haven't seen any major trend reversal.
[Operator Instructions] At this time, there are currently no questions in queue. Mr. Coote, are there any closing remarks before we end the call?
No. Thank you, operator.
Ladies and gentlemen, thank you for participating. This concludes today's second quarter earnings call. You may now disconnect.