Taro Pharmaceutical Industries Annual Report 2017

Plain-text annual report

UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549 FORM 20-F (Mark One)☐☐REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGEACT OF 1934OR☑☑ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended March 31, 2017OR☐☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934For the transition period from to OR☐☐SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934Date of event requiring this shell company report Commission file number 001-35463 TARO PHARMACEUTICAL INDUSTRIES LTD.(Exact name of Registrant as specified in its charter) N/A(Translation of Registrant’s name into English)Israel(Jurisdiction of incorporation or organization)14 Hakitor Street, Haifa Bay 2624761, Israel(Address of principal executive offices)Mariano BalaguerChief Financial OfficerTaro Pharmaceutical Industries Ltd.c/o Taro Pharmaceuticals U.S.A., Inc.3 Skyline DriveHawthorne, NY 10532Tel: 914-345-9000Fax: 914-345-6169Email: Mariano.Balaguer@Taro.com(Name, telephone, email and/or facsimile number and address of Company contact person)Securities registered or to be registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registeredOrdinary Shares, NIS 0.0001 nominal (par) value per share New York Stock ExchangeSecurities registered or to be registered pursuant to Section 12(g) of the Act:None(Title of Class)Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:None(Title of Class) Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the AnnualReport:40,513,209 Ordinary Shares, NIS 0.0001 nominal (par) value per share, and 2,600 Founders’ Shares NIS 0.00001 nominal (par) value per shareoutstanding as of March 31, 2017Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ☐ Yes ☑ NoIf this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of theSecurities Exchange Act of 1934. ☐ Yes ☑ NoNote—checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934from their obligations under those sections.Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. ☑ Yes ☐ NoIndicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required tobe submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period thatthe registrant was required to submit and post such files). ☑ Yes ☐ NoIndicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, non-accelerated filer or an emerging growth company. Seedefinition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer: ☑ Accelerated filer: ☐ Non-accelerated filer: ☐ Emerging growth company ☐ If an emerging growth company that prepares its financial statements in accordance with US GAAP, indicate by check mark if the registrant has elected not touse the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the ExchangeAct: ☐ Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing: U.S. GAAP ☑ International Financial Reporting Standards as issuedby the International Accounting Standards Board ☐ Other ☐ If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected tofollow. ☐ Item 17 ☐ Item 18If this is an Annual Report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☑ No INTRODUCTIONWe, among other business activities, develop, manufacture and market prescription (“Rx”) and over-the-counter (“OTC”) pharmaceutical products,primarily in the United States (the “U.S.”), Canada and Israel. We also develop and manufacture active pharmaceutical ingredients (“APIs”), primarily for usein our finished dosage form products. We were incorporated in 1959 under the laws of the State of Israel. In 1961, we completed the initial public offering ofour ordinary shares in the United States. Our ordinary shares have been listed on the New York Stock Exchange (the “NYSE”) under the symbol “TARO,”since March 22, 2012.As used in this Annual Report on Form 20-F for the fiscal year ended March 31, 2017 (the “2017 Annual Report”), the terms “we,” “us,” “our,” “Taro”and the “Company” mean Taro Pharmaceutical Industries Ltd. (“Taro Israel”) and its subsidiaries, unless otherwise indicated.This 2017 Annual Report is being filed in respect of the fiscal year ended March 31, 2017, and contains the audited consolidated financial statementsfor the year then ended. FORWARD-LOOKING STATEMENTSExcept for the historical information contained in this 2017 Annual Report, the statements contained herein, in particular with respect to our business,financial condition and results of operations, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 andSection 21E of the Securities Exchange Act of 1934. Actual results could differ materially from those anticipated in these forward-looking statements as aresult of various factors, including all the risks discussed in “Item 3D—Key Information: Risk Factors” and elsewhere in this 2017 Annual Report. We urgeyou to consider that statements which use the terms “believe,” “expect,” “plan,” “intend,” “estimate,” “anticipate,” “should,” “will,” “may,” “hope” andsimilar expressions are intended to identify forward-looking statements. These statements reflect our current views with respect to future events and are basedon assumptions and are subject to risks and uncertainties. Except as required by applicable law, including the securities laws of the United States, we do notintend to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.PRESENTATION OF FINANCIAL INFORMATIONOur consolidated financial statements appearing in this 2017 Annual Report are reported in U.S. dollars in thousands, unless otherwise indicated, andare prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”). Totals presented in this 2017Annual Report may not total correctly due to rounding of numbers.All references in this 2017 Annual Report to “dollars,” or “$,” are to U.S. dollars and all references in this Annual Report to “NIS” are to New IsraeliShekel. The published (1) representative exchange rate between the NIS and the dollar for March 31, 2017 was NIS 3.63 per $1.00. The published(2) representative exchange rate between the Canadian dollar and the dollar for March 31, 2017 was $1.33 Canadian dollar per $1.00. No representation ismade that the NIS amounts or Canadian dollar amounts could have been, or could be, converted into dollars at rates specified herein or any other rate. (1)As published by The Bank of Israel.(2)As published by The Bank of Canada. iTABLE OF CONTENTS PART I 1ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS 1ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE 1ITEM 3. KEY INFORMATION 2A. SELECTED FINANCIAL DATA 2B. CAPITALIZATION AND INDEBTEDNESS 3C. REASONS FOR THE OFFER AND USE OF PROCEEDS 3D. RISK FACTORS 3ITEM 4. INFORMATION ON THE COMPANY 20A. HISTORY AND DEVELOPMENT OF THE COMPANY 20B. BUSINESS OVERVIEW 21C. ORGANIZATIONAL STRUCTURE 35D. PROPERTY, PLANT AND EQUIPMENT 36ITEM 4A. UNRESOLVED STAFF COMMENTS 38ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS 38A. OPERATING RESULTS 38B. LIQUIDITY AND CAPITAL RESOURCES 47C. RESEARCH AND DEVELOPMENT, PATENTS, TRADEMARKS AND LICENSES 48D. TREND INFORMATION 49E. OFF-BALANCE SHEET ARRANGEMENTS 49F. TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS 50ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES 51A. DIRECTORS AND SENIOR MANAGEMENT 51B. COMPENSATION 54C. BOARD PRACTICES 54D. EMPLOYEES 61E. SHARE OWNERSHIP 62ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS 63A. MAJOR SHAREHOLDERS 63B. RELATED PARTY TRANSACTIONS 63C. INTERESTS OF EXPERTS AND COUNSEL 64ITEM 8. FINANCIAL INFORMATION 64A. CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION 64ITEM 9. THE OFFER AND LISTING 65A. OFFER AND LISTING DETAILS 65B. PLAN OF DISTRIBUTION 66C. MARKETS 66D. SELLING SHAREHOLDERS 66E. DILUTION 66F. EXPENSES OF THE ISSUE 66ITEM 10. ADDITIONAL INFORMATION 66A. SHARE CAPITAL 66B. MEMORANDUM AND ARTICLES OF ASSOCIATION 66C. MATERIAL CONTRACTS 73D. EXCHANGE CONTROLS 73E. TAXATION 73F. DIVIDENDS AND PAYING AGENTS 84G. STATEMENT BY EXPERTS 84H. DOCUMENTS ON DISPLAY 84I. SUBSIDIARY INFORMATION 84ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 84ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES 85 PART II 85ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES 85ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS 85ITEM 15. CONTROLS AND PROCEDURES 85ii ITEM 16. [RESERVED] 86ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT 86ITEM 16B. CODE OF ETHICS 86ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES 86ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES 87ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS 87ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT 88ITEM 16G. CORPORATE GOVERNANCE 89ITEM 16H. MINE SAFETY DISCLOSURE 90 PART III 91ITEM 17. FINANCIAL STATEMENTS 91ITEM 18. FINANCIAL STATEMENTS 91ITEM 19. EXHIBITS 91 iiiPART I ITEM 1.IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERSNot applicable. ITEM 2.OFFER STATISTICS AND EXPECTED TIMETABLENot applicable. 1ITEM 3.KEY INFORMATIONA. SELECTED FINANCIAL DATAWe have derived the following selected consolidated financial data for the years ended March 31, 2017, 2016 and 2015, and as of March 31, 2017 andMarch 31, 2016, from our audited consolidated financial statements set forth elsewhere in this 2017 Annual Report, which have been prepared in accordancewith U.S. GAAP. We have derived the consolidated selected financial data for the years ended as of March 31, 2014 and 2013, from our audited consolidatedfinancial statements not included in this Annual Report. You should read the selected consolidated financial data together with “Item 5—Operating andFinancial Review and Prospects” and our consolidated financial statements, related notes and other financial information included elsewhere in this 2017Annual Report. Year Ended March 31, 2017 2016 2015 2014 2013 U.S. dollars and shares in thousands (except per share data) Consolidated Statements of Operations Data: Sales, net $879,387 $950,751 $862,944 $759,285 $670,954 Cost of sales 207,860 169,743 186,359 179,279 176,128 Impairment 276 2,042 — — — Gross profit 671,251 778,966 676,585 580,006 494,826 Operating expenses: Research and development 70,644 71,160 65,510 55,430 46,508 Selling, marketing, general and administrative 85,656 92,365 87,644 91,733 86,438 Settlements and loss contingencies — 973 (4,200) 2,590 33,300 156,300 164,498 148,954 149,753 166,246 Operating income 514,951 614,468 527,631 430,253 328,580 Financial income, net (34,636) (19,672) (51,311) (12,285) (3,931) Other gain, net 11,211 2,680 2,738 1,369 3,352 Income before income taxes 560,798 636,820 581,680 443,907 335,863 Tax expense 103,780 95,313 96,059 82,729 67,799 Income from continuing operations 457,018 541,507 485,621 361,178 268,064 Net loss from discontinued operations attributable to Taro (352) (236) (787) (319) (1,194) Net income 456,666 541,271 484,834 360,859 266,870 Net income attributable to non-controlling interest 310 339 577 472 664 Net income attributable to Taro $456,356 $540,932 $484,257 $360,387 $266,206 Net income from continuing operations attributable to Taro $456,708 $541,168 $485,044 $360,706 $267,400 Net loss from discontinued operations attributable to Taro (352) (236) (787) (319) (1,194) Net income attributable to Taro $456,356 $540,932 $484,257 $360,387 $266,206 Net income per ordinary share from continuing operations attributable to Taro: Basic $11.06 $12.63 $11.32 $8.15 $5.99 Diluted $11.06 $12.63 $11.32 $8.15 $5.98 Net loss per ordinary share from discontinued operations attributable to Taro: Basic $(0.01) $(0.01) $(0.01) $(0.01) $(0.03) Diluted $(0.01) $(0.01) $(0.01) $(0.01) $(0.03) Net income per ordinary share attributable to Taro: Basic $11.05 $12.62 $11.31 $8.14 $5.96 Diluted $11.05 $12.62 $11.31 $8.14 $5.95 Weighted-average number of ordinary shares used to compute net income per share: Basic 41,301 42,832 42,834 44,276 44,678 Diluted 41,301 42,832 42,834 44,279 44,715 2 As of March 31, 2017 2016 2015 2014 2013 (U.S. dollars in thousands)Consolidated Balance Sheet Data: Working capital $1,789,187 $1,632,133 $1,203,802 $797,967 $717,240 Property, plant and equipment, net $180,085 $159,459 $153,045 $151,416 $145,265 Total assets $2,289,753 $2,188,033 $1,737,745 $1,284,376 $1,106,636 Short-term debt, including current maturities of long-term debt — — $912 $11,974 $11,330 Long-term debt, net of current maturities — — $4,976 $5,888 $17,269 Shareholders’ equity $2,073,806 $1,937,144 $1,417,383 $1,020,593 $890,961 DividendsWe have never paid cash dividends and we do not anticipate paying any cash dividends in the foreseeable future. Our dividend policy is set forthbelow in “Item 8.A – Consolidated Statements and Other Financial Information.”B. CAPITALIZATION AND INDEBTEDNESSNot applicable.C. REASONS FOR THE OFFER AND USE OF PROCEEDSNot applicable.D. RISK FACTORSOur business, operating results and financial condition may be seriously harmed due to any of the following risks, among others. If we do notsuccessfully address the risks facing us, we may experience a material adverse change in our business, results of operations and financial condition and ourshare price may decline. We cannot assure you that we will successfully address any of these risks.Risks Relating to Our IndustryThe pharmaceutical industry in which we operate is intensely competitive. We are particularly subject to the risks of competition. For example, thecompetition we encounter may have a negative impact upon the prices we charge for our products, the market share of our products and our revenue andprofitability.The pharmaceutical industry in which we operate is intensely competitive. The competition which we encounter has an effect on our product prices,market share, revenue and profitability. Depending upon how we respond to this competition, it may have a material adverse effect on us. We compete with: •generic manufacturers of our brand-name drugs; •the original manufacturers of the brand-name equivalents of our generic products; •drug manufacturers (including brand-name companies that also manufacture generic drugs); •generic drug manufacturers; and •manufacturers of new drugs that may compete with our generic drugs and proprietary products.Most of the products that we sell are either generic drugs or drugs for which related patents have expired. Most of these products do not benefit frompatent protection and are therefore subject to an increased risk of competition. In addition, because many of our competitors have substantially greaterfinancial, production and research and development resources, substantially larger sales and marketing organizations, and substantially greater namerecognition than we have, we are particularly subject to the risks inherent in competing with them. For example, many of our competitors may be able todevelop products and processes competitive with, or superior to, our own. Furthermore, we may not be able to differentiate our products from those of ourcompetitors, successfully develop or introduce new products that are less costly or offer better performance than those of our competitors or offer purchasersof our products payment and other commercial terms as favorable as those offered by our competitors.3Other pharmaceutical companies frequently take actions to prevent or discourage the use of generic drug products such as ours.Other pharmaceutical companies have increasingly taken actions, including the use of state and federal legislative and regulatory mechanisms, toprevent, delay or discourage the use of generic equivalents to their products, including generic products that we manufacture or market. If these efforts todelay or prevent generic competition are successful, our ability to sell our generic versions of products may be limited or prevented. This could have amaterial adverse effect on our future results of operations. These efforts have included, among others: •filing new patents or extensions of existing patents on products whose original patent protection is about to expire, which could extend patentprotection for the product and delay launch of generic equivalents; •developing patented controlled-release products or other product improvements; •developing and marketing branded products as Rx and OTC products; •pursuing pediatric exclusivity for brand-name products; •submitting citizen petitions to request that the Commissioner of the U.S. Food and Drug Administration (“FDA”) take administrative actionwith respect to an abbreviated new drug application (“ANDA”) approval; •attaching special patent extension amendments to unrelated federal legislation; •engaging in state-by-state initiatives to enact legislation that restricts the substitution of some brand-name drugs with generic drugs; •making arrangements with managed care companies and insurers to reduce the economic incentives to purchase generic pharmaceuticals; •introducing authorized generics or their own generic equivalents to the marketplace; and •setting the price of brand-name drugs at or below the price of generic equivalents.Generally, no additional regulatory approvals are required for brand-name manufacturers to sell directly or through a third party to the genericmarket. Brand-name products that are licensed to third parties and are marketed under their generic names at discounted prices are known as authorizedgenerics. Such licensing facilitates the sale of generic equivalents of a company’s own brand-name products. Because many brand-name companies aresubstantially larger than we are and have substantially greater resources than we have, we are particularly subject to the risks of their undertaking to preventor discourage the use of our products that compete with theirs. Moreover, the introduction of authorized generics may make competition in the genericmarket more intense. It may also reduce the likelihood that a generic company that obtains the first ANDA approval for a particular product will be the first-to-market and/or the only generic alternative offered to the market and thus may diminish the economic benefit associated with this position.We may experience declines in the sales volume and prices of our products as the result of the continuing trend of consolidation of certain customergroups, such as the wholesale drug distribution and retail pharmacy industries, as well as the emergence of large buying groups.We make a significant portion of our sales to a relatively small number of wholesalers, retail drug chains, food chains and mass merchandisers. Ifdemand decreases significantly, our profitability could be negatively impacted. Also, these customers constitute an essential part of the distribution chain forgeneric pharmaceutical products and continue to undergo significant consolidation. This consolidation may result in these groups gaining additionalpurchasing leverage and consequently increasing product pricing pressures facing us. In addition, the emergence of large buying groups representingindependent retail pharmacies and the prevalence and influence of managed care organizations and similar institutions, potentially enables those groups tonegotiate price discounts on our products.Our net sales and quarterly growth comparisons may also be affected by fluctuations in the buying patterns of retail chains, major distributors andother trade buyers, whether resulting from seasonality, pricing, wholesaler buying decisions or other factors. In addition, since such a significant portion ofour U.S. revenue is derived from relatively few customers, any financial difficulties experienced by a single customer, or any delay in receiving paymentsfrom a single customer could have a material adverse effect on our business, financial position and results of operations, and could cause the market value ofour ordinary shares to decline.New developments by others could make our products or technologies non-competitive or obsolete.The markets in which we compete and intend to compete continue to undergo rapid and significant technological change. Our competitors maysucceed in developing products and technologies that are more effective or less costly than any that we are developing, or that would render our productsobsolete and non-competitive.4We anticipate that we will face increased competition and product price erosion in the future as new companies enter the market and novel oradvanced technologies emerge. Smaller or early-stage companies may also prove to be significant competitors, particularly through collaborativearrangements with large and established companies. Many of our competitors have significantly greater research and development, financial, sales andmarketing, manufacturing and other resources than we have. As a result, they may be able to devote greater resources to the development, manufacture,marketing or sale of their products, initiate or withstand substantial price competition, or more readily take advantage of acquisitions or other opportunities.Our ability to market products successfully depends, in part, upon the acceptance of our products not only by consumers, but also by independent thirdparties.Our ability to market generic or proprietary pharmaceutical products successfully depends, in part, on the acceptance of the products by independentthird parties (including physicians, pharmacies, government formularies, managed care providers, insurance companies and retailers), as well as patients. Inaddition, unanticipated side effects or unfavorable publicity concerning any of our products, or any brand-name product of which our generic product is theequivalent, could have an adverse effect on our ability to achieve acceptance by prescribing physicians, managed care providers, pharmacies and otherretailers, customers and patients.Our future profitability depends upon our ability to continue monitoring our inventory levels in the distribution channel.Our future profitability depends, in part, upon our ability to continue monitoring our inventory levels in the distribution channel. We obtain reports ofthe amount of our products held in inventory by our wholesaler customers. We use these reports as part of our process for monitoring inventory levels in ourdistribution channel and our exposure to product returns. If we lose access to these reports, we may not be able to adequately monitor our inventory levels inthe distribution channel. The loss of our visibility into the distribution channel could cause inventory levels to build, exceeding market demand andresulting in our incurring significant and unanticipated expenditures to reimburse these wholesaler customers for product returns, which could materiallyaffect our profitability and cash flows in an adverse manner.Our future profitability depends upon our ability to introduce new generic or innovative products on a timely basis.Our future profitability depends, to a significant extent, upon our ability to introduce, on a timely basis, new generic or innovative products for whichwe either are the first-to-market (or among the first-to-market) or can otherwise gain significant market share. Our ability to achieve any of these objectives isdependent upon, among other things, the timing of regulatory approval of these products and the number and timing of regulatory approvals of competingproducts. Inasmuch as this timing is not within our control, we may not be able to develop and introduce new generic and innovative products on a timelybasis, if at all.To the extent that we succeed in being the first-to-market generic version of a significant product, and particularly if we obtain the 180-day period ofmarket exclusivity for the U.S. market provided under the Drug Price Competition and Patent Term Restoration Act of 1984 (the “Hatch-Waxman Act”), oursales, profits and profitability may be substantially increased in the period following the introduction of such product and prior to a competitor’sintroduction of an equivalent product. However, after the end of the 180-day exclusivity period, these sales, along with the profits therefrom, may diminishprecipitously.Our revenue and profits from individual generic pharmaceutical products typically decline as our competitors introduce their own generic equivalents.Revenue and gross profit derived from generic pharmaceutical products tend to follow a pattern based on regulatory and competitive factors unique tothe generic pharmaceutical industry. As the patents for a brand-name product and the related exclusivity periods expire, the first generic manufacturer toreceive regulatory approval for a generic equivalent of the product is often able to capture a substantial share of the market. However, as other genericmanufacturers receive regulatory approvals for competing products, or brand-name manufacturers introduce authorized generics, that market share and theprice of that product typically decline. Our overall profitability depends on, among other things, our ability to continuously, and on a timely basis, introducenew products.We may be unable to take advantage of the increasing number of high-value biosimilar opportunities.Biosimilar products are expected to make up an increasing proportion of the high-value generic opportunities in upcoming years. The development,manufacture and commercialization of biosimilar products require specialized expertise and are very costly and subject to complex regulation, which is stillevolving. We will require significant investments and collaborations with third parties to take advantage of these opportunities. We cannot assure you thatany future investments and collaborations regarding biosimilar products will be successful.5Risks Relating to Regulatory MattersWe are subject to extensive government regulation that increases our costs and could delay or prevent us from marketing or selling our products.We are subject to extensive regulation by the United States, Canada, Israel and other jurisdictions. These jurisdictions regulate, among other things,the approval, testing, manufacture, labeling, marketing, sale, import and export of pharmaceutical products. For example, approval by the FDA is generallyrequired before any new drug or the generic equivalent to any previously approved drug may be marketed in the United States. In order to receive approvalfrom the FDA for each new drug product we wish to market, we must demonstrate, through rigorous pre-clinical and clinical trials, that the new drug productis safe and effective for its intended use and that our manufacturing process for that product candidate complies with current Good Manufacturing Practices(“cGMP”). We cannot provide an assurance that the FDA will, in a timely manner, or ever, approve our applications for new drug products. The FDA mayrequire substantial additional clinical testing or find that our drug product does not satisfy the standards for approval. In addition, in order to obtain approvalfor our product candidates that are generic versions of brand-name drugs, we must demonstrate to the FDA that each generic product candidate isbioequivalent to a drug previously approved by the FDA through the new drug approval process, known as an innovator, or brand-name reference drug. Inaddition to bioequivalence testing, the generic product must also have the same dosage form, strength, route of administration, and intended use as theinnovator drug product. If the FDA determines that an ANDA for a generic drug product is not adequate to support approval, it could deny our application orrequest additional information, including clinical trials, which could delay approval of the product and impair our ability to compete with other versions ofthe generic drug product.If our product candidates receive FDA approval, the labeling claims and marketing statements that we can make for our products are limited bystatutes and regulations and, with respect to our generic drugs, by the claims approved by the FDA for the brand-name product. In addition, if the FDA and/ora foreign regulatory authority approves any of our products, the labeling, packaging, adverse event reporting, storage conditions, advertising and promotionfor the product will be subject to extensive and ongoing regulatory requirements. Further, as a manufacturer of pharmaceutical products distributed in theUnited States, we must also continue to comply with cGMPs regulations, which include requirements related to production processes, quality control andquality assurance and recordkeeping. Products that we manufacture and distribute in foreign jurisdictions may be regulated under comparable laws andregulations in those jurisdictions. The facilities of Taro Pharmaceuticals U.S.A., Inc. (“Taro U.S.A.”), our manufacturing facilities and procedures and those ofour suppliers are subject to periodic inspection by the FDA and foreign regulatory agencies. Any material deviations from cGMPs or other applicablestandards identified during such inspections may result in enforcement actions, including delaying or preventing new product approvals, a delay orsuspension in manufacturing operations, warning or untitled letters, consent decrees or civil or criminal penalties. Taro shares common ownership with,Ranbaxy Inc. through acquisitions made by Sun. In 2012, Ranbaxy Inc., entered into a Consent Decree of Permanent Injunction with the FDA which decreegives the FDA authority to impose its terms and obligations on any "subsidiary" or "affiliate" of Ranbaxy Inc. Also, if such deviations occurred, it is unclearif the FDA could extend the existing Consent Decree of Permanent Injunction, applicable to Ranbaxy Inc. to a facility owned or operated by Taro in light ofthe companies' common ownership by Sun. Further, discovery of previously unknown problems with a product or manufacturer may result in restrictions orsanctions with respect to the product, including withdrawal of the product from the market.In addition, because we market a controlled substance in the United States and other controlled substances in Israel and Canada, we must meet therequirements of the Controlled Substances Act (the “Control Substance Act”) in the United States and its equivalents in Israel and Canada, as well as theregulations promulgated thereunder in each country. These regulations include stringent requirements for registration, manufacturing controls, importation,distribution, exportation, receipt and handling procedures and security to prevent diversion of, or unauthorized access to, the controlled substances in eachstage of the production and distribution process. The United States Drug Enforcement Administration (“DEA”) and comparable regulatory authorities inIsrael and Canada may periodically inspect our facilities for compliance with the Controlled Substances Act and its equivalents in Israel and Canada. Anyfailure to comply with these laws and regulations could lead to a variety of sanctions, including the revocation, or a denial of renewal, of our DEAregistration (or Israeli or Canadian equivalent), injunctions, or civil or criminal penalties.Furthermore, all of the products that we manufacture and most of the products we distribute are manufactured outside the United States and must beshipped into the United States. The FDA and the DEA, in conjunction with the United States Customs Service, can exercise greater legal authority overgoods that we seek to import into the United States than they can over products that are manufactured in the United States.Although we devote significant time, effort and expense to addressing the extensive government regulations applicable to our business and obtainingregulatory approvals, we remain subject to the risk of being unable to obtain necessary approvals on a timely basis, if at all. Delays in receiving regulatoryapprovals could adversely affect our ability to market our products.Product approvals by the FDA and by comparable foreign regulatory authorities may be withdrawn if compliance with regulatory standards is notmaintained or if problems relating to the products are experienced after initial approval. In addition, if we6fail to comply with governmental regulations we may be subject to warning or untitled letters, fines, unanticipated compliance expenditures, interruptions ofour production and/or sales, prohibition of importation, seizures and recalls of our products, criminal prosecution and debarment of us and our employeesfrom the generic drug approval process.Changes in regulatory environment may prevent us from utilizing the exclusivity periods that are important for the success of some of our generic products.The Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Medicare Act”) provides that the 180-day market exclusivityperiod provided under the Hatch-Waxman Act is only triggered by commercial marketing of the product. However, the Medicare Act also contains forfeitureprovisions which could deprive the first “Paragraph IV” filer (as defined below) of eligibility for such exclusivity if certain conditions are met. Accordingly,in situations where we are the first “Paragraph IV” filer, we may face the risk of forfeiture and therefore may not be able to exploit a given exclusivity periodfor specific products.Under the terms of the Hatch-Waxman Act, a generic applicant must make certain certifications with respect to the patent status of the listed drug thatit references in its ANDA. In the event that such applicant plans to challenge the validity or enforceability of an existing listed patent or asserts that theproposed product does not infringe an existing listed patent, it files a Paragraph IV certification. The Hatch-Waxman Act provides for a potential 180-dayperiod of generic exclusivity for the first company that submits an ANDA with a Paragraph IV certification and that also lawfully maintains suchcertification. Such exclusivity prevents the approval for 180 days of a subsequently submitted ANDA containing a Paragraph IV certification. The MedicareAct modified certain provisions of the Hatch-Waxman Act. Under the Medicare Act, final ANDA approval for a product subject to Paragraph IV patentlitigation may be obtained upon the earlier of a favorable district court decision or 30 months from receipt of notification to the patent holder of theParagraph IV filing, provided there are no other issues preventing the FDA from granting final approval. Exclusivity rights for the first Paragraph IV filer maybe forfeited pursuant to the Medicare Act under specified circumstances including, for example, if tentative approval is not timely obtained. Some of thechanges made by the Medicare Act apply to ANDAs where the first certification was filed after the enactment of the Medicare Act; other earlier submittedANDAs are generally governed by the previous version of the law.Pharmaceutical companies are required by international law to comply with adverse event reporting requirements.We are required by international law to comply with adverse event reporting requirements. Our failure to meet these reporting requirements in anyjurisdiction could result in actions by regulatory authorities in that and/or other jurisdictions, including any of the following: warning letters, publicannouncements, restriction or suspension of marketing authorizations, revocation of marketing authorizations, fines or a combination of any of these actions.Healthcare reform may have an impact on all segments of the healthcare industry.In March 2010, the U.S. government enacted the Patient Protection and Affordable Care Act, as amended by the Health Care Education andReconciliation Act of 2010 (collectively, “PPACA”), which represented the most comprehensive overhaul of both the public and private healthcare systemsever enacted in the United States.The PPACA imposes on manufacturers a variety of additional rebates, discounts, fees, taxes and reporting and regulatory requirements. Changes to thehealthcare system enacted as part of healthcare reform in the United States, as well as the increased purchasing power of entities that negotiate on behalf ofMedicare, Medicaid, and private sector beneficiaries, may result in increased pricing pressure by influencing, for instance, the reimbursement policies ofthird-party payors. We cannot predict which additional measures may be adopted or the impact of current and additional measures on the marketing, pricingand demand for our products.Reimbursement policies of third-parties, cost containment measures and healthcare reform could adversely affect the demand for our products and limitour ability to sell our products.Our ability to market our products depends, in part, on reimbursement levels for them and related treatment established by federal and stategovernment healthcare programs, private health insurers and other third party payor organizations, including health maintenance organizations and managedcare organizations. Reimbursement may not be available for some of our products and, even if granted, may not be maintained. Limits placed onreimbursement could make it more difficult for people to buy our products and reduce, or possibly eliminate, the demand for our products. In the event thatgovernmental authorities enact additional legislation or adopt regulations which affect third-party coverage and reimbursement, demand for our productsmay be reduced with a consequent adverse effect, which may be material, on our sales and profitability.7In addition, the purchase of our products could be significantly influenced by the following factors, among others: •trends in managed healthcare in the United States; •developments in health maintenance organizations, managed care organizations and similar enterprises; •legislative proposals to reform healthcare and government insurance programs; and •price controls and reimbursement policies.The PPACA is a sweeping measure intended to expand healthcare coverage in the U.S., primarily through the establishment of an exchange tofacilitate the purchase of health insurance; premium and cost-sharing subsidies for certain low-income individuals; imposition of health insurance mandateson employers and individuals and expansion of the Medicaid program. Among other things, the PPACA contains provisions that changed payment levels forpharmaceuticals under Medicaid and increases pharmaceutical rebates under the Medicaid Drug Rebate Program. Effective October 1, 2010, the law changedthe formula for calculating federal upper limits (“FULs”), which are a type of cap on the amount a state Medicaid program can reimburse pharmacies formultiple source drugs (drugs for which there are at least three therapeutically equivalent versions on the market). The FULs are calculated based on theweighted-average of the average manufacturer prices (“AMPs”) of the equivalent drugs on the market. In addition, the law changed the preexisting definitionof AMP so that it is based only on direct sales to retail community pharmacies and indirect sales to retail community pharmacies that purchase product fromwholesalers. The Centers for Medicare & Medicaid Services (“CMS”) issued final regulations regarding the FUL and the calculation of AMP and rebatesunder the Medicaid Drug Rebate Program. These regulations are effective as of April 1, 2016. The Company is currently evaluating this new methodologyfor calculating FULs and how it will affect our pharmacy customers.In addition, the PPACA required CMS to publish and provide states with the weighted-average monthly AMPs for multiple source drugs. CMS hasencouraged state Medicaid programs to utilize these AMPs as a benchmark for prescription drug reimbursement in place of the current, widely usedbenchmark of average wholesale price (“AWP”). The disclosure may have the effect of reducing Medicaid reimbursement rates. We cannot predict how thepublic disclosure of this information may affect competition in the market place. In addition, in its final regulations for the Medicaid Drug Rebate Program,CMS is requiring state Medicaid programs, beginning April 1, 2017, to base their reimbursement rates for brand drugs and other drugs not subject to a FULon pharmacies’ actual acquisition costs, rather than using the current methodologies based on published benchmarks such as AWP or wholesale acquisitioncost. We do not know how the new Medicaid reimbursement rates will affect our pharmacy customers.Effective January 1, 2010, the PPACA also increased the minimum Medicaid rebate rate from 15.1% to 23.1% of AMP for most drugs approved undera new drug application (“NDA”), including authorized generics. This Medicaid rebate rate would also apply to authorized generics which are manufacturedunder a NDA. The PPACA also increased the Medicaid rebate from 11% to 13% of AMP for most drugs approved under an ANDA. Also, the volume ofrebated drugs has been expanded to include drugs dispensed to beneficiaries in Medicaid managed care organizations. In addition, an alternative, higherrebate may be imposed on drugs that are line extensions of previously approved oral dosage form drugs. CMS’s final regulations also expanded theMedicaid Drug Rebate Program such that manufacturers will be required to pay rebates to Puerto Rico and the U.S. Territories (the U.S. Virgin Islands, Guam,the Northern Mariana Islands, and American Samoa), effective April 1, 2020. These measures have increased or will increase our cost of selling to theMedicaid market.Furthermore, as a result of legislative changes in the Bipartisan Budget Act of 2015 (“BBA”), effective for the first calendar quarter of 2017, genericdrugs are subject to an additional rebate if the AMP for a given quarter exceeds the inflation-adjusted baseline AMP. This price increase penalty previouslyapplied only to innovator drugs.The full effects of the PPACA and the BBA on Medicaid payments and on our Medicaid rebates cannot be known at this time, in part because not allof these provisions have been implemented yet, but they may have an adverse impact on our results of operations. In addition, recently, the currentadministration has made statements that it supports repeal of all or portions of the PPACA, and Congress has introduced new legislation to repeal and replaceportions of the PPACA. There is uncertainty with respect to the impact these changes, if any, may have, and any changes likely will take time to unfold. Anyadditional federal healthcare reform measures adopted in the future could limit the amounts that federal and state governments will pay for healthcareproducts and services, and in turn could significantly reduce the projected value of certain development projects and reduce our profitability.Our relationships with customers and third-party payors are subject to applicable anti-kickback, fraud and abuse and other healthcare laws andregulations, which could expose us to criminal sanctions, civil penalties, contractual damages, reputational harm and diminished profits and futureearnings.Healthcare providers, physicians and third-party payors play a primary role in the recommendation and prescription of any products we market. Ourarrangements with third-party payors and customers may expose us to broadly applicable fraud and abuse8and other healthcare laws and regulations that may constrain the business or financial arrangements and relationships through which we market, sell anddistribute any products for which we obtain marketing approval. Restrictions under applicable federal and state healthcare laws and regulations include thefollowing: •the federal healthcare program anti-kickback statute prohibits persons from, among other things, knowingly and willfully soliciting, offering,receiving or providing remuneration, directly or indirectly, in cash or in kind, to induce or reward, or in return for, either the referral of anindividual for, or the purchase, order or recommendation of, any good or service, for which payment may be made under a federal healthcareprogram such as Medicare and Medicaid; •the federal False Claims Act imposes criminal and civil penalties, including civil whistleblower or qui tam actions, against individuals orentities for knowingly presenting, or causing to be presented, to the federal government, claims for payment that are false or fraudulent ormaking a false statement to avoid, decrease or conceal an obligation to pay money to the federal government; •the federal Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) imposes criminal and civil liability for executing a schemeto defraud any healthcare benefit program or making false statements relating to healthcare matters; •HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act and its implementing regulations, alsoimposes obligations, including mandatory contractual terms, with respect to safeguarding the privacy, security and transmission ofindividually identifiable health information; •federal law requires applicable manufacturers of covered drugs to report payments and other transfers of value to physicians and teachinghospitals on an annual basis, which includes data collection and reporting obligations. The information is made publicly available on asearchable website; and •analogous state and foreign laws and regulations, such as state anti-kickback and false claims laws, may apply to sales or marketingarrangements and claims involving healthcare items or services reimbursed by non-governmental third-party payors, including private insurers.Some state laws require pharmaceutical companies to comply with the pharmaceutical industry’s voluntary compliance guidelines and the relevantcompliance guidance promulgated by the federal government and may require drug manufacturers to report information related to payments and othertransfers of value to physicians and other healthcare providers or marketing expenditures. State and foreign laws also govern the privacy and security ofhealth information in some circumstances, many of which differ from each other in significant ways and often are not preempted by HIPAA, thuscomplicating compliance efforts.Efforts to ensure that our business arrangements with third parties comply with applicable healthcare laws and regulations involve substantial costs. Itis possible that governmental authorities will conclude that our business practices may not comply with current or future statutes, regulations or case lawinvolving applicable fraud and abuse or other healthcare laws and regulations. If our operations are found to be in violation of any of these laws or any othergovernmental regulations that may apply to us, we may be subject to significant civil, criminal and administrative penalties, damages, fines, imprisonment,exclusion of products from government funded healthcare programs, such as Medicare and Medicaid, and the curtailment or restructuring of ouroperations. If any of the physicians or other healthcare providers or entities with whom we expect to do business is found to be not in compliance withapplicable laws, they may be subject to criminal, civil or administrative sanctions, including exclusions from government funded healthcare programs.Any failure to comply with the complex reporting and payment obligations under the Medicare and Medicaid programs may result in further litigation orsanctions, in addition to the lawsuits.The U.S. laws and regulations regarding Medicare and/or Medicaid reimbursement and rebates and other governmental programs are complex. Someof the applicable laws may impose liability even in the absence of specific intent to defraud. The subjective decisions and complex methodologies used incalculating prices that are reportable under these programs are subject to review and challenge, and it is possible that such reviews could result in materialchanges. A number of state attorneys general and others have filed lawsuits alleging that we and other pharmaceutical companies reported inflated AWP,leading to excessive payments by Medicare and/or Medicaid for prescription drugs. Additional actions are possible. These actions, if successful, couldadversely affect us and may have a material adverse effect on our business, results of operations, financial condition and cash flows. For additionalinformation about our AWP related matters, please see “Item 8 Financial Information—Legal Proceedings.”We are susceptible to product liability claims that may not be covered by insurance and could require us to pay substantial sums.We face the risk of loss resulting from, and adverse publicity associated with, product liability lawsuits, whether or not such claims are valid. We maynot be able to avoid such claims. In addition, our product liability insurance may not be adequate to cover9such claims or we may not be able to obtain adequate insurance coverage in the future at acceptable costs. A successful product liability claim that exceedsour policy limits could require us to pay substantial sums. In addition, in the future, we may not be able to obtain the type and amount of coverage we desireor to maintain our current coverage.Product recalls could harm our business.Product recalls or product field alerts may be issued at our discretion or as recommended by the FDA, other governmental agencies or other companieshaving regulatory authority for pharmaceutical product sales. From time to time, we may recall products for various reasons, including failure of our productsto maintain their stability through their expiration dates. Any recall or product field alert has the potential of damaging the reputation of the product or ourreputation. Any significant recalls could materially affect our sales. In these cases, our business, financial condition, results of operations and cash flowscould be materially adversely affected.Our reputation among consumers and our customers in the pharmacy trade may be negatively impacted by incidents of counterfeiting of our products.The counterfeiting of pharmaceutical products is a widely reported problem for pharmaceutical manufacturers, distributors, retailers and consumers inthe United States, which is our largest market. Such counterfeiting may take the form of illicit producers manufacturing cheaper and less effective counterfeitversions of our products, or producing imitation products containing no active ingredients, and then packaging such counterfeit products in a manner whichmakes them look like our products. If incidents occurred in which such products prove to be ineffective, or even harmful, to the individuals who used them,consumers and our customers might not buy our products out of fear that they might be ineffective or dangerous counterfeits. In addition, sales of counterfeitproducts could reduce sales of our legitimate products, which could have a material negative impact on our sales and net income.The manufacture and storage of pharmaceutical and chemical products are subject to environmental regulation and inherent risk.Because chemical ingredients are used in the manufacture of pharmaceutical products and due to the nature of the manufacturing process itself, thereis a risk of property damage or personal injury caused by or during the storage or manufacture of both the chemical ingredients and the finishedpharmaceutical products. Although we have never incurred any material liability for damage of this nature, we may be subject to liability in the future. Inaddition, while we believe our insurance coverage is adequate, it is possible that a successful claim would exceed our coverage, requiring us to pay asubstantial sum.The pharmaceutical industry is also subject to extensive environmental regulation. We therefore face the risk of incurring liability for damages or thecosts of remedying environmental harms because of the chemical ingredients contained in our products and the processes involved with theirmanufacture. For example, we could be held liable for costs to investigate or remediate contamination resulting from the presence or release of hazardousmaterials at or from any of our properties or the disposal of any such materials at third party sites. Although we have never incurred any such liability in anymaterial amount, we may be subject to liability in the future. We may also be required to increase expenditures to address environmental issues and tocomply with applicable regulations. If we fail to comply with environmental regulations or the conditions of our operating licenses, the licenses could berevoked and we could be subject to criminal sanctions and substantial liability. We could also be required to suspend or modify our manufacturingoperations.Testing required for the regulatory approval of our products is sometimes conducted by independent third-parties. Any failure by any of these third-partiesto perform this testing properly may have an adverse effect upon our ability to obtain regulatory approvals.Our applications for the regulatory approval of our products incorporate the results of testing and other information that are sometimes provided byindependent third-parties (including, for example, manufacturers of raw materials, testing laboratories, contract research organizations or independentresearch facilities). The likelihood that the products being tested will receive regulatory approval is, to some extent, dependent upon the quality of the workperformed by these third-parties, the quality of the third-parties’ facilities and the accuracy of the information provided by these third-parties. We have littleor no control over any of these factors.Some of our products are manufactured by independent third-parties. Any failure by any of these third-parties to perform this manufacturing properly orfollow cGMPs, may have an adverse effect upon our ability to maintain regulatory approvals or continue marketing our products.Certain products are manufactured by independent third-parties. Their compliance with cGMPs and other regulatory requirements is essential to ourobtaining and maintaining regulatory approvals and marketing authorization for these products in the countries in which they are sold. Any failure by any ofthese third-parties to perform this manufacturing properly or follow cGMPs may have an adverse effect upon our ability to maintain regulatory approvals orcontinue marketing our products.10Risks Relating to Our Company and Our OperationsSun Pharmaceutical Industries Ltd., and its affiliates, currently controls 81.9% of the voting power in our Company.Our Chairman, Dilip Shanghvi and members of his immediate family (one of whom is a member of our board of directors) currently control, throughtheir beneficial ownership of 72.8% of our outstanding ordinary shares and 100% of our founders’ shares through Sun Pharmaceutical Industries Ltd.(Reuters: SUN.BO, Bloomberg: SUNP IN, NSE: SUNPHARMA, BSE: 524715) (“Sun Pharma” and its affiliates, “Sun”), 81.9% of the voting power in ourCompany, as of March 31, 2017. Dilip Shanghvi, along with entities controlled by him and members of his family, control 54.4% of Sun Pharma as ofMarch 31, 2017. Sun would be able to control the outcome of shareholder votes requiring a majority of the votes.50% of the voting power in our subsidiary Taro U.S.A. is held by a corporation which is controlled by Sun.The share capital of Taro U.S.A. is divided into two classes. Taro Israel owns 96.9% of the shares that have economic rights and 50% of the shares thathave voting rights in Taro U.S.A. Taro Development Corporation (“TDC”) owns 3.1% of the shares that have economic rights and 50% of the shares thathave voting rights in Taro U.S.A. Sun owns all of the outstanding voting shares of TDC and thereby controls TDC. Although TDC has agreed to vote all ofits shares in Taro U.S.A. for the election to its board of directors of such persons as Taro Israel may designate, TDC may terminate the agreement upon oneyear written notice. In the event that TDC were to cease voting its shares in Taro U.S.A. for our designees, or otherwise, in accordance with Taro Israel’spreference, TDC could prevent Taro Israel from electing a majority of the board of directors of Taro U.S.A., effectively block actions that require approval of amajority of the voting power in Taro U.S.A. and potentially preclude the Company from consolidating Taro U.S.A. into the Company’s financialstatements. Taro U.S.A. accounted for 88%, 90% and 89% of the Company’s consolidated revenue for the years ended March 31, 2017, 2016 and 2015,respectively.Wholesaler customers account for a substantial portion of our consolidated sales.We have no long-term agreements with the wholesalers that require them to purchase our products and they may therefore reduce or cease theirpurchases from us at any time. Any cessation or significant reduction of their purchases from us would likely have a material adverse effect on our results ofoperations and financial condition. Furthermore, changes in their buying patterns or in their policies and practices in relation to their working capital andinventory management may result in a reduction of, or a change in the timing of, their purchases of our products. While we receive periodic inventory reportsfrom the wholesalers, we have no ability to obtain advance knowledge of such changes. We base our manufacturing schedules, inventories and internal salesprojections principally on historical data. To the extent that actual orders from these wholesalers differ substantially from our internal projections, we mayeither find ourselves with excess inventory or in an out-of-stock position, which could have a material adverse effect upon our operating results.The nature of our business requires us to estimate future charges against wholesaler accounts receivable. If these estimates are not accurate, our results ofoperations and financial condition could be adversely affected.Sales to third-parties, including government institutions, hospitals, hospital buying groups, pharmacy buying groups, pharmacy chains and othersgenerally are made through wholesalers. We sell our products to wholesalers, and the wholesalers resell the products to third-parties at times and in quantitiesordered by the third-parties. Typically, we have a contract price with a third-party to which a wholesaler resells our products that may be equal to or less thanthe price at which we sold the products to the wholesaler. In such a case, following the purchase of the product by a third-party purchaser from the wholesaler,the wholesaler charges us back for any shortfall. At the time of any individual sale by us to a wholesaler, we do not know under which contracts thewholesaler will resell products to third-parties. Therefore, we estimate the amount of chargebacks and other credits that may be associated with these salesand we reduce our revenue accordingly. One factor in calculating these estimates is information on customer inventory levels provided to us by ourcustomers. We obtain official reports of the amount of our products held in inventory by our wholesaler customers. If this information is inaccurate or notforthcoming, this may result in erroneously estimated reserves for chargebacks, returns or other deductions. In addition, from time to time, the amount of suchchargebacks and other credits reported by a wholesaler may be different from our estimates. Discrepancies of this nature may result in a reduction in the valueof our accounts receivable and a related charge to net income. The reconciliation of our accounts with wholesalers may, from time to time, delay, orotherwise impact, the collection of our accounts receivable or result in a decrease in their value and in a related charge to our net income.Our inventories of finished goods have expiration dates after which they cannot be sold.Industry standards require that pharmaceutical products be made available to customers from existing stock levels rather than on a made-to-orderbasis. Therefore, in order to accommodate market demand adequately, we strive to maintain sufficiently high levels of inventories. However, inventoriesprepared for sales that are not realized as or when anticipated may approach their expiration dates and may have to be written off. These write-offs, if any,could have an adverse effect on our results of operations and financial condition.11Our future success depends on our ability to develop, manufacture and sell new products.Our future success is largely dependent upon our ability to develop, manufacture and market new commercially viable pharmaceutical products andgeneric equivalents of proprietary pharmaceutical products whose patents and other exclusivity periods have expired. Delays in the development,manufacture and marketing of new products could negatively impact our results of operations. Each of the steps in the development, manufacture andmarketing of our products involves significant time and expense. We are, therefore, subject to the risks, among others, that: •any products under development, if and when fully developed and tested, will not perform in accordance with our expectations; •any generic product under development will, when tested, not be bioequivalent to its brand-name counterpart; •necessary regulatory approvals will not be obtained in a timely manner, if at all; •any new product cannot be successfully and profitably produced and marketed; •quality control problems may adversely impact our reputation for high quality production; •other companies may launch their version of generic products, either prior to or following the launch of our newly approved generic version ofthe same product; •brand-name companies may launch their products, either themselves or through third-parties, in the form of authorized generic products whichcan reduce sales, prices and profitability of our newly approved generic products; •generic companies may launch generic versions of our brand-name drugs; or •our products may not be priced at levels acceptable to our customers.If we are unable to obtain raw materials, our operations could be seriously impaired.While the majority of our products are either synthesized by us or are derived from multiple source materials, some raw materials and certain productsare currently obtained from single domestic or foreign suppliers. Most of these materials are subject to regulatory inspections and if found to be non-compliant we could be prevented from obtaining them. Although we have not experienced significant difficulty in obtaining raw materials to date, materialsupply interruptions may occur in the future and we may have to obtain substitute raw materials or products. For most raw materials we do not have any long-term supply agreements and therefore we are subject to the risk that our suppliers of raw materials may not continue to supply to us on satisfactory terms or atall.Furthermore, obtaining the regulatory approvals required for adding alternative suppliers of raw materials for finished products we manufacture maybe a lengthy process. We strive to maintain adequate inventories of single source raw materials in order to ensure that any delays in receiving regulatoryapprovals will not have a material adverse effect upon our business. However, we may not be successful in doing so, and consequently, we may be unable tosell some products pending approval of one or more alternate sources of raw materials. Any significant interruption in our supply stream could have amaterial adverse effect on our operations.Research and development efforts invested in our innovative pipeline may not achieve expected results.We invest increasingly greater resources to develop our innovative pipeline, both through our own efforts and through collaborations with third-parties, which results in higher risks.The time from discovery to a possible commercial launch of an innovative product is substantial and involves multiple stages during which theproduct may be abandoned as a result of serious developmental problems, the inability to achieve our clinical goals, the inability to obtain necessaryregulatory approvals in a timely manner, if at all, or the inability to produce and market such innovative products successfully and profitably. In addition, weface the risk that some of the third-parties we collaborate with may fail to perform their obligations. Accordingly, our investment in research anddevelopment of innovative products can involve significant costs with no assurances of future revenues or profit.We are continuing our efforts to develop new proprietary pharmaceutical products, but these efforts are subject to risk and may not be successful.Our principal business has traditionally been the development, manufacture and marketing of generic equivalents of pharmaceutical products firstintroduced by other companies. However, we have increased our efforts to develop new proprietary products.12Expanding our focus beyond generic products and broadening our product pipeline to include new proprietary products may require additionalinternal expertise or external collaboration in areas in which we currently do not have substantial resources and personnel. We may have to enter intocollaborative arrangements with others that may require us to relinquish rights to some of our technologies or products that we would otherwise pursueindependently. We may not be able to acquire the necessary expertise or enter into collaborative agreements on acceptable terms, if at all, to develop andmarket new proprietary products.In addition, although a newly developed product may be successfully manufactured in a laboratory setting, difficulties may be encountered in scalingup for manufacture in commercially-sized batches. For this reason and others, in the pharmaceutical industry only a small minority of all new proprietaryresearch and development programs ultimately result in commercially successful drugs.In order to obtain regulatory approvals for the commercial sale of new proprietary products, we are required to complete extensive clinical trials inhumans to demonstrate the safety and efficacy of the products to the satisfaction of FDA and regulatory authorities abroad. Conducting clinical trials is alengthy, time-consuming and expensive process, and the results of such trials are inherently uncertain. A clinical trial may fail for a number of reasons, including: •failure to enroll a sufficient number of patients meeting eligibility criteria; •failure of the new product to demonstrate safety and/or efficacy; •the development of serious (including life threatening) adverse events including, for example, side effects caused by or connected withexposure to the new product; or •the failure of clinical investigators, trial monitors and other consultants or trial subjects to comply with the trial plan or protocol.The results from early clinical trials may not be predictive of results obtained in later clinical trials. Clinical trials may not demonstrate the safety andefficacy of a product sufficient to obtain the necessary regulatory approvals, or to support a commercially viable product. Any failure of a clinical trial for aproduct in which we have invested significant time or other resources could have a material adverse effect on our results of operations and financialcondition.Even if launched commercially, our proprietary products may face competition from existing or new products of other companies. These othercompanies may have greater resources, market access, and consumer recognition than we have. Thus, there can be no assurance that our proprietary productswill be successful or profitable. In addition, advertising and marketing expenses associated with the launch of a proprietary product may, if not successful,adversely affect our results of operations and financial condition.We may not be able to successfully identify, consummate and integrate future acquisitions.We have in the past, and may in the future, pursue acquisitions of product lines and/or companies and seek to integrate them into ouroperations. Acquisitions of additional product lines and companies involve risks that could adversely affect our future results of operations. Any one ormore of the following examples may apply: •we may not be able to identify suitable acquisition targets or acquire companies on favorable terms; •we compete with other companies that may have stronger financial positions and are therefore better able to acquire product lines andcompanies. We believe that this competition will increase and may result in decreased availability or increased prices for suitable acquisitiontargets; •we may not be able to obtain the necessary financing, on favorable terms or at all, to finance any of our potential acquisitions; •we may not be able to obtain the necessary regulatory approvals, including the approval of antitrust regulatory bodies, in any of the countriesin which we may seek to consummate potential acquisitions; •we may ultimately fail to complete an acquisition after we announce that we plan to acquire a product line or a company; •we may fail to integrate our acquisitions successfully in accordance with our business strategy; •we may choose to acquire a business that is not profitable, either at the time of acquisition or thereafter; •acquisitions may require significant management resources and divert attention away from our daily operations, resulting in the loss of keycustomers and personnel, and expose us to unanticipated liabilities;13 •we may not be able to retain the skilled employees and experienced management that may be necessary to operate businesses we acquire, and ifwe cannot retain such personnel, we may not be able to locate and hire new skilled employees and experienced management to replace them;and •we may purchase a company that has contingent liabilities that include, among others, known or unknown intellectual property or productliability claims.Our tax liabilities could be larger than anticipated.We are subject to tax in many jurisdictions, and significant judgment is required in determining our provision for income taxes. Likewise, we aresubject to audit by tax authorities in many jurisdictions. In such audits, our interpretation of tax legislation might be challenged and tax authorities invarious jurisdictions may disagree with, and subsequently challenge, the amount of profits taxed in such jurisdictions under our intercompanyagreements. Although we believe our estimates are reasonable, the ultimate outcome of such audits and related litigation could be different from ourprovision for taxes and might have a material adverse effect on our consolidated financial statements.We are in the process of enhancing and further developing our global enterprise resource planning systems and associated business applications, whichcould result in business interruptions if we encounter difficulties.We are enhancing and further developing our global enterprise resource planning (“ERP”), quality control laboratory operations systems and otherbusiness critical information technology (“IT”) infrastructure systems and associated applications to provide more operating efficiencies and effectivemanagement of our business and financial operations. Such changes to ERP systems and related software, quality control systems, and other IT infrastructurecarry risks such as cost overruns, project delays and business interruptions and delays. If we experience a material business interruption as a result of our ERPenhancements, it could have a material adverse effect on our business, financial position, and results of operations and/or cash flow.We are increasingly dependent on information technology and our systems and infrastructure face certain risks, including cybersecurity and data leakagerisks.We are increasingly dependent on sophisticated information technology systems and infrastructure to operate our business. In the ordinary course ofbusiness, we collect, store and transmit large amounts of confidential information, and it is critical that we do so in a secure manner to maintain theconfidentiality and integrity of such confidential information. We have also contracted with third party vendors to enhance our operations and, as part of ourservice arrangements with Sun as described in greater detail under “Item 7 Major Shareholders and Related Party Transactions—Related Party Transactions—Arrangements with Sun”, we also have outsourced elements of our operations to Sun, including significant elements of our information technologyinfrastructure. The size and complexity of our information technology systems, and those with whom we contract, make such systems potentially vulnerableto service interruptions, security breaches from inadvertent or intentional actions by employees, partners or vendors, or from attacks by malicious thirdparties. Any significant disruptions to our information technology systems, including breaches of information security or cybersecurity, or failure tointegrate new and existing information technology systems could adversely affect our business, financial condition or results of operations. While weexercise care in selecting vendors that maintain adequate information security controls and monitor our relationships with our vendors, we and our vendors orSun, could be susceptible to third party attacks on our information security systems, which attacks are of ever increasing levels of sophistication and are madeby groups and individuals with a wide range of motives and expertise, including criminal groups, “hackers” and others. Although the aggregate impact onour operations and financial condition has not been material to date, we have been the target of events of this nature and expect them to continue ascybersecurity threats have been rapidly evolving in sophistication and becoming more prevalent in the industry.Maintaining the secrecy of our confidential, proprietary, and/or trade secret information is important to our competitive business position. However,such information can be difficult to protect. While we have taken steps to protect such information and invested heavily in information technology, therecan be no assurance that our efforts will prevent service interruptions or security breaches in our systems or the unauthorized or inadvertent wrongful use ordisclosure of confidential information that could adversely affect our business operations or result in the loss, dissemination, or misuse of critical or sensitiveinformation. A breach of our security measures or the accidental loss, inadvertent disclosure, unapproved dissemination, misappropriation or misuse of tradesecrets, proprietary information, or other confidential information, whether as a result of theft, hacking, fraud, trickery or other forms of deception, or for anyother cause, could enable others to produce competing products, use our proprietary technology or information, and/or adversely affect our businessposition. Further, any such interruption, security breach, loss or disclosure of confidential information, could result in financial, legal, business, andreputational harm to us and could have a material adverse effect on our business, financial condition, results of operations, cash flows, and/or share price.14Risks Relating to Our Intellectual PropertyWe depend on our ability to protect our intellectual property and proprietary rights, but we may not be able to maintain the confidentiality, or assure theprotection, of these assets.Our success depends, in large part, on our ability to protect our current and future technologies and products and to defend our intellectual propertyrights. If we fail to protect our intellectual property adequately, competitors may manufacture and market products similar to ours. Numerous patentscovering our technologies have been issued to us, and we have filed, and expect to continue to file, patent applications seeking to protect newly developedtechnologies and products in various countries, including the United States. Some patent applications in the United States are maintained in secrecy untilthe patent is issued. Because the publication of discoveries tends to follow their actual discovery by many months, we may not be the first to invent, or filepatent applications on any of our discoveries. Patents may not be issued with respect to any of our patent applications and existing or future patents issued toor licensed by us may not provide competitive advantages for our products. Many provisions of the America Invents Act went into effect March 16, 2013,and may change or otherwise affect our ability to protect our intellectual property. Patents that are issued may be challenged, invalidated or circumvented byour competitors. Furthermore, our patent rights may not prevent our competitors from developing, using or commercializing products that are similar orfunctionally equivalent to our products. Where trade secrets are our sole protection, we may not be able to prevent third-parties from marketing genericequivalents to our products, reducing prices in the marketplace and reducing our profitability.We also rely on trade secrets, non-patented proprietary expertise and continuing technological innovation that we seek to protect, in part, by enteringinto confidentiality agreements with licensees, suppliers, employees, consultants and others. These agreements may be breached and we may not haveadequate remedies in the event of a breach. Disputes may arise concerning the ownership of intellectual property or the applicability of confidentialityagreements. Moreover, our trade secrets and proprietary technology may otherwise become known or be independently developed by our competitors. Ifpatents are not issued with respect to products arising from our research, we may not be able to maintain the confidentiality of information relating to theseproducts.Third-parties may claim that we infringe on their proprietary rights and may prevent us from manufacturing and selling such products.There has been substantial litigation in the pharmaceutical industry with respect to the manufacture, use and sale of new products. These lawsuitsoften relate to the validity and infringement of patents or proprietary rights of third-parties. We may be required to commence or defend against chargesrelating to the infringement of patent or proprietary rights. Any such litigation could: •require us to incur substantial expenses, even if we are insured or successful in the litigation; •require us to divert significant time and effort of our technical and management personnel; •result in the loss of our rights to develop or make certain products; •require us to pay substantial monetary damages or royalties in order to license proprietary rights from third-parties; and •prevent us from launching a developed, tested and approved product.Although patent and intellectual property disputes within the pharmaceutical industry have often been settled through licensing or similararrangements, costs associated with these arrangements may be substantial and could include the long-term payment of royalties. These arrangements may beinvestigated by United States regulatory agencies and, if improper, may be invalidated. Furthermore, the required licenses may not be made available to uson acceptable terms. Accordingly, an adverse determination in a judicial or administrative proceeding or a failure to obtain necessary licenses could preventus from manufacturing and selling some of our products or increase our costs to market these products.From time to time, we seek to market patented products before the related patents expire. In order to do so in the United States, we must challenge thepatent under the procedures set forth in the Hatch-Waxman Act. In the United States, in order to obtain a final approval for a generic product prior toexpiration of certain of the innovator’s patents, we must, under the terms of the Hatch-Waxman Act, as amended by the Medicare Act, notify the patent holderas well as the owner of a NDA, that we believe that the patents listed in the Approved Drug Products with Therapeutic Equivalence Evaluations contained onthe FDA website (the “Orange Book”) for the new drug are invalid, unenforceable or not infringed by our product. To the extent that we engage in patentchallenge procedures, we are involved and expect to be involved in patent litigation regarding the validity, enforceability or infringement of the originator’spatent. In addition, when seeking regulatory approval for some of our products, we are required to certify to the FDA and its equivalents in foreign countries,that such products do not infringe upon third-party patent rights, or that those patents are invalid or unenforceable. Filing a certification against a patentgives the patent holder the right to bring a patent infringement lawsuit against us. Any lawsuit in the United States would delay regulatory approval by theFDA until the earlier of the resolution of such claim or 30 months from the patent holder’s receipt of notice of certification.15In addition, it is not required that pharmaceutical patents be listed with the FDA or other regulatory authorities. For example, patents relating toantibiotics might not be listed in the Orange Book. Any launch of a pharmaceutical product by us that may infringe a patent, whether listed or not, mayinvolve us in litigation.Patent challenges are complex, costly and can take a significant amount of time to complete. A claim of infringement and the resulting delay couldresult in substantial expenses and even prevent us from manufacturing and selling products and, in certain circumstances, such litigation may result insignificant damages which could have a material adverse effect on our results of operations and financial condition.Our launch of a product prior to a final court decision, settlement with the patent owner or the expiration of a patent held by a third-party may result insubstantial damages to us. Depending upon the circumstances, a court may award the patent holder damages equal to three times the patent holder’s loss ofincome. If we are found to infringe a patent held by a third-party and become subject to significant damages, these damages could have a material adverseeffect on our results of operations and financial condition.Risks Relating to Our Compliance with the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”)We have, in the past, and could in the future, fail to maintain effective internal controls in accordance with Section 404 of Sarbanes-Oxley.Sarbanes-Oxley imposes certain duties on us and our executives and directors. Our efforts to comply with the requirements of Sarbanes-Oxley, and inparticular with Section 404 thereof, have resulted in diversion of our Management’s time and attention, and we expect these efforts to require the continuedcommitment of resources.We have in the past, and may, in the future, identify material weaknesses in our internal controls that evidence that we fail to maintain effectiveinternal controls in accordance with Section 404 of Sarbanes-Oxley. As of March 31, 2017, we did not identify any material weaknesses in internalcontrols. Failure to maintain adequate internal controls could negatively affect shareholder and customer confidence.Material weaknesses in our disclosure controls and procedures could negatively affect shareholder and customer confidence.Under Sarbanes-Oxley, we are required to assess the effectiveness of our disclosure controls and procedures on an annual basis. If we were to concludethat our disclosure controls and procedures were ineffective, shareholder and customer confidence could be negatively affected, which could have a materialadverse impact on the market price of our ordinary shares.Risks Relating to Investment in Our Ordinary SharesVolatility of the market price of our ordinary shares could adversely affect us and our shareholders.The market price of our ordinary shares may be volatile, and may, in the future, be subject to wide fluctuations, for the following reasons, amongothers: •actual or anticipated variations in our quarterly operating results or those of our competitors; •announcements by us or our competitors of new or enhanced products; •market conditions or trends in the pharmaceutical industry; •developments or disputes concerning proprietary rights; •introduction of technologies or product enhancements by others that reduce the need for our products; •general economic and political conditions; •departures of key personnel; •changes in the market valuations of our competitors; •regulatory considerations; and •the other risk factors listed in this section of this 2017 Annual Report.16No citizen or resident of the United States who acquired or acquires any of our ordinary shares at any time after October 21, 1999, is permitted to exercisemore than 9.9% of the voting power in our Company, with respect to such ordinary shares, regardless of how many shares the shareholder owns.In order to reduce our risk of being classified as a “Controlled Foreign Corporation” under the United States Internal Revenue Code of 1986, asamended (the “Code”), we amended our Articles of Association in 1999 to provide that no owner of any of our ordinary shares is entitled to any voting rightof any nature whatsoever with respect to such ordinary shares if (a) the ownership or voting power of such ordinary shares was acquired, either directly orindirectly, by the owner after October 21, 1999, and (b) the ownership would result in our being classified as a Controlled Foreign Corporation. Thisprovision has the practical effect of prohibiting each citizen or resident of the United States who acquired or acquires our ordinary shares after October 21,1999, from exercising more than 9.9% of the voting power in our Company, with respect to such ordinary shares, regardless of how many shares theshareholder owns. The provision may therefore discourage United States persons from seeking to acquire, or from accumulating, 15% or more of our ordinaryshares (which, due to the voting power of the founders’ shares, would represent 10% or more of the voting power of our Company). As of March 31, 2017, nocitizen or resident of the United States held an amount of ordinary shares that would represent 10% or more of the voting power of our Company.Risks Relating to Our International OperationsWe face risks related to foreign currency exchange rates.Because some of our revenue, operating expenses, assets and liabilities are denominated in foreign currencies, we are subject to foreign exchange risksthat could adversely affect our operations and reported results. To the extent that we incur expenses in one currency but earn revenue in another, any changein the values of those foreign currencies relative to the U.S. dollar could cause our profits to decrease or our products to be less competitive against those ofour competitors. To the extent that our foreign currency holdings and other assets denominated in a foreign currency are greater or less than our liabilitiesdenominated in a foreign currency, we have foreign exchange exposure.Current and changing economic conditions may adversely affect our industry, business, partners and suppliers, financial position, results of operationsand/or cash flow.The global economy continues to experience significant volatility, and the economic environment may continue to be, or become, less favorable thanthat of past years. Among other matters, the continued risk of a debt default by one or more European countries, related financial restructuring efforts inEurope, and/or evolving deficit and spending reduction programs instituted by the U.S. and other governments could negatively impact the global economyand/or the pharmaceutical industry. This has led, and/or could lead, to reduced consumer and customer spending and/or reduced or eliminated governmentalor third party payor coverage or reimbursement in the foreseeable future, and this may include spending on healthcare, including but not limited topharmaceutical products. While generic drugs present an alternative to higher-priced branded products, our sales could be negatively impacted if patientsforego obtaining healthcare, patients and customers reduce spending or purchases, and/or if governments and/or third-party payors reduce or eliminatecoverage or reimbursement amounts for pharmaceuticals and/or impose price or other controls adversely impacting the price or availability ofpharmaceuticals. In addition, reduced consumer and customer spending, and/or reduced government and/or third party payor coverage or reimbursement,and/or new government controls, may drive us and our competitors to decrease prices and/or may reduce the ability of customers to pay and/or may result inreduced demand for our products. The occurrence of any of these risks could have a material adverse effect on our industry, business, financial position,results of operations and/or cash flow.Our business requires us to move goods across international borders. Any events that interfere with, or increase the costs of, the transfer of products acrossinternational borders could have a material adverse effect on our business.We transport most of our products across international borders, primarily those of the United States, Canada and Israel. Since September 11, 2001,there has been more intense scrutiny of products that are transported across international borders. As a result, we may face delays, and increases in costs dueto such delays, in delivering products to our customers. Any events that interfere with, or increase the costs of the transfer of products across internationalborders could have a material adverse effect on our business.Risks Relating to Key EmployeesOur future success is highly dependent on our continued ability to attract and retain key personnel. Any failure to do so could have a material adverseeffect on our business, financial position and results of operations and could cause the market value of our ordinary shares to decline.The pharmaceutical industry, and our company in particular, is science based. It is therefore imperative that we attract and retain qualified personnelin order to develop new products and compete effectively. If we fail to attract and retain key scientific,17technical or management personnel, our business could be affected adversely. If we are unsuccessful in retaining or replacing key employees, it could have amaterial adverse effect on our business, financial position and results of operations and could cause the market value of our ordinary shares to decline.Risks Relating to Our Location in IsraelConditions in Israel affect our operations and may limit our ability to produce and sell our products.We are incorporated under Israeli law and a significant component of our manufacturing and research and development facilities are located inIsrael. Political, economic and military conditions in Israel may directly affect our operations, and we could be adversely affected by hostilities involvingIsrael, the interruption or curtailment of trade between Israel and its trading partners, or a significant downturn in the economic or financial condition ofIsrael. Although Israel has entered into various agreements with Egypt, Jordan and the Palestinian Authority, Israel frequently has been subject to civil unrestand terrorist activity, with varying levels of severity. Any armed conflicts, terrorist activities or political instability in the region could adversely affect ouroperations. Furthermore, certain parties with whom we do business periodically have declined to travel to Israel, forcing us to make alternative arrangementswhere necessary, and the United States Department of State has issued an advisory regarding travel to Israel. As a result, the FDA has at various timescurtailed or prohibited its inspectors from traveling to Israel to inspect the facilities of Israeli companies, which, should it occur with respect to our Company,could result in the FDA withholding approval for new products we intend to produce at those facilities.If terrorist acts were to result in substantial damage to our facilities, our business activities would be disrupted since, with respect to some of ourproducts, we would need to obtain prior FDA approval for a change in manufacturing site. Our business interruption insurance may not adequatelycompensate us for losses that may occur and any losses or damages sustained by us could have a material adverse effect on our business.Many male Israeli citizens, including our employees, are subject to compulsory annual reserve military service until they reach the age of 45 (or older,for citizens who hold certain positions in the Israeli armed forces reserves) and, in the event of a military conflict, may be called to active duty. In response toincreases in terrorist activity, there have been periods of significant call-ups of military reservists, and some of our Israeli employees have been called up inconnection with armed conflicts. It is possible that there will be similar large-scale military reserve duty call-ups in the future. Our operations could bedisrupted by the absence for a significant period of one or more of our executive officers or key employees or a significant number of our other employeesdue to obligatory military service requirement. Any disruption in our operations could harm our business.We may be affected by fluctuations in the NIS relative to the U.S. Dollar.A substantial portion of our expenses, primarily labor and occupancy expenses in Israel, are incurred in NIS. As a result, the cost of our operations inIsrael, as measured in U.S. dollars, is subject to the risk of exchange rate fluctuations between the U.S. dollar and the NIS. During the year-ended March 31,2017, the value of the NIS increased 3.7% with respect to the U.S. dollar. While that change had a negative impact on our results of operations, if the NISwere to once again depreciate relative to the U.S. dollar (as was the case in certain previous years), that would positively affect our U.S. dollar-measuredresults of operations.Our operations may be affected by negative labor conditions in Israel.Strikes and work-stoppages occur relatively frequently in Israel. If Israeli trade unions threaten strikes or work-stoppages and such strikes or work-stoppages occur, those may, if prolonged, have a material adverse effect on the Israeli economy and on our business, including our ability to deliver productsto our customers and to receive raw materials from our suppliers in a timely manner.Government price control policies can materially impede our ability to set prices for our products.All pharmaceutical products sold in Israel are subject to government price controls. Permitted price increases and decreases are enacted by the Israeligovernment as part of a formal review process. The inability to control the prices of our products may adversely affect our operations.We may benefit from government programs and tax benefits, both or either of which may be discontinued or reduced.We have, in the past, received grants and substantial tax benefits under Israeli government programs, including the Approved Enterprise program andprograms of the National Technological Innovation Authority (the “Authority”) (formerly operating as Office of the Chief Scientist of the Ministry ofEconomy of the State of Israel (the “OCS”)). In order to be eligible for these programs and benefits, we must meet specified conditions including makingspecified investments in fixed assets from our equity and paying royalties with respect to grants received. In addition, some of these programs could restrictour ability to manufacture particular18products and transfer particular technology outside of Israel. If we fail to comply with these conditions in the future, the benefits received could be canceledand we could be required to refund payments previously received under these programs or pay increased payments and/or taxes. In the future, thegovernment of Israel may discontinue or curtail these and the tax benefits available under these programs. If the government of Israel ends these programsand tax benefits while we are recipients, our business, financial condition and results of operations could be materially adversely affected.Provisions of Israeli law may delay, prevent or make more difficult a merger or acquisition. This could prevent a change of control and depress the marketprice of our ordinary shares.Provisions of Israeli corporate and tax law may have the effect of delaying, preventing or making more difficult a merger or acquisition. The IsraeliCompanies Law, 5759- 1999 (the “Israeli Companies Law”) and the regulations promulgated thereunder, generally require that a merger be approved by acompany’s board of directors and by a shareholder vote at a shareholders’ meeting that has been called on at least 35 days’ advance notice by each of themerger parties. Under our Articles of Association, the required shareholder vote is a supermajority of at least 75% of the shares voting in person or by proxyon the matter. Any creditor of a merger party may seek a court order blocking a merger if there is a reasonable concern that the surviving company will not beable to satisfy all of the obligations of any party to the merger. Moreover, a merger may not be completed until at least 50 days have passed from the timethat a merger proposal has been delivered to the Israeli Registrar of Companies and at least 30 days have passed from the time each merging companyreceived shareholder approval. In addition, a majority of each class of securities of the target company must approve a merger. Moreover, a tender offer forall of a company’s issued and outstanding shares can only be completed if the acquirer receives sufficient responses such that the acquirer will hold at least95% of the issued share capital upon consummation of the shareholders’ tenders. Completion of the tender offer also requires approval of a majority ofshareholders who do not have a personal interest in the tender offer, unless, following consummation of the tender offer, the acquirer would hold at least 98%of the company’s outstanding shares. Furthermore, the shareholders, including those who indicated their acceptance of the tender offer, may, at any timewithin six months following the completion of the tender offer, petition an Israeli court to alter the consideration for the acquisition, unless the acquirerstipulated in its tender offer that a shareholder that accepts the offer may not seek such appraisal rights.Other potential means of acquiring a public Israeli company such as ours might involve additional obstacles. In addition, a body of case law has notyet developed with respect to the Israeli Companies Law. Until this happens, uncertainties will exist regarding its interpretation.Finally, Israeli tax law treats some acquisitions, such as stock-for-stock exchanges between an Israeli company and a foreign company, less favorablythan do United States tax laws. The provisions of Israeli corporate and tax law and the uncertainties surrounding such laws may have the effect of delaying,preventing or making more difficult a merger or acquisition. This could prevent a change of control of the Company and depress the market price of ourordinary shares, which otherwise might rise as a result of such a change of control. With respect to mergers, Israeli tax law allows for tax deferral in certaincircumstances but makes the deferral contingent on the fulfillment of a number of conditions, including a holding period of two years from the date of thetransaction during which sales and dispositions of shares of the participating companies are subject to certain restrictions. With respect to other share swaptransactions, the tax deferral is limited in time, and when this time expires, the tax becomes payable even if no disposition of the shares has occurred.It may be difficult to effect service of process and enforce judgments against our directors and officers.We are incorporated in Israel. The majority of our executive officers and directors are non-residents of the United States and a substantial portion ofour assets and the assets of such persons are located outside the United States. Therefore, it may be difficult to enforce a judgment obtained in the UnitedStates against us or any of those persons or to effect service of process upon those persons. It may also be difficult to enforce civil liabilities under UnitedStates federal securities laws in original actions instituted in Israel. Israeli courts may refuse to hear a claim based on a violation of U.S. securities lawsbecause Israel is not the most appropriate forum in which such a claim should be brought. Even if an Israeli court agrees to hear a claim, it may determine thatIsraeli law and not U.S. law is applicable to the claim. If U.S. law is found to be applicable, the applicable U.S. law must be proved as a factual matter, whichcan be a time-consuming and costly process. Also, certain matters of procedure will be governed by Israeli law.We are subject to government regulation that increases our costs and could prevent us from marketing or selling our products.We are subject to extensive pharmaceutical industry regulations in countries where we operate. We cannot predict the extent to which we may beaffected by legislative and other regulatory developments concerning our products.In Israel, the manufacture and sale of pharmaceutical products is regulated in a manner substantially similar to that in the United States. Legalrequirements generally prohibit the handling, manufacture, marketing and importation of any pharmaceutical product unless it is properly registered inaccordance with applicable law. The registration file relating to any particular product must contain medical data related to product efficacy and safety,including results of clinical testing and references to medical publications, as well19as detailed information regarding production methods and quality control. Health ministries are authorized to cancel the registration of a product if it isfound to be harmful or ineffective or manufactured and marketed other than in accordance with registration conditions.We are subject to legislation in Israel, primarily relating to patents and data exclusivity provisions. Modifications of this legislation or court decisionregarding this legislation may adversely affect us and may prevent us from exporting Israeli-manufactured products in a timely fashion. Additionally, theexistence of third-party patents in Israel, with the attendant risk of litigation, may cause us to move production outside of Israel or otherwise adversely affectour ability to export certain products from Israel.Risks Relating to Our Location in CanadaGovernment price control policies can materially impede our ability to set prices for our products.The Canadian Government Patented Medicine Prices Review Board (“PMPRB”) monitors and controls prices of patented drug products marketed inCanada by persons holding, or licensed under, one or more patents. The PMPRB will approve an introductory price (based on a comparative analysis) andwill require that the price not be increased each year thereafter by more than the annual increase of the Canadian Consumer Price Index. Consequently, theexistence of one or more patents relating to a drug product, while providing some level of proprietary protection for the product, also triggers a governmentalprice control regime that significantly affects the Canadian pharmaceutical industry’s ability to set pricing. The inability to control the prices of our productsmay adversely affect our operations.Sales of our products in Canada depend, in part, upon their being eligible for reimbursement from drug benefit formularies.In each province of Canada there is a drug benefit formulary. A formulary lists the drugs for which a provincial government will reimburse qualifyingpersons and the prices at which the government will reimburse such persons. There is not complete uniformity among provinces. However, provincialgovernments generally will reimburse the lowest available price of the generic equivalents of any drug listed on the formulary list of the province. Theformularies can also provide for drug substitution, even for patients who do not qualify for government reimbursement. The effect of these provincialformulary regimes is to encourage the sale of lower-priced versions of pharmaceutical products. The potential lack of reimbursement represents a threat to ourbusiness. Additionally, the substitution effect may adversely affect our ability to profitably market our products.We may be adversely affected if the rate of inflation in Canada exceeds the rate of devaluation of the Canadian dollar against the U.S. dollar.A substantial portion of our expenses, primarily labor, raw materials, occupancy, marketing and research and development expenses in Canada, areincurred in Canadian dollars. As a result, the cost of our operations in Canada, as measured in U.S. dollars, is subject to the risk of exchange rate fluctuationsamong the U.S. dollar and the Canadian dollar. During the year-ended March 31, 2017, the value of the Canadian dollar decreased 2.3% with respect to theU.S. dollar. This decrease in the value of the Canadian dollar had the effect of decreasing the U.S. dollar value of operating income in Canada, decreasing theU.S. dollar cost of our goods manufactured in Canada for the United States and favorably impacting financial income, net related to the U.S. dollardenominated cash and cash equivalents, short-term bank deposits and intercompany balances in Canada. If the value of the Canadian dollar increases in thefuture, it may have a negative effect on our results from operations. ITEM 4.INFORMATION ON THE COMPANYA. HISTORY AND DEVELOPMENT OF THE COMPANYThe legal and commercial name of our company is Taro Pharmaceutical Industries Ltd. We were incorporated under the laws of the State of Israel in1959 under the name Taro-Vit Chemical Industries Ltd. In 1984, we changed our name to Taro Vit Industries Ltd. and in 1994 we changed our name to TaroPharmaceutical Industries Ltd., which was the name of a subsidiary of Taro Vit Industries Ltd. incorporated under the laws of the State of Israel in 1950.In 1961, we completed the initial public offering of our ordinary shares. In that year, we also acquired 97% of the outstanding stock of an Israelicorporation, then known as Taro Pharmaceutical Industries Ltd. (“TPIL”). In 1981, we sold 37% of our interest in TPIL. In 1993, after acquiring all of theoutstanding shares of TPIL, we merged TPIL into our company. In July 2001, we completed a stock split by distributing one ordinary share for each ordinaryshare then outstanding and one ordinary share for every ten founders’ shares then outstanding. In October 2001, we sold 3,950,000 of our ordinary shares,and shareholders sold 1,800,000 of our ordinary shares, in a public offering. In 2007, we sold 6,787,500 of our ordinary shares to Sun. In September 2010, theLevitt and Moros families and Sun Pharma reached an agreement to transfer their interest in Taro to Sun in accordance with an option agreement20entered into by the parties in May 2007. Since March 22, 2012, our ordinary shares have been traded on the NYSE under the symbol “TARO.”On December 23, 2013, we completed a modified “Dutch auction” tender offer through which we repurchased 1,959,514 ordinary shares at a price of$97.50 per share.On March 15, 2016, the Company announced that its Board of Directors approved a $250 million share repurchase of ordinary shares. On August 19,2016, we announced the completion of this program, with the last shares being purchased on August 18, 2016. Under the program, the Company boughtback 1,801,099 of its ordinary shares in open market transactions, in accordance with a 10b5-1 program, at an average price of $138.80 per share. On November 23, 2016, the Company announced that its Board of Directors approved a new $250 million share repurchase of ordinaryshares. Repurchases may be made from time to time at the Company’s discretion, based on ongoing assessments of the capital needs of the business, themarket price of its stock, and general market conditions. No time period has been set for the repurchase program, and any such program may be suspended ordiscontinued at any time. The repurchase authorization enables the Company to purchase its ordinary shares from time to time through open marketpurchases, negotiated transactions or other means, including 10b5-1 trading plans in accordance with applicable securities laws or other restrictions. As ofMarch 31, 2017, we repurchased a total of 518,965 of our ordinary shares at an average price of $104.56 per share, in accordance with a 10b5-1program. During the year ended March 31, 2017, the Company repurchased 2,252,725 shares between the two programs at an average price of $130.87.Our registered office is located at 14 Hakitor Street, Haifa Bay 2624761, Israel. Our telephone number at that address is +972-4-847-5700. Our agentfor service of process in the United States is Taro Pharmaceuticals U.S.A., Inc., 3 Skyline Drive, Hawthorne, NY 10532. Our telephone number at that addressis +1-914-345-9000.Capital ExpendituresDuring the years ended March 31, 2017, 2016 and 2015, our capital expenditures were $35.8 million, $19.0 million and $20.0 million,respectively. The focus of our capital expenditure program has been the expansion and upgrade of our manufacturing facilities and information technologysystems in order to enable us to increase operational efficiencies, remain in compliance with cGMP, accommodate anticipated increased demand for ourproducts and maintain a competitive position in the marketplace.The major projects undertaken during these three years, as part of our capital expenditure program, include: •the acquisition of additional production and packaging equipment; •expanding and upgrading our research and development laboratories in Israel and Canada; and •the upgrade of our information technology and serialization systems, in addition to general improvements to our facilities.For a detailed presentation of our property, plant and equipment, see Note 7 to our consolidated financial statements included elsewhere in this2017 Annual Report. Also see Item 4.D.—“Property, Plant and Equipment.”B. BUSINESS OVERVIEWWe are a multinational, science-based pharmaceutical company. We develop, manufacture and market Rx and OTC pharmaceutical productsprimarily in the United States, Canada and Israel. Our primary focus includes semi-solids formulations, such as creams and ointments and other dosage formssuch as liquids, capsules and tablets, in the dermatological and topical, cardiovascular, neuropsychiatric and anti-inflammatory therapeutic categories.21We operate principally through three entities: Taro Pharmaceutical Industries Ltd. (“Taro Israel”), and two of its subsidiaries (including indirect), TaroPharmaceuticals Inc. (“Taro Canada”) and Taro U.S.A. The principal activities and primary product lines of these subsidiaries may be summarized asfollows: Entity Principal Activities Primary Product Lines Taro Israel • Manufactures more than 100 finished dosage formpharmaceutical products for sale in Israel and forexport• Produces APIs used in the manufacture of finisheddosage form pharmaceutical products• Markets and distributes both proprietary and genericproducts in the local Israeli market• Performs research and development • Dermatology: Rx and OTC semi-solid and liquidproducts (creams, ointments, lotions and gels)• Cardiology and Neurology: Prescription oral dosageproducts• Oral analgesics, Rx and OTC• Oral Central Nerve System (CNS) - Rx• OTC nasal sprays• Allergy (Antihistamine): OTC oral dosage products Taro Canada • Manufactures more than 200 finished dosage formpharmaceutical products for sale in Canada and forexport• Markets and distributes both proprietary and genericproducts in the Canadian market• Performs research and development • Dermatology: Rx and OTC semi-solid products(creams, ointments and gels) and liquids• Allergy (Antihistamine): OTC oral dosage products Taro U.S.A. • Markets and distributes both proprietary and genericproducts in the U.S. market • Dermatology: Rx and OTC semi-solid products(creams, ointments and gels) and liquids • Performs regulatory, post marketing and clinicalactivities • Cardiology and Neurology: Rx oral dosage products• Other Rx and OTC products As of March 31, 2017, 33 (excluding tentative approvals) of our ANDAs are being reviewed by the FDA. During the fiscal year ended March 31, 2017,we filed 8 ANDAs with the FDA. In addition, there are numerous products for which either development or internal regulatory work is in process. Theapplications pending before the FDA are at various stages in the review process, and there can be no assurance that we will be able to successfully completeany remaining testing or that, upon completion of such testing, approvals will be granted. In addition, there can be no assurance that the FDA will not grantapprovals for competing products submitted by our competitors, prior to, simultaneous with or after granting approval to us.The Generic Pharmaceutical IndustryGeneric pharmaceuticals are the chemical and therapeutic equivalents of brand-name drugs and are typically marketed after the patents for brand-namedrugs have expired. Generic pharmaceuticals generally must undergo clinical testing that demonstrates that they are bioequivalent to their brandedequivalents and are manufactured to the same standards. Proving bioequivalence generally requires data demonstrating that the generic formulation resultsin a product whose rate and extent of absorption are within an acceptable range of the results achieved by the brand-name reference drug. In some instances,bioequivalence can be established by demonstrating that the therapeutic effect of the generic formula falls within an acceptable range of the therapeuticeffects achieved by the brand-name reference drug.Generic pharmaceutical products must meet the same quality standards as branded pharmaceutical products although they are generally sold at pricesthat are substantially lower than those of their branded counterparts. As a result, generic pharmaceuticals represent a much larger percentage of total drugprescriptions dispensed than their corresponding percentage of total sales. This discount tends to increase (and margins tend to decrease) as the number ofgeneric competitors increases for a given product. Because of this pricing dynamic, companies that are among the first to develop and market a genericpharmaceutical tend to earn higher profits than companies that subsequently enter the market for that product. Furthermore, products that are difficult todevelop or are intended for niche markets generally attract fewer generic competitors and therefore may offer higher profit margins than those products thatattract a larger number of competitors. However, profit is influenced by many factors other than the number of competitors for a given drug or the size of themarket. Depending on the actions of each of our competitors, price discounts can be just as significant for a specific product with only a few competitors or asmall market, as for a product with many competitors or a large market.22In recent years, the market for generic pharmaceuticals has grown. We believe that this growth has been driven by the following factors, among others: •efforts by governments, employers, third-party payers and consumers to control healthcare costs; •increased acceptance of generic products by physicians, pharmacists and consumers; and •the increasing number of pharmaceutical products whose patents have expired and are therefore subject to competition from, and substitutionby, generic equivalents.23ProductsWe currently market more than 200 pharmaceutical products in over 25 countries. The following table represents some of our key product groups andthe major markets in which they are sold: Brand Therapeutic Major Generic Name Dosage Form Name(1) Category Markets Rx/OTCAcetaminophen rectal suppository Feverall® Antipyretic U.S. OTCAcetaminophen, Codeine and Caffeine tablets Rokacet®(2) Analgesic Israel Rx / OTCAcetazolamide tablets Diamox® Diuretic U.S., Israel RxAcyclovir ointment Zovirax® Dermatologics andtopicals U.S. RxAdapalene gel Differin® Dermatologics andtopicals U.S. RxAlclometasone Dipropionate cream, ointment Aclovate® Dermatologics andtopicals U.S. RxAlnase solution Pyrilamine® Allergy Israel OTCAmcinonide cream Cyclocort® Dermatologics andtopicals Canada RxAmiodarone Hydrochloride tablets Cordarone® Cardiovascular U.S. RxAmmonium Lactate cream, lotion Lac-Hydrin® Dermatologics andtopicals U.S., Canada Rx / OTCAnastrozole tablets Arimidex® Nonsteroidal aromataseinhibitor Canada RxAugmented Betamethasone Dipropionate cream, lotion, gel Diprolene AF® Dermatologics andtopicals U.S. RxBacitracin ointment Baciquent® Dermatologics andtopicals U.S. OTCBetamethasone Dipropionate cream Diprosone® Dermatologics andtopicals U.S., Canada RxBetamethasone Valerate cream Valisone® Dermatologics andtopicals U.S., Canada RxBrexin tablets Anti-Inflammatory &Analgesic Israel RxButamine solution for infusion Dobutrex® Cardiovascular Israel RxCalcimore chewable tablets Calcimore® Gastrointentinal Israel RxCalcipotriene ointment Dovonex® Dermatologics andtopicals U.S. RxCarbamazepine tablets, controlledrelease tablets, chewabletablets, oral suspension Tegretol® Anticonvulsant U.S., Israel,Canada RxCetirizine Hydrochloride solution Zyrtec® Allergy U.S. Rx / OTCCiclopirox solution Penlac® Dermatologics andtopicals / Antifungal U.S., Canada RxCiclopirox Olamine cream Loprox® Dermatologics andtopicals / Antifungal U.S. RxClindamycin Phosphate solution Cleocin T® Dermatologics andtopicals U.S., Canada RxClindamycin/Benzoyle Peroxide gel Clindoxyl® Dermatologics andtopicals Canada RxClobetasol Propionate cream, ointment, gel, topicalsolution, lotion Temovate® ,Clobex® Dermatologics andtopicals U.S., Canada RxClomipramine Hydrochloride capsule Anafranil® Neuropsychiatric U.S. RxClorazepate Dipotassium tablets Tranxene® Neuropsychiatric U.S. Rx24Clotrimazole and Betamethasone Dipropionate cream, lotion Lotrisone® Dermatologics andtopicals / Antifungal U.S., Israel RxClotrimazole cream, topicalsolution, vaginal cream Lotrimin®Gyne-Lotrimin® Dermatologics andtopicals / Antifungal U.S., Canada Rx / OTCClotrimazole/Fluconazole cream / capsule CanesOral® Dermatologics andtopicals/ Antifungal Canada OTCCuratane capsule Accutane® Dermatologics andtopicals Israel RxDermacombin cream Dermacombin® Dermatologics andtopicals / Antifungal Israel RxDesonide cream, ointment, lotion Tridesilon® ,Des-Owen® Dermatologics andtopicals U.S. RxDesoximetasone cream, ointment, gel Topicort®(2) Dermatologics andtopicals U.S. RxDiclofenac Sodium solution, gel Pennsaid®,Solaraze® Dermatologics andtopicals U.S., Canada RxDiflorasone Diacetate cream, ointment Psorcon® Dermatologics andtopicals U.S. RxDiphenhydramine cream Benadryl® Dermatologics andtopicals U.S. OTCDiprofol emulsion for injection orinfusion Diprivan® Sedative/hypnotic Israel RxDocusate Sodium gel capsules Soflax®Colace® Gastrointentinal Canada OTCDouble Antibiotic ointment Polysporin® Dermatologics andtopicals Canada OTCEconazole Nitrate cream Spectazole® Dermatologics andtopicals / Antifungal U.S. RxEnalapril Maleate tablets Vasotec® Cardiovascular U.S. RxEnalapril Maleate / Hydrochlorothiazide tablets Vaseretic® Cardiovascular U.S. RxEntumin tablets Entumin® CNS Israel RxEstelle tablets Androcur® Endocrine Israel RxEtodolac tablets,capsules, extended releasetablets Etopan®(2)Lodine® Anti-Inflammatory &Analgesic U.S., Israel RxFluocinolone Acetonide solution, oil Synalar®, Derma-Smooth® Dermatologics andtopicals U.S. RxFluocinonide cream, ointment, gel, topicalsolution Lidex®,Vanos® Dermatologics andtopicals U.S., Canada RxFluorouracil topical solution, cream Efudex® Topical Anti-neoplastic U.S. RxFlurandrenolide cream, lotion Cordran® Dermatologics andtopicals U.S. RxHydrocortisone 1% and Acetic Acid 2% solution Vosol HC Otic® Antibacterial U.S. RxHydrocortisone Butyrate cream, ointment, solution Locoid® Dermatologics andtopicals U.S. RxHydrocortisone Valerate cream, ointment Westcort® Dermatologics andtopicals U.S., Canada RxHydrocortisone cream, ointment Cortizone 10®,Hytone® Dermatologics andtopicals U.S., Canada Rx / OTCImiquimod cream Aldara® Dermatological andtopicial U.S. RxJungborn granules Jungborn® Laxative Israel OTCKetoconazole tablets, cream Nizoral® Dermatologics andtopicals / Antifungal U.S., Canada RxLamotrigine tablets Lamictal® Anticonvulsant U.S. RxLevocetirizine Dihydrochloride solution Xyzal® Allergy U.S. Rx25Lidocaine ointment Xylocaine™ Dermatologics andtopicals U.S. RxLoratadine solution, tablets Claritin® Allergy U.S., Canada OTCLozapine tablets Clozaril® Neuropsychiatric Israel RxMalathion lotion Ovide®(2) Dermatologics andtopicals U.S. RxMercaptizol tablets Tapazole® Endocrine Israel RxMeroken powder for solution Laxative Israel RxMetronidazole gel MetroGel® Dermatologics andtopicals U.S. RxMiconazole Nitrate vaginal cream, cream Monistat® 3Monistat® 7Micatin® Dermatologics andtopicals / Antifungal U.S., Canada OTCMometasone Furoate lotion, cream Elocon® Dermatologics andtopicals Canada RxMupirocin ointment Bactroban® Dermatologics andtopicals U.S., Canada RxNaftifine HCL cream Naftin® Dermatologics andtopicals / Antifungal U.S. RxNexium tablets Nexium® Gastrointentinal Israel RxNormalax powder Miralax® Gastrointestinal Israel OTCNortriptyline capsule Pamelor® Neuropsychiatric U.S. RxNystatin oral suspension, vaginalcream, topical cream Mycostatin® Antifungal Oral andtopical U.S., Israel,Canada Rx / OTCNystatin/Triamcinolone cream, ointment Mycogen® II, Mycolog®II, Myconel® Dermatologics andtopicals / Antifungal U.S. RxNystatin/Triamcinolone/Neomycin/Gramicidin cream, ointment Kenacomb® Dermatologics andtopicals /Antifungal/antibiotic Canada RxOndansetron solution Zofran® Antiemetic U.S. RxOracort E paste Xylocaine and lignocaine® Dermatologics andtopicals Israel RxOtomycin drops Otomycin® Antibacterial Israel RxOxacatin syrup Oxacatin® Cough & Cold Israel RxOxaliplatin injectable Eloxatin® Antineoplastics Canada RxOxiconazole Nitrate cream Oxistat® Dermatologics andtopicals / Antifungal U.S. RxPartane tablets Benzhexol and trihex® CNS Israel RxPemetrexed Disodium injectable Alimta® Antineoplastics Canada RxPercocet tablets Percocet® Narcotics Israel RxPerphenan tablets Neuropsychiatric Israel RxPhenytoin Sodium extended releasecapsules, chewabletablets, suspension Dilantin® Anticonvulsant U.S., Canada RxProfex tablets Rythmol SR® Cardiovascular Israel RxPromethazine rectal suppository Phenergan® Allergy & Antiemetic U.S. RxPromnix modified releasecapsules Alna ® / Flomax ® Endocrine Israel RxRidazin tablets Melleril® Neuropsychiatric Israel RxSebosel suspension Sebosel® Dermatologics andtopicals Israel OTCSterocort tablets Sterocort® Corticosteroid Israel RxSumatriptan Succinate injectable Imitrex® CNS Canada Rx26Taro Base cream Glaxal® base Dermatologics andtopicals Canada OTCTaro Gel gel K-Y® gel Dermatologics andtopicals/lubricant Canada OTCTarodent solution Tarodent® Adrenergic receptorblockade Israel OTCTemozolomide capsules Temodal® Antineoplastics Canada RxTerbinafine Hydrochloride cream Lamisil® Dermatologics andtopicals / Antifungal U.S. OTCTerconazole vaginal cream Terazol® Dermatologics andtopicals / Antifungal U.S., Canada RxTestosterone Undecanoate gel capsules Andriol® Endocrine Canada RxTolnaftate cream Tinactin® Dermatologics andtopicals / Antifungal U.S., Canada OTCTramadol Hydrochloride extended release tablets Tridural® Analgesic Canada RxTriamcinolone Acetonide cream, ointment, dental paste Kenalog® Dermatologics andtopicals U.S., Canada,Israel RxTriple Antibiotic ointment Neosporin® Dermatologics andtopicals U.S., Canada OTCWarfarin Sodium tablets Coumadin® Cardiovascular U.S., Israel,Canada RxZindaclin gel Zindaclyn® Dermatologics andtopicals Israel RxZoledronic acid injectable Aclasta®Zometa® Bone metabolismregulator Canada Rx(1)Presented in this column are the brand-names under which the products are most commonly prescribed in the United States. Except as noted below,we do not own any of the specific names. In some cases, we manufacture and sell the generic equivalent of the product sold by the third-party ownerof such name. For example, we sell our product warfarin sodium tablets under that name in the United States. Warfarin sodium is the genericequivalent of Coumadin, a product sold under that name in the United States by the third-party owner of the United States rights to that name and byus in Israel, where we own the right to use that name.(2)Taro brands.Topical corticosteroids are used in the treatment of some dermatologic conditions (including psoriasis, eczema and various types of skinrashes). Topical antineoplastics are used in the treatment of cancer (including skin cancer). Antifungals are used in the treatment of some infections(including athlete’s foot, ringworm and vaginal yeast infections). Anticonvulsants are used in the treatment of various seizure disorders (includingepilepsy). Cardiovascular products are used in the treatment of heart disease. There are several categories of cardiovascular drugs, including anticoagulants,antihypertensive and antiarrhythmic. Anticoagulants, commonly known as blood thinners, are used in the treatment of heart disease and stroke associatedwith heart disease.Some of our products are subject to seasonality, such as allergy drugs, however, in the aggregate our products are not materially subject to seasonality.Sales and MarketingIn the United States, Israel and Canada, our sales are primarily generated by our own dedicated sales force. In other countries, we sell through agentsand other distributors. Our sales force is supported by our customer service and marketing employees.27The following is a breakdown of our net sales by geographic region, including the percentage of our total consolidated net sales for each period: Year ended March 31, 2017 2016 2015 Sales % of Sales % of Sales % of (in thousands) total sales (in thousands) total sales (in thousands) total sales United States $785,319 89% $865,224 91% $777,191 90%Canada 57,621 7% 56,605 6% 55,452 6%Israel 29,200 3% 22,963 2% 22,157 3%Other 7,247 1% 5,959 1% 8,144 1%Total $879,387 100% $950,751 100% $862,944 100%In the year ended March 31, 2017, revenue in the United States accounted for 89% of total consolidated net sales. In addition to marketing Rx drugs,we market our generic OTC products primarily as store brands under its customers’ labels to wholesalers, drug chains, food chains and massmerchandisers. During the year ended March 31, 2017, we sold to approximately 130 customers in the United States. The following table represents sales toour three largest customers as a percent of consolidated net sales: Year ended March 31, Customer 2017 2016 2015 Customer A 19.3% 20.0% 18.0%Customer B 14.2% 14.1% 10.3%Customer C 10.3% 14.0% 14.1%The following table sets forth the percentage of consolidated net sales by each type of customer in the United States in the year ended March 31,2017: Percentage of Customer Type Consolidated Sales Drug wholesalers and store chains 48%Mass merchandisers, food and retail chains 13%Managed care organizations 11%Generic drug distributors 6%Other 11%In the year ended March 31, 2017, sales in Canada accounted for 7% of our total consolidated net sales and Taro Canada sold to approximately 50customers.The PMPRB monitors and controls prices of patented drug products marketed in Canada by persons holding, or licensed under, one or morepatents. The existence of one or more patents relating to a drug product triggers a governmental price control regime that significantly affects the Canadianpharmaceutical industry’s ability to set pricing. Furthermore, in each province of Canada there is a drug benefit formulary. A formulary lists the drugs forwhich a provincial government will reimburse qualifying persons and the prices at which the government will reimburse such persons. Provincialgovernments generally will reimburse the lowest available price of the generic equivalents of any drug listed on the formulary list of aprovince. Consequently, provincial formulary regimes tend to encourage the sale of lower-priced versions of pharmaceutical products.The following table sets forth the percentage of consolidated net sales by each type of customer in Canada in the year ended March 31, 2017: Percentage of Customer Type Consolidated Sales Drug wholesalers 5%Drug chains, independent pharmacies and others 2% In the year ended March 31, 2017, sales in Israel accounted for 3% of our total consolidated net sales. The marketing, sales and distribution of Rxpharmaceuticals and OTC products in Israel is closely monitored by the Israeli government. The market for these products is dominated by institutions thatare similar to health maintenance organizations in the United States, as well as private pharmacies. Most of our marketing efforts in Israel focus on sellingdirectly to these groups.28All pharmaceutical products sold in Israel are subject to price controls. Permitted price increases and decreases are enacted by the Israeli governmentas part of a formal review process. There are no restrictions on the import of pharmaceuticals, provided that they comply with registration requirements of theIsraeli Ministry of Health.In Israel, the pharmaceutical market generally is divided into two market segments: (i) the private market, which includes drug store chains, privatepharmacies and wholesalers; and (ii) the institutional market, which includes Kupat Holim Clalit (the largest health maintenance organization in Israel), otherhealth maintenance organizations, the Israel Ministry of Health, the Armed Forces, and sales to the Palestinian authorities through third parties.The following table sets forth the percentage of consolidated net sales by each type of customer in Israel and other international markets in the yearended March 31, 2017: Percentage of Customer Type Consolidated Sales Institutional 1%Private 2%Other international 1%We have expanded the production capacity of our Israeli and Canadian operations to meet anticipated greater demand for our products in futureyears. As discussed below under “Industry Practice Relating to Working Capital Items,” future demand for our products may not increase at a rate wepreviously anticipated. In addition, we utilize contract manufacturers for certain products to satisfy customer demand in a timely manner. As a result, in eachof the years ended March 31, 2017, 2016 and 2015, backorders represented less than 5% of our consolidated net sales.Competition and PricingThe pharmaceutical industry is intensely competitive. We compete with the original manufacturers of the brand-name equivalents of our genericproducts, other generic drug manufacturers (including brand-name companies that also manufacture generic drugs or license their products to other genericdrug manufacturers) and manufacturers of new drugs that may compete with our generic drugs. Many of our competitors have greater financial, productionand research and development resources, substantially larger sales and marketing organizations, and substantially greater name recognition than we have. Inthe recent past, the barriers to entry for new entrants to the generic industry have significantly reduced, thus resulting in a larger competitive field. At thesame time, the customer base for the generic manufacturers has seen significant consolidation at the purchasing level, resulting in increased purchasing powerfor the customer. This dual effect of increased competition and increased purchasing power has resulted in a downward trend for prices for our genericproducts.Additionally, brand-name drug companies have historically attempted to prevent generic drug manufacturers from producing certain products and toprevent competing generic drug products from being accepted as equivalent to their brand-name products. We expect such efforts to continue in thefuture. Also, some brand-name competitors, in an attempt to participate in the generic drug sales of their branded products, have introduced genericequivalents of their own branded products, both prior and subsequent to the expiration of their patents or FDA exclusivity periods for such drugs. Thesecompetitors have also introduced authorized generics or generic equivalents of brand-name drug products. Our brand-name drug competitors areincreasingly selling their branded products through controlled distribution channels, further limiting our access and increasing competitive intensity withthose generic manufacturers.Competitive factors in the major markets in which we participate can be summarized as follows:North AmericaThe U.S. pharmaceutical market is undergoing, and is expected to continue to undergo, rapid and significant market and technological changes andwe expect competition to intensify as these market and scientific advances are made. We intend to effectively compete in this marketplace by focusing on aniche product development strategy highlighted by differentiated technologies and dedicated focus on therapeutic areas which play to our strengths.In the United States, we compete with branded pharmaceutical manufacturers such as Bristol-Myers Squibb Company, Celgene Corporation,GlaxoSmithKline Inc., Merck & Co., Inc., Novartis AG, Pfizer Inc., Valeant Pharmaceuticals International, Inc. and Galderma Laboratories, LP., as well as withgeneric companies such as Teva Pharmaceuticals U.S.A., Mylan Inc., Perrigo Company PLC, Glenmark Generics, Inc., USA., PruGen, Inc. and SandozPharmaceuticals (the generics subsidiary of Novartis). Many of these29companies have more resources, market and name recognition and better access to customers than we have. Therefore, there can be no assurance that we cancompete successfully with them.A significant portion of our sales are made to a relatively small number of wholesalers, retail drug chains, food chains and mass merchandisers, whichcontinue to undergo significant consolidation. We face increasing product pricing pressures as a result of this consolidation as well as the emergence of largebuying groups who are able to negotiate price discounts on our products.There can be no guarantee that Taro will not continue to experience challenges during the current year in comparison to prior years, especially for ourgeneric drug division, due to price erosion from our customers increased focus on lower pricing, customer consolidation and increased competition inspecific product segments due to new entrants in our markets. These challenges could have a material impact on our business, cash flows, and results ofoperations or result in impairment charges, and the market value of our share price may decline.CanadaIn Canada, our competition includes Merck Canada Inc., Pfizer Canada Inc., Janssen Inc., Novartis Pharmaceuticals Canada Inc., GlaxoSmithKlineInc., Valeant Canada, AstraZeneca Canada, Johnson & Johnson Inc., Bayer Inc. and Bristol-Myers Squibb Canada. We also compete with other manufacturersof generic products, such as Apotex Inc., Teva Canada Limited, Mylan Pharmaceuticals ULC, Sandoz Canada Incorporated and Pharmascience Inc.Depending on the product, pricing in Canada is established by competitive factors or by Canadian provincial formulary price lists published by theCanadian provinces.IsraelIn Israel, we compete with Teva Pharmaceutical Industries Ltd., Perrigo Israel Pharmaceuticals Ltd., Dexcel Pharma Israel, and Rafa Laboratories Ltd.,among others. In addition, many leading multinational companies, including Bayer AG, Eli Lilly and Company, Merck & Co., Inc. and Pfizer Inc. markettheir products in Israel.In Israel, the government establishes the prices for pharmaceutical products as part of a formal review process. There are no restrictions on the importof pharmaceuticals provided that they comply with registration requirements of the Israeli Ministry of Health.Manufacturing and Raw MaterialsWe currently manufacture finished pharmaceutical products at our government approved facility in Canada and Israel and APIs in our facilities inIsrael. For the manufacture of our finished dosage form pharmaceutical products, we use pharmaceutical chemicals that we either produce ourselves orpurchase from chemical manufacturers in the open market globally. Substantially all of such chemicals are obtainable from a number of sources, subject toregulatory approval. However, we purchase certain raw materials from single source suppliers. The decision to purchase APIs is a function of our salesforecast and prevailing prices in the market. When appropriate purchasing opportunities arise, the Company may acquire certain APIs in excess of itsordinary requirements or rate of growth. Obtaining the regulatory approvals required to add alternative suppliers of such raw materials for products sold inthe United States or Canada may be a lengthy process. We strive to maintain adequate inventories of single source raw materials in order to ensure that anydelays in receiving such regulatory approvals will not have a material adverse effect on our business. However, we may become unable to sell certainproducts in the United States or Canada pending approval of one or more alternate sources of raw materials.We synthesize the APIs used in some of our key products, including our warfarin sodium tablets, carbamazepine products, etodolac tablets, terbinafinecream, imiquimod cream, fluocinonide cream, naftifine cream, oxiconazole nitrate cream, lamotrigine tablets, clorazepate dipotassium tablets, cetirizine oralsolution and desoximetasone spray. We plan to continue the strategic selection of APIs for synthesis in order to maximize the advantages from this scientificand manufacturing capability.Although, prices of principal raw materials have been relatively stable, the Company has programs to keep the cost of APIs consistent or to improveupon them; for example, through the qualification of alternate suppliers and process improvements.30Industry Practices Relating to Working Capital ItemsCertain customary industry selling practices affect our working capital, including, but not limited to, providing favorable payment terms to customersand discounting selling prices through the issuance of free products as well as other incentives within a specified time frame if a customer purchases morethan a specified threshold of a product. These incentives are provided principally with the intention of maintaining or expanding our distribution to thedetriment of competing products.Industry practice requires that pharmaceutical products be made available to customers from existing stock rather than on a made-to-orderbasis. Therefore, in order to accommodate market demand adequately, we strive to maintain a sufficient level of inventory.Government RegulationWe are subject to extensive pharmaceutical industry regulations in the United States, Canada, Israel and other jurisdictions, and may be subject tofuture legislative and other regulatory developments concerning our products and the healthcare field generally. Any failure by us to comply with applicablepolicies and regulations of any of the numerous authorities that regulate our industry could have a material adverse effect on our results of operations.In the United States, the Federal Food, Drug, and Cosmetic Act, or the “FDC Act,” and other federal and state statutes and regulations, govern, amongother things, the research, development, testing, manufacture, storage, recordkeeping, approval, labeling, promotion and marketing, distribution, post-approval monitoring and reporting, sampling, and import and export of pharmaceutical products. Failure to comply with applicable U.S. requirements maysubject a company to a variety of administrative or judicial sanctions, such as FDA refusal to approve pending new drug applications, or NDAs, warning oruntitled letters, product recalls, product seizures, total or partial suspension of production or distribution, injunctions, fines, civil penalties, and criminalprosecution. In Canada, Israel and other jurisdictions, the manufacture and sale of pharmaceutical products are regulated in a similar manner. Legalrequirements generally prohibit the handling, manufacture, marketing and importation of any pharmaceutical product unless it is properly registered inaccordance with applicable law. In addition, approval is required before any new drug or a generic equivalent to a previously approved drug can bemarketed. Furthermore, each country requires successful inspections or approval of manufacturing facilities, including adherence to cGMPs during theproduction and storage of pharmaceutical components, including, but not limited to, raw materials and finished products. As a result, we have had periodicinspections of our facilities and records.Regulatory authorities in each country also have extensive enforcement powers over the activities of pharmaceutical manufacturers, including thepower to seize, force the recall of and prohibit the sale or import of non-complying products and to halt the operations of and criminally prosecute and finenon-complying manufacturers. These regulatory authorities also have the power to revoke approvals previously granted and remove from the marketpreviously approved drug products.In the United States, Canada, Israel and other jurisdictions, we, as well as other manufacturers of drugs, are dependent on obtaining timely approvalsfor products. The approval process in each country has become more rigorous and costly in recent years. There can be no assurance that approvals will begranted in a timely manner or at all. In the United States, Canada, Israel and other jurisdictions, the procedure for drug product approvals, if such approval isultimately granted, generally takes longer than one year. The review processes in Canada and Israel are substantively similar to the review process in theUnited States.In the United States, any drug that is not generally recognized as safe and effective by qualified experts for its intended use is deemed to be a new drugwhich generally requires FDA approval. Approval is obtained, either by the submission of an ANDA or a NDA. If the new drug is a new dosage form, astrength not previously approved, a new indication or an indication for which the ANDA procedure is not available, a NDA is required. Pharmaceuticalproduct development for a new product or certain changes to an approved product in the United States typically involves preclinical laboratory and animaltests, the submission to the FDA of an investigational new drug application, or “IND,” which must become effective before clinical testing may commence,and adequate and well-controlled clinical trials to establish the safety and effectiveness of the drug for each indication for which FDA approval issought. Satisfaction of FDA approval to market requirements typically takes many years and the actual time required may vary substantially based upon thetype, complexity, and novelty of the product or disease.Preclinical tests include laboratory evaluation of product chemistry, formulation, and toxicity, as well as animal trials to assess the characteristics andpotential safety and efficacy of the product. The conduct of the preclinical tests must comply with federal regulations and requirements, including goodlaboratory practices. The results of preclinical testing are submitted to the FDA as part of an IND along with other information, including information aboutproduct chemistry, manufacturing and controls, and a proposed clinical trial protocol. Long-term preclinical tests, such as animal tests of reproductivetoxicity and carcinogenicity, may continue after the IND is submitted.31A 30-day waiting period after the submission of each IND is required prior to the commencement of clinical testing in humans. If the FDA has neithercommented on nor questioned the IND within this 30-day period, the clinical trial proposed in the IND may begin.Clinical trials involve the administration of the investigational new drug to healthy volunteers or patients under the supervision of a qualifiedinvestigator. Clinical trials must be conducted: (i) in compliance with federal regulations; (ii) in compliance with good clinical practice, or GCP, aninternational standard meant to protect the rights and health of patients and to define the roles of clinical trial sponsors, administrators, and monitors; as wellas (iii) under protocols detailing the objectives of the trial, the parameters to be used in monitoring safety, and the effectiveness criteria to be evaluated. Eachprotocol involving testing on U.S. patients and subsequent protocol amendments must be submitted to the FDA as part of the IND.The FDA may order the temporary, or permanent, discontinuation of a clinical trial at any time, or impose other sanctions, if it believes that theclinical trial either is not being conducted in accordance with FDA requirements or presents an unacceptable risk to the clinical trial patients. The studyprotocol and informed consent information for patients in clinical trials must also be submitted to an institutional review board, or IRB, for approval. An IRBmay also require the clinical trial at the site to be halted, either temporarily or permanently, for failure to comply with the IRB’s requirements, or may imposeother conditions.We generally receive approval for generic products by submitting an ANDA to the FDA. An ANDA provides for marketing of a drug product thatcontains the same active ingredient and has the same route of administration, dosage form, and strength as a previously approved drug (also known as thereference listed drug) and has been shown to be bioequivalent to the reference listed drug. Other than the requirement for bioequivalence testing, ANDAapplicants are not required to conduct, or submit results of, pre-clinical tests to prove the safety or effectiveness of their drug product. Bioavailability isgenerally determined by the rate and extent of absorption and levels of concentration of a drug product in the blood stream needed to produce a therapeuticeffect. Bioequivalence compares the bioavailability of one drug product with another and, when established, indicates that the rate of absorption and levelsof concentration of a generic drug in the body or on the skin are substantially equivalent to the previously approved brand-name reference listeddrug. ANDA approvals are granted after the review by the FDA of detailed information submitted as part of the ANDA regarding the pharmaceuticalingredients, drug production methods, quality control, labeling, and demonstration that the product bioequivalent to the brand-name reference listeddrug. Demonstrating bioequivalence generally requires data demonstrating that the generic formula results in a product whose rate and extent of absorptionare within an acceptable range of the results achieved by the brand-name reference listed drug. In some instances, bioequivalence can be established bydemonstrating that the therapeutic effect of the generic product falls within an acceptable range of the therapeutic effects achieved by the brand-namereference listed drug. Generic drug user fees pursuant to the Generic Drug User Fee Amendments of 2012 must be paid to FDA upon submission of eachANDA and any ANDA supplements, Drug Master Files as well as for any manufacturing facilities.Products resulting from our proprietary drug program may require us to submit a NDA to the FDA. A NDA must include the results of all preclinical,clinical, and other testing and a compilation of data relating to the product’s pharmacology, chemistry, manufacture, and controls. The clinical studiesrequired prior to the NDA submission are both costly and time consuming, and often take five to seven years or longer, depending, among other factors, onthe nature of the chemical ingredients involved and the indication for which the approval is sought. The cost of preparing and submitting a NDA is alsosubstantial. The submission of most NDAs is additionally subject to a substantial application user fee and the manufacturer and/or sponsor under anapproved new drug application are also subject to annual product and establishment user fees pursuant to the Prescription Drug User Fee Act. The FDA has60 days from its receipt of a NDA to determine whether the application will be accepted for filing based on the agency’s threshold determination that it issufficiently complete to permit substantive review. Once the submission is accepted for filing, the FDA begins an in-depth review. The FDA has agreed tocertain performance goals in the review of new drug applications. A majority of such applications for standard review drug products are reviewed within 10to 12 months; most applications for priority review drugs are reviewed in six to eight months. Priority review can be applied to drugs that the FDAdetermines offer major advances in treatment, or provide a treatment where no adequate therapy exists. For biologics, priority review is further limited onlyfor drugs intended to treat a serious or life-threatening disease relative to the currently approved products. The review process for both standard and priorityreview may be extended by FDA for three additional months to consider certain late-submitted information, or information intended to clarify informationalready provided in the submission.The FDA may also refer applications for novel drug products, or drug products that present difficult questions of safety or efficacy, to an advisorycommittee—typically a panel that includes clinicians and other experts—for review, evaluation, and a recommendation as to whether the application shouldbe approved. The FDA is not bound by the recommendation of an advisory committee, but it generally follows such recommendations. Before approving aNDA, the FDA will typically inspect one or more clinical sites to assure compliance with GCP. Additionally, the FDA will inspect the facility or the facilitiesat which the drug is manufactured. The FDA will not approve the product unless compliance with cGMP is satisfactory and the NDA contains data thatprovide substantial evidence that the drug is safe and effective in the indication studied.32Among the requirements for drug approval by the FDA is that manufacturing procedures and operations conform to cGMP. The cGMP regulationsmust be followed at all times during the manufacture of pharmaceutical products. During the review of a NDA or ANDA, the FDA will inspect the facility orthe facilities at which the drug is manufactured. FDA will not approve the product unless compliance with cGMP is satisfactory. In addition, quality-control,drug manufacture, packaging, and labeling procedures must continue to conform to cGMPs, after approval. Drug manufacturers and certain of theirsubcontractors are required to register their establishments with FDA and certain state agencies. Registration with the FDA subjects entities to periodicunannounced inspections by the FDA, during which the agency inspects manufacturing facilities to assess compliance with cGMPs. Accordingly,manufacturers must continue to expend time, money, and effort in the areas of production and quality-control to maintain compliance with cGMPs. If theFDA believes a company is not in compliance with cGMP, certain sanctions may be imposed, including: (i) withholding new drug approvals as well asapprovals for supplemental changes to existing applications; (ii) preventing the receipt of necessary licenses to export products; (iii) preventing theimportation of certain products into the United States; (iv) classifying the company as an unacceptable supplier and thereby disqualifying the company fromselling products to federal agencies; and (v) pursuing a consent decree or court action that limits company operations or imposes monetary fines.After the FDA evaluates the NDA and the manufacturing facilities, it issues either an approval letter or a complete response letter. A completeresponse letter generally outlines the deficiencies in the submission and may require substantial additional testing, or information, in order for the FDA toreconsider the application. If, or when, those deficiencies have been addressed to the FDA’s satisfaction in a resubmission of the NDA, the FDA will issue anapproval letter. An approval letter authorizes commercial marketing of the drug with specific prescribing information for specific indications.Changes to some of the conditions established in an approved application, including changes in indications, labeling, or manufacturing processes orfacilities, require submission and FDA approval of a new NDA or NDA supplement before the change can be implemented. A NDA supplement for a newindication typically requires clinical data similar to that in the original application, and the FDA uses the same procedures and actions in reviewing NDAsupplements as it does in reviewing NDAs.As a condition of ANDA or NDA approval, the FDA may require a risk evaluation and mitigation strategy, or REMS, to help ensure that the benefits ofthe drug outweigh the potential risks. REMS can include medication guides, communication plans for healthcare professionals, and elements to assure safeuse, or “ETASU.” ETASU can include, but are not limited to, special training or certification for prescribing or dispensing, dispensing only under certaincircumstances, special monitoring, and the use of patient registries. The requirement for a REMS can materially affect the potential market and profitabilityof the drug. Moreover, product approval may require substantial post-approval testing and surveillance to monitor the drug’s safety or efficacy. Oncegranted, product approvals may be withdrawn if compliance with regulatory standards is not maintained or problems are identified following initialmarketing.In addition, because we market a controlled substance in the United States and other controlled substances in Canada and Israel, we must meet therequirements of the federal Controlled Substances Act and relevant state laws and regulations in the United States as well as equivalent laws in Canada andIsrael. These regulations include stringent requirements for registration, manufacturing controls, receipt and handling procedures, recordkeeping andreporting and security to ensure accountability and prevent diversion of, or the unauthorized access to, the controlled substances in each stage of theproduction and distribution process. The DEA inspects manufacturers, distributors, importers, and exporters to review compliance with the ControlledSubstances Act and DEA regulations including security, record keeping and reporting prior to issuing a controlled substance registration. The specificsecurity requirements vary by the type of business activity and the schedule and quantity of controlled substances handled by the registrant. Once registered,manufacturing, distribution, exporting or importing facilities must maintain records documenting the manufacture, receipt, distribution, import, or export ofall controlled substances. Manufacturers are required to obtain quotas for certain Schedule I and II controlled substances. Also, manufacturers anddistributors must submit periodic reports to the DEA of the distribution of Schedule I and II controlled substances, Schedule III narcotic substances, and otherdesignated substances. All DEA registrants must report any controlled substance thefts or significant losses, and must obtain authorization to destroy ordispose of controlled substances. In addition to maintaining an importer and/or exporter registration, importers and exporters of controlled substances mustobtain a permit for every import or export of a Schedule I or II substance and a narcotic substance in Schedule III, IV and V. For all other drugs in ScheduleIII, IV and V, importers and exporters must submit an import or export declaration. Failure to maintain the appropriate registrations or to obtain sufficientquota or approval for imports and exports could have a material adverse effect on our business. Failure to maintain compliance with applicable requirements,particularly as manifested in the loss or diversion of controlled substances, can result in enforcement action that could have a material adverse effect on ourbusiness, operations and financial condition. The DEA may seek civil penalties, refuse to renew necessary registrations, or initiate proceedings to revokethose registrations. In certain circumstances, violations could lead to criminal prosecution.In May 1992, the Generic Drug Enforcement Act of 1992 (the “Generic Act”) was enacted. The Generic Act, a result of legislative hearings andinvestigations into the generic drug approval process, allows the FDA to impose debarment and other penalties on individuals and companies that commitcertain illegal acts relating to the generic drug approval process. In some situations, the Generic Act requires the FDA not to accept or review, for a period oftime, ANDAs from a company or an individual33that has committed certain violations. It also provides for temporary denial of approval of applications during the investigation of certain violations thatcould lead to debarment and also, in more limited circumstances, provides for the suspension of the marketing of approved drugs by the affected company.Lastly, the Generic Act allows for civil penalties and withdrawal of previously approved applications. To our knowledge, neither we nor any of ouremployees has ever been subject to debarment.Several types of state and federal laws have been applied to prohibit or restrict certain marketing practices in the pharmaceutical industry. These lawsinclude anti-kickback statutes and false claims statutes. The federal healthcare program anti-kickback statute prohibits, among other things, knowingly andwillfully offering, paying, soliciting or receiving remuneration to induce, or in return for; purchasing, leasing, ordering or arranging for the purchase, lease ororder of any healthcare item or service reimbursable under Medicare, Medicaid, or other federally financed healthcare programs. The PPACA, enacted inMarch 2010, amended the intent element of the federal anti-kickback statute so that a person or entity no longer needs to have actual knowledge of thestatute or specific intent to violate it. This statute has been interpreted to apply to arrangements between pharmaceutical manufacturers on the one hand andprescribers, purchasers, and formulary managers on the other. Violations of the anti-kickback statute are punishable by imprisonment, criminal fines, civilmonetary penalties, and/or exclusion from participation in federal healthcare programs. Although there are a number of statutory exemptions and regulatorysafe harbors protecting certain common activities from prosecution or other regulatory sanctions, the exemptions and safe harbors are drawn narrowly, andpractices that involve remuneration intended to induce prescribing, purchases, or recommendations may be subject to scrutiny if they do not qualify for anexemption or safe harbor.The Federal False Claims Act prohibits any person from knowingly presenting, or causing to be presented, a false claim for payment to the federalgovernment, or knowingly making, or causing to be made, a false statement material to a false claim. This includes claims made to programs where thefederal government reimburses, such as Medicaid, as well as programs where the federal government is a direct purchaser, such as when it purchases off theFederal Supply Schedule. Numerous pharmaceutical companies have been sued under this law for allegedly inflating drug prices they report to pricingservices, which in turn were used by the government to set Medicare and Medicaid reimbursement rates. In addition, certain marketing practices, includingoff-label promotion, may also violate the Federal False Claims Act. Additionally, the PPACA amended the federal anti-kickback statute such that a violationof that statute can also serve as a basis for liability under the Federal False Claims Act. The majority of states also have statutes or regulations similar to thefederal anti-kickback law and the Federal False Claims Act, which apply to items and services reimbursed under Medicaid and other state programs, or, inseveral states, apply regardless of the payor.In addition, several states prohibit various marketing-related activities by prescription drug manufacturers, and certain states require drugmanufacturers to report expenses relating to the marketing and promotion of drug products and to report gifts and payments to healthcare practitioners andinstitutions in these states. Moreover, California, Connecticut, Nevada, and Massachusetts require pharmaceutical companies to implement complianceprograms and/or marketing codes. Compliance with these laws is difficult and time consuming, and companies that do not comply with these state laws facecivil penalties.Federal law requires that a pharmaceutical manufacturer, as a condition of having its products receive federal reimbursement under Medicaid andMedicare Part B, must pay rebates to state Medicaid programs for all units of its covered outpatient drugs dispensed to Medicaid beneficiaries and paid for bya state Medicaid program under either a fee-for-service arrangement or through a managed care organization. The rebates are based on prices reported toCMS by manufacturers for their covered outpatient drugs (AMP for generic drugs, and AMP and best price for brand drugs). CMS issued final regulationsregarding the calculation of AMP and rebates under the Medicaid Drug Rebate Program, effective as of April 1, 2016. The terms of participation in theMedicaid Drug Rebate Program impose an obligation to correct the prices reported in previous quarters, as may be necessary. Any such corrections couldresult in additional or lesser rebate liability, depending on the direction of the correction. In addition to retroactive rebates, if a manufacturer were found tohave knowingly submitted false information to the government, federal law provides for civil monetary penalties for failing to provide required information,late submission of required information, and false information.A manufacturer must also participate in a federal program known as the 340B drug pricing program in order for federal funds to be available to pay forthe manufacturer’s drugs under Medicaid and Medicare Part B. Under this program, the participating manufacturer agrees to charge certain safety nethealthcare providers no more than an established discounted price for its covered outpatient drugs. The formula for determining the discounted price isdefined by statute and is based on the AMP and the unit rebate amount as calculated under the Medicaid Drug Rebate Program, discussed above.Federal law also requires that manufacturers report data on a quarterly basis to CMS regarding the pricing of drugs that are separately reimbursableunder Medicare Part B. These are generally drugs, such as injectable products, that are administered “incident to” a physician service and are not generallyself-administered. The pricing information submitted by manufacturers is the basis for reimbursement to physicians and suppliers for drugs covered underMedicare Part B. As with the Medicaid Drug Rebate Program, federal law provides for civil monetary penalties for failing to provide required information,late submission of required information, and false information.34Manufacturers are also required to make their covered drugs, which are generally drugs approved under NDAs or biologics licenseapplications (“BLA”), available to authorized users of the Federal Supply Schedule (“FSS”) of the General Services Administration. The law also requiresmanufacturers to offer discounted FSS contract pricing for purchases of their covered drugs by certain government agencies in order for federal funding to beavailable for reimbursement or purchase of the manufacturer’s drugs under certain federal programs. The discounts are determined based on prices that arecalculated and reported to the government by manufacturers. The accuracy of a manufacturer’s reported prices may be audited by the government. Amongthe remedies available to the government for inaccuracies is recoupment of any overcharges to the government. If a manufacturer were found to haveknowingly reported false prices, in addition to other penalties available to the government, the law provides for civil monetary penalties per incorrect item. It is expected that the PPACA, as well as subsequent legislation, such as the BBA, will have an impact on all segments of the health careindustry. Pharmaceutical and medical device manufacturers may see an increase in revenues by virtue of an additional estimated 30 million Americans whohave or will have access to health insurance beginning in 2014; however, the legislation imposes on manufacturers a variety of additional rebates, discountsand fees that would curtail that increase in revenues. For example, Medicare Part D beneficiaries within the coverage gap receive a manufacturer funded, 50%point-of-sale discount (in 2017) off of negotiated prices for brand drugs (approved via a NDA or BLA). As another example, the PPACA increased theminimum Medicaid rebate rate from 15.1% to 23.1% of AMP for most drugs approved under a NDA, and increased the Medicaid rebate from 11% to 13% ofAMP for drugs approved under an ANDA. In another example, under the BBA, generic drugs approved under an ANDA are subject to an additional Medicaidrebate if the AMP for a given quarter exceeds the inflation-adjusted baseline AMP, effective for the first calendar quarter of 2017. This price increase penaltypreviously applied only to innovator drugs. For generic drugs, the baseline AMP will depend on when the drug was launched. For innovator drugs, thebaseline AMP is the AMP for the first full quarter after launch. Also, annual fees are imposed on each manufacturer and importer of branded prescriptiondrugs or biologics, based on the ratio of its sales reimbursed or purchased by government agencies to such sales made by all drug manufacturers during theprior year, and based on different sales dollar tiers (the highest being over $400 million in brand sales, and the lowest being at least $5 million in brand sales).The PPACA also imposes reporting and regulatory requirements that could increase a company’s regulatory liability. For example, the “sunshine”provisions impose reporting requirements and public disclosure requirements on a drug manufacturer’s payments to physicians and teaching hospitals, andon drug sample distributions. Annual reports are due in March of each year. The data reported under the “sunshine” provisions are posted in searchable formon a public website.In addition, the legislation advances the policy of comparative clinical effectiveness research on medical treatments, services and items, includingdrugs and devices. Taken together, these government-adopted health care reform measures may adversely impact the pricing of healthcare products andservices in the United States and the amount of reimbursement available from governmental agencies or other third-party payors. Government cost controlinitiatives could decrease the price that we or any current or potential collaborators could receive for any of our products and could adversely affect ourprofitability.Environmental ComplianceWe believe that we are currently in compliance with all applicable environmental laws and regulations in all of the countries in which we operate.C. ORGANIZATIONAL STRUCTUREThe legal and commercial name of our company is Taro Pharmaceutical Industries Ltd. We were incorporated under the laws of the State of Israel in1959 under the name Taro-Vit Chemical Industries Ltd. In 1984, we changed our name to Taro Vit Industries Ltd., and in 1994, we changed our name to TaroPharmaceutical Industries Ltd.The following is a list of our significant subsidiaries and their countries of incorporation as of March 31, 2017: Name of Subsidiary Country of IncorporationTaro Pharmaceuticals U.S.A., Inc. United StatesTaro Pharmaceuticals Inc. CanadaTaro Pharmaceuticals North America, Inc. Cayman IslandsTaro Pharmaceuticals Europe B.V. NetherlandsTaro International Ltd. Israel The share capital of Taro U.S.A. is divided into two classes. The Company owns 96.9% of the shares that have economic rights and 50% of the sharesthat have voting rights in Taro U.S.A. TDC owns 3.1% of the shares that have economic rights and 50% of the35shares that have voting rights in Taro U.S.A. TDC has agreed to vote all of its shares in Taro U.S.A. for such persons as we may designate for any election toits board of directors; however, TDC may terminate the agreement upon one year’s written notice.The Company owns 100% of the shares of Taro International Ltd. and 100% of Taro Pharmaceuticals North America, Inc., which owns 100% of TaroCanada. The Company owns 99.75% of Taro Pharmaceuticals Europe B.V. and Taro Pharmaceuticals North America, Inc. owns the remaining 0.25%.Sun beneficially owns 81.9% of the voting power of the Company as of March 31, 2017.D. PROPERTY, PLANT AND EQUIPMENTThe following is a list of our principal facilities as of March 31, 2017: Square Location Footage Main Use Own/LeaseHaifa Bay, Israel 881,000 Pharmaceutical manufacturing,production and research laboratories, officesand chemical production(including tank farm and chemicalfinishing plant) Long-term Lease/Own(1)Haifa Bay, Israel 31,000 Warehousing LeaseBrampton, Canada 159,000 Pharmaceutical manufacturing,production and research laboratories, administration, distribution,and warehousing OwnBrampton, Canada 89,000 Administration and warehousing LeaseHawthorne, New York 124,000 Administrative offices OwnCranbury, New Jersey 315,000 Distribution facility OwnRoscrea, Ireland 124,000 Pharmaceutical manufacturingand warehousing Own (2) (1)The land housing the majority of our manufacturing, production laboratories and research facilities, as described above is held by the Company undera long-term lease from the Israeli Land Authority (“ILA”). As of March 31, 2017, the Company received approval from the ILA for the change ofcontrol to the Company of a portion of the plot of land subject to the long-term lease, and is awaiting approval for a change of control of the remainderof the land. The buildings and the vast majority of the equipment on this land are owned by the Company.(2)The Irish facility is a discontinued operation and is held for sale.From April 1, 2014 through March 31, 2017, we invested $74.8 million in property, plant and equipment (“PP&E”). Most of these projects have beencompleted and are subject to depreciation in accordance with our accounting policy of capitalizing costs that are direct and incremental to the activitiesrequired to bring the facilities to commercial production.Our manufacturing plant, research and office facilities in Haifa Bay, Israel, are located in a complex of buildings with an aggregate area of 871,000square feet. We lease much of the land underlying these facilities from the ILA pursuant to long-term ground leases that expire between 2018 and 2060. TheCompany has the right to extend the lease agreement ending 2018 for an additional period of 49 years. In February 2014, we purchased approximately10,000 square feet of adjacent space in Haifa Bay, which we had previously been leasing under a lease agreement that commenced in September 1994. Foradditional information, please refer to Note 2.i. and 2.j. to our consolidated financial statements included elsewhere in this 2017 Annual Report.We have owned our main manufacturing facility in Brampton, Canada since 1992. Since then, we have purchased additional adjacent square footageand engaged in projects to develop and expand the facility to meet our growing manufacturing needs in Taro Canada. As of March 31, 2017, we owned atotal of 159,000 square feet at our main manufacturing facility. In addition to our owned space, since September 2000, Taro Canada has leased 75,000 squarefeet of office and warehouse space, adjacent to our main manufacturing facilities, which lease term continues to September 2020. In December 2013, TaroCanada leased an additional 14,000 square feet of warehouse space near the two other facilities, which lease term continues to December 2021.A subsidiary of Taro U.S.A. has owned its 124,000 square foot building in Hawthorne, New York since February 2005. The mortgage was repaid onthis building in December 2015.36A subsidiary of Taro U.S.A. owns a 315,000 square foot distribution facility in Cranbury, New Jersey. The mortgage was repaid on this facility inFebruary 2012.In the pharmaceutical industry, both manufacturing plants and equipment must be constructed and installed in accordance with regulations designedto meet stringent quality and sterility guidelines, among others. In order to meet these requirements, certain validation processes are required to becompleted prior to commencing commercial production.Design qualification (“DQ”), installation qualification (“IQ”), operational qualification (“OQ”), performance qualification (“PQ”) and validation arethe steps required by cGMPs to bring plants and/or equipment to the status of their intended use. In the performance of these activities, the Company usesboth internal and external resources. The Company capitalizes external costs and those internal costs that are direct and incremental to the activities requiredto bring the facilities and activities to commercial production.In the pharmaceutical industry, project life cycles (e.g., the construction of a new manufacturing facility) are typically longer than those in otherindustries. Such projects are technically complicated due to the highly regulated nature of the industry and the necessity of complying with specific detaileddemands of regulatory authorities such as the FDA.Certain internal resources utilized in bringing these facilities to the status required for their intended use are completely dedicated to theseprojects. The costs of personnel involved in such a process are capitalized only to the extent that they are directly dedicated to the completion of thefacilities.As described below, the nature of the activities performed by the employees whose salaries were capitalized include only the work and the direct costsassociated with the factory acceptance test (“FAT”), the installation of equipment and the qualification and testing of the equipment prior to its commercialuse.The typical stages for defining the beginning and the completion of such construction projects include: planning and design of the facilities;construction; purchase, transportation and installation of equipment; equipment and facility validation (run in tests); and process and product validation.All new equipment must undergo DQ, IQ, OQ and PQ in order to test and verify, according to written protocols, that all aspects of the equipment meetpre-determined specifications. IQ is defined as the documented evidence that the equipment has been installed according to the approved drawings andspecifications. OQ is the documented evidence that all aspects of the equipment and the facility operate as intended within pre-determined ranges, accordingto the operational specifications. PQ is defined as the documented evidence that all aspects of the facility, utility or equipment that can affect productquality perform as intended in the pre-determined acceptance criteria.Such qualification and validation activities are required for all equipment and systems that have an impact on or affect product quality and arerequired prior to commencing commercial production. At the time of installation and validation, all employees who will operate and maintain the equipmentfrom the engineering, technology and maintenance departments are appropriately trained. At this stage in the installation and validation process, expertsfrom the equipment manufacturer are on site, as part of the purchase contract, to provide training to Company employees in the operation and maintenance ofthe equipment.This phase, which is necessary to bring the asset to the condition required for its intended use, is handled by a multi-functional team of engineers andtechnologists. The direct costs are the direct labor and the material consumed during this stage of installation and validation such as bottles, ampoules andraw materials. Incremental costs, which have arisen in direct response to the additional activity, include the expenses directly attributable to any employee’stime fully dedicated to the project in question. After the equipment has passed all DQ, IQ, OQ and PQ tests, it is then tested for its ability to actuallymanufacture the specific products that are intended to be produced on the equipment. Three consecutive successful validation batches must beproduced. This process is performed jointly by the technology and the manufacturing departments. In addition, the cleaning of the equipment must bevalidated to assure that there is no carry-over residue to the next product to be manufactured using the equipment. Only after the validation batches that aremanufactured using the new equipment pass quality control and quality assurance tests can they be released for sale, completing the validation process. Nofurther costs are capitalized. This process is performed for all products.During the installation process, materials from inventory are consumed. For example, in order to qualify a tablet press machine or an ampoule fillingmachine, we use raw materials, including APIs and excipients, to run the qualification test. As part of this test, actual tablets are manufactured and costs areincurred. These tablets may neither be distributed nor sold. These qualification procedures are part of cGMPs mandated by the FDA and its internationalcounterparts. The amount of inventory capitalized as part of these projects is less than one percent of the total cost of the assets. We do not capitalize, as partof the asset cost, inventories that are routinely produced in commercial quantities on a repetitive basis.37ITEM 4A.UNRESOLVED STAFF COMMENTSNone. ITEM 5.OPERATING AND FINANCIAL REVIEW AND PROSPECTSA. OPERATING RESULTSThe following discussion should be read in conjunction with our consolidated financial statements and related notes for the years ended March 31,2017, 2016 and 2015, which are included elsewhere in this 2017 Annual Report.OVERVIEWWe are a multinational, science-based pharmaceutical company. We develop, manufacture and market Rx and OTC pharmaceutical products,primarily in the United States, Canada and Israel. We also develop and manufacture APIs primarily for use in our finished dosage form products. Our primaryareas of focus include topical creams and ointments, liquids, capsules and tablets. We operate principally through three entities: Taro Israel and two of itssubsidiaries, Taro Canada and Taro U.S.A.The pharmaceutical industry is affected by demographic and socioeconomic trends, such as aging populations and increased demand forpharmaceuticals, as well as broad economic trends, resulting in a corresponding increase in healthcare costs, effects on reimbursement pricing, and spendingdecisions of healthcare organizations, all of which lead to increased recognition of the importance of generics as providing access to affordablepharmaceuticals. We believe our business model is appropriately structured to take advantage of these trends. The following is a breakdown of net sales by geographic region, including the percentage of our total consolidated net sales for each period: Year ended March 31, 2017 2016 2015 Sales % of total Sales % of total Sales % of total (in thousands) net sales (in thousands) net sales (in thousands) net sales United States $785,319 89% $865,224 91% $777,191 90%Canada 57,621 7% 56,605 6% 55,452 6%Israel 29,200 3% 22,963 2% 22,157 3%Other 7,247 1% 5,959 1% 8,144 1%Total $879,387 100% $950,751 100% $862,944 100% We generate most of our revenue from the sale of Rx and OTC pharmaceutical products. Portions of our OTC products are sold as private labelproducts primarily to chain drug stores, food stores, drug wholesalers, drug distributors and mass merchandisers in the United States. Three customers in theUnited States accounted for the following proportion of our total consolidated net sales: Year ended March 31, 2017 2016 2015 Customer Sales(in millions) % of totalnet sales Sales(in millions) % of totalnet sales Sales(in millions) % of totalnet sales Customer A $169.3 19.3% $190.4 20.0% $155.3 18.0%Customer B $125.0 14.2% $134.0 14.1% $88.8 10.3%Customer C $90.7 10.3% $133.6 14.0% $121.7 14.1% Due to increased competition from other generic pharmaceutical manufacturers as they gain regulatory approvals to market generic products, sellingprices and related profit margins tend to decrease as products mature. Thus, our future operating results are dependent on, among other factors, our ability tointroduce new products. In addition, our operating results are dependent on the impact of pricing pressures on existing products. These pricing pressures areinherent in the generic pharmaceutical industry.38For the years ended March 31, 2017 and 2015, no product comprised 10% of our total consolidated sales. The percentage of net sales for products ona consolidated basis greater than 10% of our total consolidated sales in 2016 are: Year ended March 31,Product 2017 2016 2015Clobetasol * 10.7% * *Less than 10%Our sales are subject to market conditions and other factors. We are therefore unable to predict the extent, if any, to which the relative contribution toour total revenue of this product line as well as other product lines may increase or decrease in the future.Cost of goods sold consists of direct costs and allocated costs. Direct costs consist of raw materials, packaging materials, royalties, and direct laboridentified with a specific product. Allocated costs are costs not associated with a specific product.Certain customary industry selling practices affect our level of working capital; for example, industry practice requires that pharmaceutical productsbe made available to customers on demand from existing stock levels rather than on a made-to-order basis. Therefore, in order to accommodate marketdemand, we try to maintain adequate levels of inventories. Increased demand for existing products and preparation for new product launches, the exacttiming of which cannot be determined accurately, have generally resulted in higher levels of inventory. However, anticipated growth in sales of anyindividual product, or of all products, may not materialize. Consequently, inventories prepared for these sales may become obsolete and have to be writtenoff.Another industry practice causes us to provide our customers with limited rights to return products, receive rebates, assert chargebacks and take otherdeductions with respect to sales that we make to them. See Item 5.A—“Critical Accounting Policies—Allowance for Sales Deductions and ProductReturns.” The exercise of these rights by customers to whom we have granted them has an impact, which may be substantial, upon our working capital.We continuously monitor our aged receivables and our customers’ creditworthiness. We also engage in active and intensive collection efforts asnecessary.CRITICAL ACCOUNTING POLICIESOur significant accounting policies are described in Note 2 to our consolidated financial statements, which are prepared in conformity with U.S.GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities,revenues and expenses. We evaluate, on an ongoing basis, our estimates, including those related to bad debts, income taxes and contingencies. We base ourestimates on currently available information, our historical experience and various other assumptions that we believe to be reasonable under thecircumstances. The results of these assumptions are the basis for determining the carrying values of assets and liabilities that are not readily apparent fromother sources. Since the factors underlying these assumptions are subject to change over time, the estimates on which they are based are subject to changeaccordingly.The following is a summary of certain policies that have a critical impact upon our financial statements and, we believe, are most important to keep inmind in assessing our financial condition and operating results.Use of Estimates. In preparing the consolidated financial statements, we use certain estimates and assumptions that affect reported amounts anddisclosures. These estimates and underlying assumptions can impact all elements of our financial statements. We use estimates when accounting for productreturns and sales deductions from revenues, determining the valuation and recoverability of assets (for example: accounts receivables, inventories, andintangible assets), and the reported amounts of accrued liabilities. We regularly evaluate our estimates and assumptions, using historical experience, third-party data, and market and external factors. Our estimates are often based on complex judgments, probabilities and assumptions that we believe to bereasonable but that are inherently uncertain and unpredictable. As future events and their effects cannot be determined with precision, our estimates andassumptions may prove to be incomplete or inaccurate, or unanticipated events and circumstances may occur that might cause us to change those estimatesand assumptions. We adjust our estimates and assumptions when facts and circumstances indicate the need for change. It is possible that other professionals,applying reasonable judgment to the same facts and circumstances, could develop and support a range of alternative estimated amounts.Revenue Recognition. We sell our products directly to wholesalers, retail drug store chains, mass merchandisers, grocery chains and other directpurchasers and customers that acquire our products indirectly through wholesalers.39We generally recognize revenue from product sales when title and risk of loss have transferred to our customers and when the criteria in the FinancialAccounting Standards Board (the “FASB”) Accounting Standards Codification (“ASC”), Subtopic 605-15, “Revenue Recognition—Products” have beensatisfied. Those criteria generally require that (i) persuasive evidence of an arrangement exists; (ii) product delivery has occurred; (iii) our price to ourcustomers is fixed or determinable; (iv) collectability is reasonably assured; and (v) the amount of product returns, chargebacks, rebates and other salesdeductions can be reasonably estimated. We ship products to our customers only in response to, and to the extent of, the orders that customers submit tous. Depending on the terms of our customer arrangements, revenue is generally recognized when the product is received by the customer (“FOB DestinationPoint”) or at the time of shipment (“FOB Shipping Point”).Allowance for Sales Deductions and Product Returns. When we recognize and record revenue from the sale of our pharmaceutical products, werecord an estimate in the same financial reporting period for product returns, chargebacks, rebates and other sales deductions, which are reflected asreductions of the related gross revenue. We regularly monitor customer inventory information at our three largest wholesale customers to assess whether anyexcess product inventory levels may exist. We review this information along with historical product and customer experience, third-party prescription data,industry and regulatory changes and other relevant information and revise our estimates as necessary.Our estimates of inventory in the distribution channel are based on inventory information reported to us by our major wholesale customers, historicalshipment and return information from our accounting records and third-party data on prescriptions filled. Our estimates are subject to inherent limitationspertaining to reliance on third-party information.Product returns. Consistent with industry practice, we generally offer our customers the right to return inventory within three to six months prior toproduct expiration and up to 12 months thereafter (the “return period”). Product returns are identified by their manufacturing lot number. Because wemanufacture in bulk, lot sizes are generally large and, therefore, shipments of a particular lot may occur over a one-to-three month period. As a result,although we cannot associate a product return with the actual shipment in which such lot was included, we can reasonably estimate the period (in months)over which the entire lot was shipped and sold. We use this information to estimate the average time period between lot shipment (and sale) and return foreach product, which we refer to as the “return lag.” The shelf life of most of our products ranges between 18-36 months. Because returns of expired productsare heavily concentrated during the return period, and given our historical data, we are able to reasonably estimate return lags for each of our products. Thesereturn lags are periodically reviewed and updated, as necessary, to reflect our best knowledge of facts and circumstances. Using sales and return data(including return lags), we determine a rolling average monthly return rate to estimate our return reserves. We supplement this calculation with additionalinformation including customer and product specific channel inventory levels, competitive developments, external market factors, our planned introductionsof similar new products and other qualitative factors in evaluating the reasonableness of our return reserve. We continuously monitor factors that could affectour estimates and revise the reserves as necessary. Our estimates of expected future returns are subject to change based on unforeseen events anduncertainties.We monitor the levels of inventory in our distribution channels to assess the adequacy of our product returns reserve and to identify potential excessinventory on hand that could have an impact on our revenue recognition. We do not ship product to our wholesalers when it appears that they have anexcess of inventory on hand, based on demand and other relevant factors, for that particular product. Additionally, as a general practice, we do not shipproducts that have less than 12 months until expiration (i.e., “short-dated sales”).Chargebacks. We have arrangements with certain customers that allow them to buy our products directly from wholesalers at specificprices. Typically these price arrangements are lower than the wholesalers’ acquisition costs or invoice prices. In exchange for servicing these third partycontracts, our wholesalers can submit a “chargeback” claim to us for the difference between the price sold to the third-party and the price at which itpurchased the product from us. We generally pay chargebacks on generic products, whereas branded products are typically not eligible for chargebackclaims. We consider many factors in establishing our chargeback reserves including inventory information from our largest wholesale customers and thecompleteness of their reports, estimates of Taro inventory held by smaller wholesalers and distributors, processing time lags, contract and non-contract salestrends, average historical contract pricing, actual price changes, actual chargeback claims received from the wholesalers, Taro sales to the wholesalers andother relevant factors. Our chargeback provision and related reserve varies with changes in product mix, changes in pricing, and changes in estimatedwholesaler inventory. We review the methodology utilized in estimating the reserve for chargebacks in connection with analyzing our product return reserveeach quarter and make revisions as considered necessary to reasonably estimate our potential future obligation.Rebates and other deductions. We offer our customers various rebates and other deductions based primarily on their volume of purchases of ourproducts. Chain wholesaler rebates are rebates that certain chain customers claim for the difference in price between what the chain customer paid awholesaler for a product purchase and what the chain customer would have paid if such customer had purchased the same product directly from us. Cashdiscounts, which are offered to our customers, are generally 2% of the gross sales price, and provide our customers an incentive for paying within a specifiedtime period after receipt of invoice. Medicaid rebates are40earned by states based on the amount of our products dispensed under the Medicaid plan. Billbacks are special promotions or discounts provided over aspecific time period to a defined customer base, and for a defined product group. Distribution allowances are a fixed percentage of gross purchases forinventory shipped to a national distribution facility that we pay to our top wholesalers on a monthly basis. Administration fees are paid to certainwholesalers, buying groups, and other customers for stocking our products and managing contracts and servicing other customers. Shelf stock adjustments,which are customary in the generic pharmaceutical industry, are based on customers’ existing levels of inventory and the decrease in the market price of therelated product. When market prices for our products decline, we may, depending on our contractual arrangements, elect to provide shelf-stock adjustmentsand thereby allow our customers with existing inventories to compete at the lower product price. We use these shelf-stock adjustments to support our marketposition and to promote customer loyalty.The Company establishes reserves for rebates and these other various sales deductions based on contractual terms and customer purchasing activity,tracking and analysis of rebate programs, processing time lags, the level of inventory in the distribution channel and other relevant information. Based onour historical experience, substantially all claims for rebates and other sales deductions are received within 24 months.Three-year summaryThe following tables summarize the activities for sales deductions and product returns for the years ended March 31, 2017, 2016 and 2015: For the year ended March 31, 2017 (in thousands) Beginningbalance Provisionrecordedfor currentperiod sales (1) Creditsprocessed/Payments Endingbalance Accounts Receivable Reserves Chargebacks $(126,729) $(1,153,406) $1,168,064 $(112,071)Rebates and Other (164,670) (522,791) 494,206 (193,255)Total $(291,399) $(1,676,197) $1,662,270 $(305,326) Current Liabilities Returns $(93,920) $(41,871) $53,297 $(82,494)Other (2) (60,428) (79,372) 96,430 (43,370)Total $(154,348) $(121,243) $149,727 $(125,864) For the year ended March 31, 2016 (in thousands) Beginningbalance Provisionrecordedfor currentperiod sales (1) Creditsprocessed/Payments Endingbalance Accounts Receivable Reserves Chargebacks $(64,119) $(1,032,248) $969,638 $(126,729)Rebates and Other (173,228) (439,654) 448,212 (164,670)Total $(237,347) $(1,471,902) $1,417,850 $(291,399) Current Liabilities Returns $(109,765) $(25,228) $41,073 $(93,920)Other (2) (55,317) (100,570) 95,459 (60,428)Total $(165,082) $(125,798) $136,532 $(154,348) 41For the year ended March 31, 2015 (in thousands) Beginningbalance Provisionrecordedfor currentperiod sales Creditsprocessed/Payments Endingbalance Accounts Receivable Reserves Chargebacks $(46,919) $(772,584) $755,384 $(64,119)Rebates and Other (136,449) (443,797) 407,018 (173,228)Total $(183,368) $(1,216,381) $1,162,402 $(237,347) Current Liabilities Returns $(64,144) $(85,990) $40,369 $(109,765)Other (2) (43,186) (73,768) 61,637 (55,317)Total $(107,330) $(159,758) $102,006 $(165,082) (1)Includes immaterial amounts of reversals of provisions recorded for prior years’ sales.(2)Includes indirect rebates and amounts due to customers.Chargebacks at March 31, 2017, decreased approximately $14.7 million compared to March 31, 2016. This decrease is primarily attributable tocontinuing pricing pressure during the year.Inventory. Inventories are stated at the lower of cost or market. Cost is determined as follows: raw and packaging materials mainly on a weighted-average cost basis; finished goods products and products still in process, mainly on a weighted-average production cost including direct and indirect, oroverhead, manufacturing expenses. Our finished goods inventories generally have a limited shelf life and are subject to obsolescence as they approach theirexpiration dates. As a result, we record a reserve against our entire finished goods inventory with expiration dates of less than 12 months and use historicalexperience to estimate the reserve for products with expiration dates of more than 12 months from the balance sheet date. When available, we use actual datato validate our estimates. We regularly evaluate our policies and the carrying value of our inventories and establish a reserve against the carrying value ofour inventories. The determination that a valuation reserve is required, as well as the appropriate level of such reserve, requires us to utilize significantjudgment. Although we make every effort to ensure the accuracy and reasonableness of our forecasts of future demand for our products, any significantunanticipated decreases in demand, or unanticipated changes in our major customer inventory management policies, could have a material impact on thecarrying value of our inventories and reported operating results.Valuation of Long-Lived Assets and Goodwill. We evaluate our long-lived assets for impairment and perform annual impairment testing for goodwilland other indefinite-lived intangible assets and other long-lived assets at the year-end, on March 31, when impairment indicators exist. Impairments arerecorded for the excess of a long-lived asset’s carrying value over fair value. Some examples of impairment indicators are as follows: •Changes in legal or business climate that could affect an asset’s value. For example, a failure to gain regulatory approval for a product or theextension of an existing patent that prevents our ability to produce a generic equivalent. •Changes in our ability to continue using an asset. For example, restrictions imposed by the FDA could reduce our production and salesvolume. •Decreases in the pricing of our products. For example, consolidation among our wholesale and retail customers could place downward pressureon the prices of some of our products.We estimate the fair value of our long-lived assets other than goodwill, such as product rights, using a discounted cash flow analysis or marketapproach where appropriate when required under applicable U.S. GAAP. Under the discounted cash flow method, we estimate cash flows based on ourforecasts and discount these cash flows using the appropriate rate to determine the net present value of the asset. The net present value of our assets isaffected by several estimates, such as: •The timing and amount of forecasted cash flows •Discount rates •Tax rates •Regulatory actions •Amount of competition42 •Manufacturing efficiencies •The number and size of our customersFor the years ended March 31, 2017, 2016 and 2015, the Company recorded $0, $2, and $0 million impairment charges, respectively, primarily relatedto certain intellectual property as the Company is no longer selling a certain product.We estimate the fair value of goodwill using a two-step procedure. First, we compare the market value of our equity to the carrying value of ourequity. If the carrying value exceeds the market value of our equity, we calculate the implied fair value of our goodwill by taking the excess of our marketcapitalization over the fair value of our assets other than goodwill and obligations. An impairment is recorded for the difference between the implied fairvalue and carrying value of goodwill. The implied fair value of goodwill and any potential impairment is sensitive to estimates of the fair value of otherassets and liabilities. We have not recorded any impairments of goodwill for the years ended March 31, 2017, 2016 and 2015.Income Taxes. We determine deferred taxes by utilizing the asset and liability method based on the estimated future tax effects of differences betweenthe financial accounting and tax basis of assets and liabilities under the applicable tax laws. Deferred taxes are measured using the enacted tax rates and lawsthat will be in effect when the differences are expected to reverse. As of March 31, 2017, 2016 and 2015, Management determined that it was more likelythan not that we will not benefit from the deferred tax assets in Ireland and certain other subsidiaries. Therefore, for these locations a full valuation allowancewas provided against the deferred tax assets. In future years, if it is more likely than not that we will be in a position to utilize its deferred tax asset, thevaluation allowance for such assets may be modified.Discontinued Operations. Under ASC Subtopic 205-20, “Presentation of Financial Statements—Discontinued Operations,” when a component of anentity has been disposed of or classified as held for sale, the results of its operations, including the gain or loss on the disclosed component, should beclassified as discontinued operations and the assets and liabilities of such component should be classified as assets and liabilities attributed to discontinuedoperations; that is, provided that the operations, assets and liabilities of the component have been eliminated from the entity’s consolidated operations andthe entity will no longer have any significant continuing involvement in the operations of the component.Recent Accounting Pronouncements that may have an impact on future consolidated financial statements.In January 2017, the FASB issued ASU No.2017-04, “Intangibles—Goodwill and Other (Topic 350).” The new guidance reduces the complexity ofgoodwill impairment tests by no longer requiring entities to determine goodwill impairment by calculating the implied fair value of goodwill by assigningthe fair value of a reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination. The guidance will beeffective for the fiscal year beginning on January 1, 2020, including interim periods within that year (early adoption is permitted). We are currentlyevaluating the potential effect of the adoption of ASU 2017-04 on our financial position and results of operations.In August 2016, the FASB issued ASU No.2016-15, “Statement of Cash Flows (Topic 230).” The guidance addresses eight specific issues: debtprepayment or debt extinguishment costs; settlement of certain debt instruments; contingent consideration payments made after a business combination;proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance policies; distributions received from equitymethod investees; beneficial interest in securitization transactions; separately identifiable cash flows and application of predominance principle. Theguidance will be effective for the fiscal year beginning on January 1, 2018, including interim periods within that year (early adoption is permitted). We arecurrently evaluating the potential effect of the adoption of ASU 2016-15 on our financial position and results of operations.In June 2016, the FASB issued ASU No.2016-13, “Financial Instruments—Credit Losses (Topic 326).” The guidance replaces the current incurredloss impairment methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable andsupportable information to inform credit loss estimates. The guidance will be effective for the fiscal year beginning on January 1, 2020, including interimperiods within that year. We are currently evaluating the potential effect of the adoption of ASU 2016-13 on our financial position and results of operations.In February 2016, the FASB issued ASU No.2016-02, “Leases (Topic 842).” The new guidance requires that the lessee recognize the assets andliabilities that arise from leases. The guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscalyears (early adoption is permitted). The adoption of ASU 2016-02 is not expected to have a material impact on our financial position or results of operations.In January 2016, the FASB issued ASU No.2016-01, "Financial Instruments-Overall (Subtopic 825-10).” The amended guidance focuses on therecognition and measurement of financial assets and liabilities. The guidance is effective for fiscal years43beginning after December 15, 2017, including interim periods within those fiscal years. The adoption of ASU 2016-01 is not expected to have a materialimpact on our financial position or results of operations.In November 2015, FASB issued ASU No.2015-17, “Income Taxes (Topic 740).” The amended guidance requires entities to present all deferred taxassets and liabilities, along with any related valuation allowance, as non-current on the balance sheet. The guidance is effective for interim and annualperiods beginning after December 15, 2016 (early adoption is permitted). The adoption of ASU 2015-17 is not expected to have a material impact on theCompany’s financial position or results of operations.In July 2015, the FASB issued ASU No.2015-11, “Inventory (Topic 330).” The amended guidance requires inventory to be measured at the lower ofcost and net realizable value instead of at lower of cost or market. This guidance does not apply to inventory that is measured using last-in, first out (LIFO) orthe retail inventory method but applies to all other inventory including those measured using first-in, first-out (FIFO) or the average cost method. Theauthoritative guidance will be effective in the first quarter of fiscal 2018 and should be applied prospectively. Early adoption is permitted as of thebeginning of an interim or annual reporting period. We are currently evaluating the potential effect of the adoption of ASU 2015-11 on our financialposition and results of operations.In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606), Section A—Summary and Amendments thatCreate Revenue from Contracts with Customers (Topic 606) and Other Assets and Deferred Costs—Contracts with Customers (Subtopic 340-40).” Theamended guidance will enhance the comparability of revenue recognition practices and will be applied to all contracts with customers. Improved disclosuresrelated to the nature, amount, timing, and uncertainty of revenue that is recognized are requirements under the amended guidance. The guidance is effectivefor the interim and annual periods beginning on or after December 15, 2017 (early adoption is permitted for the interim and annual periods beginning on orafter December 15, 2016), as a result of the FASB announcing a one year deferral. Either a full retrospective method or modified retrospective method ispermitted. We continue to monitor any clarifications and modifications made by the FASB. The Company will adopt the new revenue standard effectiveApril 1, 2018, and is currently evaluating the use of the modified retrospective method and its potential effect of the adoption on our financial position andresults of operations. RESULTS OF OPERATIONSThe following table sets forth selected items from our consolidated statements of operations as a percentage of total sales: For the year ended March 31, 2017 2016 2015 Consolidated Statements of Operations Sales, net 100.0% 100.0% 100.0%Cost of sales 23.7% 17.9% 21.6%Impairment * 0.2% * Gross profit 76.3% 81.9% 78.4%Operating expenses: Research and development 8.0% 7.5% 7.6%Selling, marketing, general and administrative 9.7% 9.7% 10.2%Settlements and loss contingencies * 0.1% (0.5%)Total operating expenses 17.7% 17.3% 17.3%Operating income 58.6% 64.6% 61.1%Financial income, net (3.9%) (2.1%) (5.9%)Other gain, net 1.3% 0.3% 0.4%Income before income taxes 63.8% 67.0% 67.4%Tax expense 11.8% 10.0% 11.1%Income from continuing operations 52.0% 57.0% 56.3%Net loss from discontinued operations attributable to Taro * * (0.1%)Net income 52.0% 57.0% 56.2%Net income attributable to non-controlling interest * * 0.1%Net income attributable to Taro 52.0% 57.0% 56.1% *Less than 0.05%44YEAR ENDED MARCH 31, 2017 COMPARED WITH YEAR ENDED MARCH 31, 2016Sales. For the year ended March 31, 2017, sales decreased $71.4 million, or 7.5%, compared to the same period in 2016. Sales in the United Statesduring the year ended March 31, 2017 decreased $79.9 million or 9.2%, compared to the same period in 2016. We continue to experience a difficult genericpricing environment, particularly in the U.S., driven by more intense competition among manufacturers, new entrants to the market, buying consortiumpressures, and a higher ANDA approval rate from the FDA. There are no products in the year ended March 31, 2017, that represent more than 10.0% ofconsolidated net sales; while Clobetasol represented 10.7% in 2016. The Company actively manages its product portfolio to assess pricing relative to marketdynamics. Sales in Israel and other international markets increased $7.5 million, or 26.0%, primarily due to increased volumes on certain products. Sales inCanada increased $1.0 million, or 1.8%, compared to the year ended March 31, 2016, due to increased market share on certain products. Total Companyvolumes increased 2% as compared to 2016 on the strength of our generic business.Cost of Sales. Cost of sales, as a percentage of net sales, increased to 23.7% in the year ended March 31, 2017, compared to 17.9% in 2016. Thisincrease is primarily related to increased sales volumes of 2% compared to prior year, in addition to the challenging pricing environment effecting net sellingprice, product mix and increased royalties. Gross Profit. The Company’s gross profit was $671.3 million, or 76.3% of net sales, in the year ended March 31, 2017, while gross profit was $779.0million, or 81.9% of net sales in the same period in 2016. The decrease in 2017 was primarily the result of increased competition and the challenging pricingenvironment, as noted above.Research and Development. Research and development (“R&D”) expenses decreased $0.5 million in the year ended March 31, 2017, compared to theprevious year. The decrease in R&D expenses was primarily the result of lower clinical study expenses. As a percentage of net sales R&D expenses increased0.5% to 8.0% in the year ended March 31, 2017, compared to the previous year.Selling, Marketing, General and Administrative. In the year ended March 31, 2017, selling, marketing, general and administrative (“SMG&A”)expenses decreased $6.7 million primarily as a result of reduced Keveyis® spend and certain other savings. As a percentage of net sales, SMG&A remainedflat at 9.7%.Settlements and Loss Contingencies. Settlements and loss contingencies expense was $0 million in the year ended March 31, 2017, compared to anexpense of $1.0 million in 2016 primarily due to the Utah AWP settlement.Operating Income. In the year ended March 31, 2017, the Company had operating income of $515.0 million compared to $614.5 million in the sameperiod in 2016, a decrease of $99.5 million. This decrease is primarily attributed to the decrease in gross profit, which is partially offset by lower SMG&Aexpenses. Operating income, as a percentage of sales, decreased to 58.6% in the year ended March 31, 2017 from 64.6% in the same period in 2016.Financial Income, Net. Financial income, net results principally from interest income and the impact of foreign currency exchange rate fluctuations. Net financial income was $34.6 million in the year ended March 31, 2017, compared to $19.7 million for the year ended March 31, 2016, an increase of$15.0 million, or 76.1%. The change in financial income, net from 2016 to 2017 reflects the favorable impact of the change in foreign currency exchangerates related primarily to the cash and cash equivalents, short-term bank deposits and intercompany balances in Canada. This is principally driven by thestrengthening of the U.S. dollar compared to the Canadian dollar at a slightly lower rate compared to the prior year.Taxes. Tax expense in the year ended March 31, 2017 was $103.8 million, compared to $95.3 million in the same period in 2016, an increase of$8.5 million. The effective tax rate increased 3.5% mainly due to the recognition of $36.0 million of tax loss carry-forwards and investment tax creditsresulting from the acquisition of Zalicus in 2016. As of March 31, 2017, we had carryforward tax losses of $11.1 million in the United Kingdom, $18.6million in Canada, and $67.2 million in Ireland. Please refer to Item 8.a. for information relating to Israel carryforward tax losses. Net Income attributable to Taro. Net income decreased $84.6 million to $456.4 million for the year ended March 31, 2017, from $540.9 million inthe prior year, by reason of the factors noted above.YEAR ENDED MARCH 31, 2016 COMPARED WITH YEAR ENDED MARCH 31, 2015Sales. For the year ended March 31, 2016, sales increased $87.8 million, or 10.2%, compared to the same period in 2015. Sales in the United Statesduring the year ended March 31, 2016 increased $88.0 million or 11.3%, compared to the same period in 2015, primarily due to the full year impact of prioryear price adjustments and increased market share of select products. Certain of the price adjustments were due to limited market availability of therespective products in the market. These pricing actions existed given these products were, and continue to be, high quality and cost effective to patientscompared to a number of alternative treatment options available in the market. In general, as competition on any specific product increases, our pricing maynot be sustainable and sales45volumes may decline. Approximately $77.1 million of the increase relates to price adjustments on four Rx generic products, which representedapproximately 21% of consolidated net sales for the year ended March 31, 2016 and 14% in 2015. Clobetasol, represents approximately 10.7% ofconsolidated net sales in 2016, and was less than 10% for 2015. There were no additional products that represented more than 10.0% of consolidated netsales for the year ended March 31, 2016. The Company actively manages its product portfolio to assess pricing relative to market dynamics. Sales in Israel and other international markets decreased $1.4 million, or 4.6%, primarily due to decreased volumes on select products. Sales inCanada increased $1.2 million, or 2.1%, compared to the year ended March 31, 2015, due to increased market share on select products.Cost of Sales. Cost of sales, as a percentage of net sales, decreased to 17.9% in the year ended March 31, 2016, compared to 21.6% in 2015. Thisdecrease is primarily related to the full year impact of prior year price adjustments noted above, which had no impact on costs.Gross Profit. The Company’s gross profit was $779.0 million, or 81.9% of net sales, in the year ended March 31, 2016, while gross profit was $676.6million, or 78.4% of net sales in the same period in 2015. The increase in 2016 was primarily the result of the full year impact of prior year price adjustmentson select products, as noted above.Research and Development. R&D expenses increased $5.7 million, or 8.6%, in the year ended March 31, 2016 compared to the previous year. Theincrease in R&D expenses was primarily the result of an increase in clinical studies related to development of generic products.Selling, Marketing, General and Administrative. In the year ended March 31, 2016, selling, marketing, general and administrative (“SMG&A”)expenses increased $4.7 million primarily as a result of increased advertising and promotion. As a percentage of net sales, SMG&A decreased to 9.7% from10.2% in 2015.Settlements and Loss Contingencies. Settlements and loss contingencies expense was $1.0 million in the year ended March 31, 2016, related to theUtah AWP settlement, compared to a $4.2 million credit in 2015, the net result of which resulted in the reversal of a portion of the associated reserve.Operating Income. In the year ended March 31, 2016, the Company had operating income of $614.5 million compared to $527.6 million in the sameperiod in 2015, an increase of $86.8 million. This increase is primarily attributed to the increase in gross profit. Operating income, as a percentage of sales,increased to 64.6% in the year ended March 31, 2016 from 61.1% in the same period in 2015.Financial Income, Net. Financial income, net results from interest expense and income and the impact of foreign currency exchange ratefluctuations. Net financial income was $19.7 million in the year ended March 31, 2016, compared to income of $51.3 million for the year ended March 31,2015, a change of $31.6 million, or 61.7%. The change in financial income, net from 2015 to 2016 reflects the favorable impact of the change in foreigncurrency exchange rates related primarily to the cash and cash equivalents, short-term bank deposits and intercompany balances in Canada. While favorable,the impact for 2015 was greater than the impact for 2016.Taxes. Tax expense in the year ended March 31, 2016 was $95.3 million, compared to $96.1 million in the same period in 2015, a decrease of $0.8million. The effective tax rate decreased 2% due to the recognition of approximately $36 million of tax loss carry-forwards and investment tax creditsresulting from the acquisition of Zalicus. As of March 31, 2016, we had carryforward tax losses of approximately $10.5 million in the United Kingdom and$70.4 million in Ireland. We also had available carryforward capital losses of $74.0 million in Israel, which can only be used to offset capital gains.Net Income attributable to Taro. Net income increased $56.7 million to $540.9 million for the year ended March 31, 2016, from $484.3 million inthe prior year, by reason of the factors noted above.IMPACT OF INFLATION, DEVALUATION (APPRECIATION) AND EXCHANGE RATES ON RESULTS OF OPERATIONS, LIABILITIES ANDASSETSWe conduct manufacturing, marketing and research and development operations primarily in Israel, Canada and the United States. As a result, we aresubject to risks associated with fluctuations in the rates of inflation and foreign exchange in each of these countries.46The following table sets forth the annual rate of inflation, the devaluation (appreciation) rate of the NIS and the Canadian dollar against the U.S. dollarand the exchange rates between the U.S. dollar and each of the NIS and the Canadian dollar at the end of the period indicated: Rate of (Appreciation) Devaluation Rate of Exchange of Rate of Inflation Against U.S. Dollar U.S. Dollar Period ended Israel (1) Canada (2) Israel (1) Canada (2) Israel (1) Canada (2) 3/31/2015 (1.01%) 1.20% 14.04% 14.41% 3.98 1.27 3/31/2016 (0.71%) 1.27% (5.28%) 2.36% 3.77 1.30 3/31/2017 0.92% 1.56% (3.71%) 2.31% 3.63 1.33 (1)Bank of Israel.(2)Bank of Canada.B. LIQUIDITY AND CAPITAL RESOURCESCash, including short-term deposits, and marketable securities, increased $158.1 million from March 31, 2016 to $1.4 billion at March 31,2017. Total shareholders’ equity increased from $1.9 billion at March 31, 2016 to $2.1 billion at March 31, 2017, principally due to net income of $456.7million, offset by the repurchase of $294.9 million in treasury stock.In December 2013, we completed a modified “Dutch auction” tender offer whereby we repurchased an aggregate of 1,959,514 ordinary shares at thefinal purchase price of $97.50 per share, for an aggregate purchase price of $193.0 million (including fees and expenses related to the tender offer).On March 15, 2016, the Company announced that its Board of Directors approved a $250 million share repurchase of ordinary shares. On August 19,2016, we announced the completion of this program, with the last shares being purchased on August 18, 2016. Under the program, the Company boughtback 1,801,099 of its ordinary shares in open market transactions, in accordance with a 10b5-1 program, at an average price of $138.80 per share. On November 23, 2016, the Company announced that its Board of Directors approved a new $250 million share repurchase of ordinaryshares. Repurchases may be made from time to time at the Company’s discretion, based on ongoing assessments of the capital needs of the business, themarket price of its stock, and general market conditions. No time period has been set for the repurchase program, and any such program may be suspended ordiscontinued at any time. The repurchase authorization enables the Company to purchase its ordinary shares from time to time through open marketpurchases, negotiated transactions or other means, including 10b5-1 trading plans in accordance with applicable securities laws or other restrictions. As ofMarch 31, 2017, we repurchased a total of 518,965 of our ordinary shares at an average price of $104.56 per share, in accordance with a 10b5-1program. During the year ended March 31, 2017, the Company repurchased 2,252,725 shares between the two programs.Net cash provided by operating activities for the year ended March 31, 2017 was $437.5 million, compared to $395.1 million, in the year endedMarch 31, 2016, an increase of $42.4 million. For the year ended March 31, 2017, the Company had net cash used in investing activities of $117.8 millioncompared to $284.7 million for the year ended March 31, 2016. For the year ended March 31, 2017, the Company had net cash used in financing activitiesof $294.9 million compared to $15.3 million for the year ended March 31, 2016.The change in our liquidity for the year ended March 31, 2017 resulted from a number of factors, including: •Net cash provided by operating activities consists primarily of net income of $456.7 million, deferred income taxes , net of $73.7 million, adecrease in trade receivables, net of $34.4 million and non-cash items of depreciation and amortization and impairment of long-lived assets of$15.1 million; offset by increases in income tax receivables of $70.4 million, inventories and other receivables, prepaid expenses and other of$8.8 million, decreases in trade payables, other accounts payable, accrued expenses and income tax payables of $35.5 million, the effect ofexchange differences on intercompany balances of $6.0 million, the foreign exchange effect of bank deposits of $15.2 million and gain on saleof long-lived assets of $8.4 million. •Net cash used in investing activities consists of the purchase of plant, property and equipment, which consumed $35.8 million, and investmentin long-term deposits and other assets of $286.6 million, offset by proceeds from short-term bank deposits, net of $196.2 million and proceedsfrom sale of long-lived assets of $8.5 million. •Net cash used in financing activities consists of the repurchase of $294.9 million of treasury stock.47DebtAs of March 31, 2017, we had no debt, as the mortgage for the U.S. headquarters was repaid in December 2015. (For more on our debt obligations, seeNote 13 to the consolidated financial statements included in this 2017 Annual Report.)In November 2014, the Company paid $10.7 million, comprised of $10.1 million of principal and $0.6 million of interest in order to retire debentures.During the the year ended March 31, 2017, we did not incur any additional indebtedness, including increases in our borrowing capacity under anyrefinancing.LiquidityOn March 31, 2017, we had total cash and cash equivalents and short-term bank deposits of $1.4 billion and no indebtedness. We expect that existingcash resources and cash from operations will be sufficient to finance our foreseeable working capital requirements. None of our cash and cash equivalents isheld captive by any financial covenants or government regulation. As of March 31, 2017 and 2016, we had no commitment for capital expenditures whichwe consider to be material to our consolidated financial position. The Company had no available and undrawn credit facilities in place at March 31, 2017.Capital ExpendituresWe invested $35.8 million in capital equipment and facilities in the year ended March 31, 2017 and $19.0 million in the year ended March 31,2016. These investments are principally related to our pharmaceutical and chemical manufacturing facilities, expanding and upgrading our research anddevelopment laboratories in Israel and Canada, expanding our serialization capabilities, and maintaining compliance with cGMPs. In addition to facility-related investments, we acquired certain research and development, manufacturing, and packaging equipment to increase production capacity. We alsocontinued to upgrade our information systems infrastructure to enable more efficient production scheduling and enhanced inventory analysis. (See Note 7 toour consolidated financial statements included in this 2017 Annual Report.)C. RESEARCH AND DEVELOPMENT, PATENTS, TRADEMARKS AND LICENSESWe believe that our research and development activities have been a principal contributor to our achievements to date and that our future performancewill depend, to a significant extent, upon the results of these activities.Recruiting talented scientists is essential to the success of our research and development programs. Approximately 16% of our employees work in ourworldwide research and development programs.We currently conduct research and development in three principal areas: •generic pharmaceuticals, where our programs have resulted in our developing and introducing a wide range of pharmaceutical products(including tablets, sachets, capsules, suspensions, solutions, syrups, sprays, foams, creams, ointments and gels) that are equivalent to numerousbrand-name products whose patents and FDA exclusivity periods have expired; •proprietary pharmaceuticals; and •organic and steroid chemistry, where our programs have enabled us to synthesize the active ingredients used in many of our products.For the years ended March 31, 2017, 2016 and 2015, we spent $70.6 million, $71.2 million and $65.5 million on research and developmentactivities. Taro’s Management estimates that research and development expenses were allocated 70% to generic pharmaceuticals, 20% to proprietarypharmaceuticals and delivery systems and 10% to organic and steroid chemistry for the year ended March 31, 2017.Pharmaceutical ProductsIn the year ended March 31, 2017, we received 11 ANDA approvals, 3 of which were tentatively approved for products developed/manufactured inCanada and Israel. The following table sets forth the approvals received in the United States from the FDA from April 1, 2016 through March 31, 2017: 48FINAL NDA/ANDA APPROVALS Brand NameDiclofenac Sodium Topical Gel 3% Solaraze®Fluocinolone Acetonide Topical Oil 0.01% (Body and Scalp Oil)Dermasmoothe®Desloratadine Oral Solution 0.5mg/mlClarinex®Adapalene Topical Gel 0.3%Differin®Naftifine Hydrochloride Topical Cream 1%Naftin®Acyclovir Topical Ointment 5%Zovirax®Metronidazole Topical Gel 1% Metrogel®Brompheniramine Maleate; Dextromethorphan HBr;Pseudoephedrine HCl Oral Solution2mg;10mg;30mg/5mlBromfed-Dm® TENTATIVE ANDA APPROVALS Betamethasone Valerate Topical Foam 0.12%Luxiq®Clindamycin Phosphate and Benzoyl Peroxide Gel 1.2%/3.75% Onexton®Clobetasol Propionate Topical Spray 0.05%Clobex®As of March 31, 2017, 33 of our ANDAs, not including the tentative approvals listed above, were being reviewed by the FDA. In addition, there aremultiple products for which either developmental or internal regulatory work is in process. The applications pending before the FDA are at various stages inthe review process, and there can be no assurance that we will be able to successfully complete any remaining testing or that, upon completion of suchtesting, approvals for any of the applications currently under review at the FDA will be granted. In addition, there can be no assurance that the FDA will notgrant approvals for competing products.Patents, Trademarks and LicensesWe have filed and received patents, and obtained an exclusive license in the United States and other countries for a variety of products, processes andmethods of treatment, including: •a novel anti-fungal compound for onychomycosis; and •the synthesis and formulation of certain products.We do not believe that any single patent is of material importance to us in relation to our current commercial activities.We have registered trademarks in the United States, Canada and other countries. Taro U.S.A. typically does not use trademarks in the sale andmarketing of its generic multi-source non-innovator products.From time to time, we seek to develop products for sale in various countries prior to patent expiration. In the United States, in order to obtain a finalapproval for a generic product prior to expiration of certain innovator’s patents, we must, under the terms of the Hatch-Waxman Act, as amended by theMedicare Prescription Drug Improvement and Modernization Act of 2003, notify the patent holder as well as the owner of a NDA, that we believe that thepatents listed in the Orange Book for the new drug are either invalid or not infringed by our product. To the extent that we seek to utilize this mechanism toobtain approval to sell products, we are involved and expect to be involved in patent litigation regarding the validity, enforceability or infringement ofpatents listed in the Orange Book, as well as other patents, for a particular product for which we have sought approval. We may also be involved in patentlitigation with third parties to the extent that claims are made that our finished product, an ingredient in our product or our manufacturing process, mayinfringe the innovator’s or third party’s process patents. We may also become involved in patent litigation in other countries where we conduct business,including Israel, Canada and various countries in Europe. From time to time, we may settle such litigations and obtain licenses to the asserted patents thatallow us to market our products. D. TREND INFORMATIONSee Item 4—“Information on the Company” and Item 5—“Operating and Financial Review and Prospects” for trend information.E. OFF-BALANCE SHEET ARRANGEMENTSThe Company does not have any off-balance sheet arrangements.49F. TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONSThe following table describes the payment schedules of our contractual obligations as of March 31, 2017: Payments due by period (in millions) Less than Type of Contractual Obligation Total 1 year 1-3 years 3-5 years More than 5 years Operating lease obligations $3.75 $1.85 $1.61 $0.29 $— Other Long-term liabilities (1) 6.11 0.12 1.31 1.36 3.32 Total $9.86 $1.97 $2.92 $1.65 $3.32 (1)Includes severance commitments and tax accruals. 50ITEM 6.DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEESA. DIRECTORS AND SENIOR MANAGEMENTThe following table lists our directors and executive officers as of March 31, 2017: Name Age PositionDilip Shanghvi 61 Director and Chairman of theBoardAbhay Gandhi 52 Director, Vice Chairman andInterim Chief Executive OfficerSudhir Valia 60 DirectorUday Baldota 47 DirectorLinda Benshoshan 51 Director and Chairwoman of theAudit CommitteeElli Streit 76 Director and Chairman of theCompensation CommitteeDov Pekelman 77 Director and Chairman of theSocial Responsibility CommitteeJames Kedrowski 65 DirectorMariano Balaguer 44 Vice President, Chief FinancialOfficer and Chief AccountingOfficerStephen Manzano, Esq. 52 Group Vice President, GeneralCounsel, Secretary & CorporateComplianceAvi Avramoff, Ph.D. 52 Global Vice President, Researchand DevelopmentItamar Karsenti 45 Vice President, Head ofOperations, HaifaMichael Teiler 54 Group Vice President, PortfolioManagementDaryl LeSueur 54 Vice President, Head ofOperations, BramptonMichael Perfetto 56 Group Vice President and ChiefCommercial Officer of theGeneric Rx and OTC BusinessMichele Visosky 51 Group Vice President, HumanResourcesJayesh Shah 61 Head of ProcurementChantal LeBlanc 54 Vice President, Global Quality Certain Familial RelationshipsMr. Sudhir Valia is a brother-in-law of Mr. Dilip Shanghvi. Mr. Dilip Shanghvi is the beneficial majority owner of Sun.Business ExperienceDilip Shanghvi became the Chairman of the Taro Board in August 2013, after previously serving as director and Chairman from September 2010 toApril 2012. He is the founder and Managing Director of Sun Pharma and has extensive industrial experience in the pharmaceutical industry. A firstgeneration entrepreneur, Mr. Shanghvi has won numerous awards and recognitions, including the 2016 PADMA SHRI (Fourth Highest Civilian Award) fromthe Government of India and the 2016 NDTV Business Leadership Award (Pharmaceutical), as well as various other awards including, the ForbesEntrepreneur of the Year award in 2014, Outstanding Business Leader of the Year from CNBC TV18 in 2014, the Economic Times’ Business Leader of theYear Award in 2014, the JRD TATA Corporate Leadership Award AIMA (All India Association) in 2014, CNN IBN’s Indian of the Year (Business) in 2012,51Business India’s Businessman of the Year in 2012 and Ernst and Young’s World Entrepreneur of the Year in 2011. He has also been awarded theEntrepreneur of the Year, Ernst and Young in 2010, CNBC TV 18’s First Generation Entrepreneur of the Year in 2007 and Entrepreneur of the Year(Healthcare and Life Sciences), Ernst and Young in 2005. Mr. Shanghvi is a Director of various companies, including Shantilal Shanghvi Foundation and isalso the Chairman and Managing Director of Sun Pharma Advanced Research Company Ltd.Abhay Gandhi became Vice Chairman, Director and Interim Chief Executive Officer in December 2016. He will serve in the role of Interim ChiefExecutive Officer until Mr. Uday Baldota assumes the duties of Chief Executive Officer. Mr. Gandhi was appointed Chief Executive Officer of SunPharmaceutical Industries, Inc. (“Sun Pharmaceuticals”) in November 2016. Prior to joining Sun Pharmaceuticals, Mr. Gandhi served as a Director starting inNovember 2014, and as the CEO – India Subcontinent, of Sun Pharmaceutical Laboratories Ltd. (“SPLL”) starting in November 2013, where he wasresponsible for domestic operations of the business as well as certain international markets, including sales & marketing, integration efforts, businessdevelopment, portfolio management and other allied functions. Prior to that appointment, Mr. Gandhi was President – India Subcontinent of SPLL fromMarch 2012 to November 2013, Executive Vice President – International Marketing from April 2007 to March 2012 and has served in various otherpositions within the Sun Pharma organization for over 20 years. Prior to joining Sun Pharma, Mr. Gandhi held positions at Boehringer Mannheim Gmbh, andNestle India Ltd. From 2013 to 2015, he was a Member of the Executive Committee of the Indian Drug Manufacturers Association (IDMA) and a Member ofthe Confederation of Indian Industry (CII) National Committee on Drugs and Pharmaceuticals from 2013 to 2014. Mr. Gandhi holds a Bachelor of Scienceand a Masters in Marketing Management from the University of Mumbai, and a Diploma in Business Management from the Institute of Chartered FinancialAnalysts of India (ICFAI University). Sudhir Valia became a member of the Taro Board in September 2010. Mr. Valia joined Sun Pharma as a director in January 1994 and has been a full-time director since his appointment in April 1994. Mr. Valia is the recipient of the CNBC TV 18’s CFO Awards for best performing CFO in thePharma/Healthcare sector in 2012, 2009 and 2006. He also received the “Adivasi Sevak Puraskar” award from the Government of Maharashtra in 2008-2009. Prior to joining Sun Pharma, Mr. Valia was a chartered accountant in private practice. Mr. Valia is a Director of various companies, including ShantilalShanghvi Foundation and Sun Pharma Advanced Research Company Ltd. Mr. Valia is a qualified chartered accountant in India.Uday Baldota became a member of the Taro Board in December 2016 and will assume the role of Chief Executive Officer in 2017. Mr. Baldota iscurrently Executive Vice President & Chief Financial Officer of Sun Pharma. He has led their global Finance function since June 2012 and was designated asthe Chief Financial Officer in August 2014. He is a member of the global Core Management Team of Sun Pharma. From June 2005 to May 2012, Mr.Baldota served in various leadership positions as a Vice President and later Senior Vice President reporting to the Chairman and Managing Director of SunPharma. Mr. Baldota’s areas of responsibility over his tenure at Sun Pharma have included accounting, M&A, business finance, tax, treasury, insurance,controllership, legal, corporate secretarial, corporate communication and internal audit. Mr. Baldota was the Vice President Purchasing of Lafarge IndiaLimited from March 2003 to June 2005 and served as its Head of Information Technology from November 1999 to March 2003. Prior to that, Mr. Baldotaserved in various IT and marketing roles with Sun Pharma between May 1995 and November 1999. Mr. Baldota earned a Bachelor of Technology inChemical Engineering from Indian Institute of Technology, Delhi, and a Masters of Business Administration from the Indian Institute of Management,Ahmedabad.Linda Benshoshan became a member of the Taro Board in December 2016; served as a member of the board of Israel Discount Bank from November2014 until May 2017. Mrs. Benshoshan has been a Partner at FORMA Real Estate Funds since November 2016 and a lecturer at the College of Managementin Israel since October 2009. Over the last five years, Mrs. Benshoshan has served in various capacities within the finance and academic sphere, including, asa member of the advisory board at ALTO Real Estate Funds; a member on the board and Chairwoman of the marketing committee at Tel-Aviv StockExchange Ltd; CEO of Aluminum Construction Pro Ltd; an External Director and Chairwoman of the investments committee at ‘Rom’ and ‘Agur’ StudyFunds; and a member on the board of Aloni-Hetz Properties and Investments Ltd. Mrs. Benshoshan holds a B.A. in Economics and Sociology and anM.B.A.in Finance and Banking, from the Hebrew University of Jerusalem.Elhanan (Elli) Streit became a member of the Taro Board in December 2016; has served as a member of the Board of Governors of Tel AvivUniversity since 2000. From August 2007 to August 2014, Mr. Streit served on the board of directors of ITGI Medical Ltd. and served on the board ofdirectors of Medigus Ltd. from July 2007 to May 2013. He served a six year tenure from 2001 to 2007 on the board of NCR Global Ltd. (formerly RetalixLtd), including as Chairman of the audit committee. Mr. Streit has over 30 years of experience in multinational business development, corporate finance,private equity, international trade and transfer of technologies and provides investment banking advisory services to companies primarily in the health caresector, and provides advice on capital raisings, licensing of intellectual property and strategic partnerships to established and growing companies. Notably,Mr. Streit was appointed to Managing Director of Yeda Research and Development Company Ltd., the commercial arm of the Weizmann Institute of Science,where he served nearly five years, starting in 1982. Mr. Streit earned a Bachelor of Arts degree in economics and political science from the Hebrew Universityof Jerusalem and a Master of Business Administration in finance and marketing from the University of Pennsylvania—the Wharton School. 52Dov Pekelman became a member of the Taro Board and Audit Committee in August 2011, Chairman of the Special Committee in November 2011(disbanded in February 2013), the Stock Option Committee in March 2012 (disbanded in January 2015) and the Compensation Committee in February2013. Professor Pekelman is currently a major shareholder of Atera Networks Ltd. and a board member of Enzymotec (NASDAQ:ENZY). He serves as Dean ofthe Business School at the Interdisciplinary Center (IDC), Herzliya, Israel, and is Chairman of the IDC Corporation, the center’s economic arm. ProfessorPekelman served as a senior consultant to Teva Pharmaceutical Industries Ltd. (NASDAQ: TEVA) from 1985 to 2008 and also founded and ran a leading,Israeli-based management-consulting firm, P.O.C. Ltd. Professor Pekelman served on the Board of Directors of several large industrial corporations, includingKoor Industries Ltd. (TASE: KOR) and served for 22 years on the Board of Directors of Makhteshim Agan Industries Ltd. (TASE: MAIN). Professor Pekelmanwas also a member of the advisory committee of the Bank of Israel. He holds a Ph.D. from the University of Chicago and a B.S. from the Technion, IsraeliInstitute of Technology. Professor Pekelman is a published author writing on various aspects of business operations.James Kedrowski became a member of the Taro Board in May 2011. In addition, Mr. Kedrowski served as the Company’s Interim Chief ExecutiveOfficer from October 2010 until August 2013. Mr. Kedrowski has been with Chattem Chemicals, Inc., an indirect subsidiary of Sun Pharma since 1997 and iscurrently its President. Mr. Kedrowski’s prior experience includes over 20 years with Alcoa Inc., starting in sales, then purchasing roles culminating as seniorpurchasing agent for all chemicals, energy, and carbon. Subsequently, Mr. Kedrowski was in progressive P&L business management positions in the UnitedStates before heading to Tokyo for four years of international experience running Alcoa’s Industrial Chemicals business in Asia. Mr. Kedrowski thenreturned to the United States as Operational Vice President for seven North American Industrial Chemicals plants.Mariano Balaguer became Chief Financial Officer, Chief Accounting Officer and Finance Vice President of the Company in October 2016. Mr.Balaguer has nearly 20 years of global professional finance and management experience. Most recently, Mr. Balaguer was Vice President, CFO for the GlobalStrategic Portfolio Division at Henry Schein, a worldwide distributor of medical, dental and veterinary supplies including vaccines, pharmaceuticals,financial services and equipment. Mr. Balaguer’s prior experience includes, serving as Vice President, CFO North America for Novartis Consumer Healthproviding support to the U.S., Canada and Puerto Rico businesses and prior to that as VP, Global Head of Business Planning and Analysis for the ConsumerHealth division. Preceding Novartis until 2010, Mr. Balaguer worked in several divisions of Nestle in the US, Italy, France and Argentina for over 10 yearswith his last two years serving as Global Finance Head Performance Nutrition Division. Mr. Balaguer earned a Bachelor’s Degree in Economics from theUniversidad Nacional de Cuyo, Argentina and an MBA from New York University Stern School of Business.Stephen Manzano, Esq. became Group Vice President, General Counsel, Secretary & Corporate Compliance in August 2014. In addition to hissecretarial duties, he is responsible for the legal affairs of Taro, and leading Taro’s emphasis on fulfilling its corporate compliance responsibilities. Mr.Manzano had been Interim General Counsel, Secretary and VP of Compliance since 2012 and, prior to that, VP, Corporate Affairs, Secretary and AssociateGeneral Counsel of Taro U.S.A. since September 2010, after joining Taro in September 2008 as Associate General Counsel of Taro U.S.A. Prior to joiningTaro, Mr. Manzano was in private practice since 1992, which included being a partner at Kennedy Covington and beginning his legal career as an associateat Dewey Ballantine.Avi Avramoff, Ph.D. joined our Company in October 2011 as Global Vice President, Research & Development. He is responsible for the Company’snew products development, and the management of the R&D Pharma and Chemistry, R&D Analytical Laboratories, Preclinical, Pharmacokinetic and ClinicalStudies, Regulatory Affairs and Pharmacovigilance in all of Taros’ sites. He has penned various publications and abstracts in the field of pharmacy, as well asseveral patents and patent applications. Prior to joining our Company, Dr. Avramoff worked as Vice President, Research & Development at Dexcel Pharma.Itamar Karsenti joined our Company in December 2014 and currently serves as Vice President, Head of Operations, Haifa. Mr. Karsenti is theoperations lead for our Israeli facility located in Haifa. He is responsible for Pharma and API Manufacturing, Supply Chain Management, Engineering andEnvironmental Health and Safety (EH&S). Mr. Karsenti also provides leadership oversight on sales and marketing, human resources, IT and finance inHaifa. Prior to joining Taro, Mr. Karsenti worked for Teva Pharmaceutical Industries Ltd. since 2002, where he recently served as Executive Director,Jerusalem OSD site manager.Michael Teiler joined our Company in July 2011 and currently serves as Group Vice President, Portfolio Management. He is responsible for the newproduct introduction process, from selection to launch. From 1987 to 2011, Mr. Teiler served at Teva Pharmaceutical Industries Ltd. in several generic R&Dand Portfolio Management positions, most recently as VP Generic R&D for Teva International Group.Daryl LeSueur joined our Company in April 2014 and currently serves as Vice President, Head of Operations, Brampton, Canada. He is responsiblefor providing strategic leadership and tactical support for our Brampton manufacturing facility which includes Manufacturing and Packaging Operations,Pharmaceutical Technologies, Engineering, Materials Management and Procurement, Warehouse and Distribution. Mr. LeSueur has over 31 years ofPharmaceutical Production and Manufacturing Operations experience. Prior to joining Taro, Mr. LeSueur was with Progenitor Cell Therapy, LLC(Progenitor) since 2009, where he53served as Vice President Manufacturing Operations. Prior to Progenitor, Mr. LeSueur served as Vice President for Teva Pharmaceuticals, Barr PharmaceuticalsInc. and Novartis.Michael Perfetto joined our Company in January 2013 and currently serves as Group Vice President, Chief Commercial Officer of the Generic Rx andOTC business. Mr. Perfetto is the commercial lead of our generic and OTC product lines, including Sales, Marketing, Sales Operations, and Distribution inCanada, Israel and the United States. Mr. Perfetto has over 26 years of pharmaceutical Sales and Marketing experience. Prior to joining Taro, Mr. Perfettowas with Actavis Inc. since 2003, where he served as Vice President of Rx Sales and Marketing. Prior to Actavis, Mr. Perfetto worked in National AccountsSales positions for Barr Laboratories Inc. and Fisons Pharmaceuticals Pvt. Ltd.Michele Visosky joined our Company in January 2004 in the Human Resources department. She is currently Group Vice President, Human Resourcesand heads the department in Canada, Israel and the United States. Ms. Visosky has over 26 years of human resources experience, the majority of which werespent in management level roles. Prior to joining Taro, Ms. Visosky worked at Micro Warehouse, Inc. and PricewaterhouseCoopers LLP, holdingprogressively responsible human resources positions, with the last one as Senior Vice President, Human Resources.Jayesh Shah joined our Company in December 2011 as Head of Procurement. His responsibilities include procurement of raw materials, capital itemsand services for North America. Prior to joining Taro, Mr. Shah worked at Caraco Pharmaceutical Laboratories, Ltd. (now known as Sun PharmaceuticalIndustries, Inc.), a subsidiary of Sun Pharma, in 2000 and worked there until 2011. Prior to that, Mr. Shah worked at Sun Pharma in India from 1997 to2000. From 1977 to 1997, Mr. Shah was a proprietor of J.B. Trading Corporation, an import/export company located in Mumbai, India.Chantal LeBlanc joined our Company in August 2014 and currently serves as Vice President, Global Quality. Ms. LeBlanc is responsible for theQuality and cGMP compliance activities at our Canada and Israel manufacturing locations as well as our operations in the United States. Ms. LeBlanc has 32years of experience in the biotechnology and pharmaceutical industries. Prior to joining Taro, Ms. LeBlanc was the Global Quality Director of GSK Vaccinesin Belgium from 2007 to 2014. Prior to GSK, Ms. LeBlanc was a Quality/Compliance expert for 10 years. Ms. LeBlanc started her career as a Quality siteDirector for Kempac- Polylab Inc. then Pharmascience Inc. in Montreal for a cumulative of 12 years. Ms. LeBlanc qualified as a Health Canada fieldinspector in 2001.B. COMPENSATIONOur directors are paid NIS 148,575 per year for their service as directors and NIS 5,715 for each board and committee meeting they attend, linked tothe Israeli CPI, for their service as directors. Dilip Shanghvi and Sudhir Valia are paid approximately $1.8 million and $1.2 million per year, respectively, fortheir service in addition to their duties as directors. During the year ended March 31, 2017, Mr. Dov Pekelman received an increased annual fee of NIS244,725 as of January 1, 2017 due to his role in the establishment of a Social Responsibility Committee. The compensation for our statutory externaldirectors, as defined under Israeli law, is not in excess of the amounts set forth in the Israeli Companies Law and regulations promulgated thereunder.We incurred an aggregate of approximately $7.9 million to all of our then current directors and executive officers for services rendered to us in allcapacities during the year ended March 31, 2017. This amount does not include certain additional benefits which, as to all directors and executive officers asa group, aggregated $0.2 million. In addition, approximately $0.4 million was set aside in 2017 to provide certain executive officers and directors withpension, retirement or similar benefits. During the year ended March 31, 2017, the Company’s executive officers and directors did not receive any options topurchase Taro‘s ordinary shares.As of March 31, 2017, the Company’s executive officers and directors held no options to purchase ordinary shares.C. BOARD PRACTICESWe are incorporated in Israel and, therefore, we are subject to the provisions of the Israeli Companies Law, in addition to the relevant provisions ofU.S. laws.Board of DirectorsUnder Israeli Companies Law, the Board sets the policy of a company and supervises the general manager (i.e., the chief executive officer) of acompany in the performance of his or her role. The Board has residual powers so that it may exercise any power of the company not granted to any otherbody either by law or by our Articles of Association. According to our Articles of Association, as part of its powers, our Board may cause us to borrow orsecure payments of any sum or sums of money for our purposes, at times and upon conditions as it thinks fit, including the grant of security interests on all orany part of our property.54Under our Articles of Association, our Board may consist of between 5 and 25 directors.Our directors, other than our statutory external directors, are elected at annual general meetings of our shareholders, which are required to be held atleast once during every calendar year and not more than 15 months after the last preceding meeting. Directors may also be appointed to fill vacancies, or maybe appointed to serve as additional members of the Board, by an ordinary resolution passed at an extraordinary general meeting of ourshareholders. Likewise, in the event of a vacancy, the Board is empowered to appoint a director to fill such vacancy until the next annual general meeting ofshareholders. A director, other than a statutory external director, holds office until the next annual general meeting, unless such directorship is earlier vacatedin accordance with the provisions of any applicable law or regulation or under our Articles of Association.Under the Israeli Companies Law, nominations for directors may be made by any shareholder holding at least 1% of our outstanding votingpower. However, any such shareholder may make such a nomination only if a written notice of such shareholder’s intent to make such nomination has beengiven to our company. Any such notice must include certain information, the consent of the proposed director nominee(s) to serve as our director(s) if electedand a declaration signed by the nominee(s) declaring that they have the required skills and availability to carry out their duties and providing details of suchskills and that there is no limitation under the Israeli Companies Law preventing their election and that all of the information that is required to be providedto us in connection with such election under the Israeli Companies Law has been provided.We do not have any service contracts with any of our directors that would provide for benefits upon termination of employment.Our Board currently consists of eight directors. The following members of our Board have been determined to be independent within the meaning ofapplicable NYSE regulations: Linda Benshoshan, Elli Streit and Dov Pekelman.Under the Israeli Companies Law, the board of directors of a public company must hold at least one meeting every three months.Statutory External DirectorsQualifications of Statutory External DirectorsUnder the Israeli Companies Law, companies incorporated under the laws of the State of Israel whose shares, inter alia, are listed for trading on a stockexchange or have been offered to the public by a prospectus and are held by the public, are required to have at least two statutory external directors. TheIsraeli Companies Law provides that a person may not be elected as a statutory external director if the person is a relative of a controlling shareholder and/orthe person or the person’s relative (as defined below), partner, employer, anyone to whom the person is subordinate, directly or indirectly, or any entity underthe person’s control has, as of the date of the person’s election to serve as a statutory external director, or had, during the two years preceding that date, anyaffiliation (as defined below) with: •our company; •any entity controlling our company or relative thereof as of the date of the election; or •any entity controlled by our company or under common control with our company as of the date of the election or during the two yearspreceding that date.Under the Israeli Companies Law, “relative” is defined as a spouse, brother or sister, parent, grandparent, child and a child/brother/sister/parent of suchperson’s spouse or the spouse of any of the preceding.The term “affiliation” includes an employment relationship, a business or professional relationship even if not maintained on a regular basis (butexcluding insignificant relationships), or control of the company, and service as an office holder (as defined below).The Israeli Companies Law defines the term “office holder” as general manager (i.e., chief executive officer), chief business manager, deputy generalmanager, vice general manager, any other person assuming the responsibilities of any of the foregoing positions without regard to such person’s title, and anydirector or manager that reports directly to the general manager.The Israeli Companies Law provides that no person can serve as a statutory external director if the person’s other positions or other business creates, ormay create, a conflict of interest with the person’s responsibilities as a statutory external director or may otherwise interfere with the person’s ability to serveas a statutory external director, or if the person is an employee of the Israel Securities Authority or of an Israeli stock exchange. Until the lapse of two yearsfrom termination of office as statutory external director, a company, its controlling shareholder and any entity controlled by the controlling shareholder, maynot grant a former statutory external director, his/her spouse or child any benefits, directly or indirectly, including engaging the former statutory external55director, his/her spouse or child to serve as an office holder in the company or in any company controlled by the controlling shareholder of the company andcannot employ or receive professional services from that person for consideration, either directly or indirectly, including through a corporation controlled bysuch former statutory external director. The same shall apply to a relative, who is not a former statutory external director’s spouse or child, for a period of oneyear from termination of office as statutory external director.A person shall be qualified to serve as a statutory external director only if he or she possesses accounting and financial expertise or professionalcompetence, as defined in the regulations promulgated under the Israeli Companies Law. At least one statutory external director must possess accountingand financial expertise.The Israeli Companies Law also provides that a shareholders’ general meeting at which the appointment of a statutory external director is to beconsidered will not be called unless the nominee has declared to the company that he or she complies with the qualifications for appointment as a statutoryexternal director.Election of Statutory External DirectorsThe Israeli Companies Law provides that statutory external directors must be elected by a majority vote at a shareholders’ meeting, provided thateither: •the majority includes the majority of the total votes of non-controlling shareholders (as defined in the Israeli Companies Law) who do not havea personal interest in the election of the subject external director, other than a personal interest that is not derived from a relationship with acontrolling shareholder in such election present at the meeting in person or by proxy (abstentions are not taken into account); or •the total number of votes against the election of the statutory external director by the non-controlling disinterested shareholders (as describedin the previous bullet point) may not exceed two percent of the aggregate voting rights in the company.For purposes of determining a controlling shareholder, Section 1 of the Israeli Companies Law defines “control” by reference to the definition of theIsraeli Securities Law, 5728-1968 (the “Securities Law”), which defines “control” as “the ability to direct the activity of a corporation, excluding an abilityderiving merely from holding an office of director or another office in the corporation, and a person shall be presumed to control a corporation if he or sheholds half or more of a certain type of means of control of the corporation.” “Means of control” in Section 1 of the Securities Law is defined as “any one ofthe following: (1) the right to vote at a general meeting of a company or a corresponding body of another corporation; or (2) the right to appoint directors ofthe corporation or its general manager.”The definition of “personal interest” under the Israeli Companies Law is provided in Item 10.B below, under “Approval of Specified Related PartyTransactions Under Israeli Law and Our Articles of Association—Disclosure of Personal Interest of an Office Holder.”The initial term of a statutory external director is three years and may be extended for two consecutive terms of three years each, provided that either(i) his or her service for each such additional term is recommended by one or more shareholders holding at least one percent (1%) of the company’s votingrights and is approved by a majority at a shareholders meeting, which majority must include either of the criteria described above with respect to his or herinitial election; or (ii) his or her service for each such additional term is recommended by the board of directors and is approved by a majority at ashareholders meeting, which majority must include either of the criteria described above with respect to his or her initial election. In accordance with theregulations under the Israeli Companies Law, companies whose securities are listed on one of a number of non-Israeli stock exchanges (including the NYSE,where our ordinary shares are listed) may re-appoint an external director for additional three-year terms, in excess of the nine years described above, if theaudit committee and the board of directors confirm that, due to the expertise and special contribution of the external director to the work of the board and itscommittees, his or her re-appointment is in the best interests of the company. The same special majority is required for election of the statutory externaldirector for each additional three-year term (as was required for the initial term), with the additional requirement that the arguments of the board of directorsand audit committee in favor of election for such additional term, and the number of terms already served by the external director, be presented to the generalmeeting prior to the vote.Statutory external directors may be removed from office only by the same percentage of votes as is required for election or by a court, if the statutoryexternal director ceases to meet the statutory qualifications for his or her appointment or if he or she violates his or her duty of loyalty to the company.56If an external directorship becomes vacant and there are fewer than two external directors on the board of directors at the time, then the board ofdirectors is required under the Israeli Companies Law to call a shareholders’ meeting immediately to appoint a replacement external director.Each committee of a company’s board of directors that is empowered to exercise one of the functions of the board of directors is required to include atleast one statutory external director, except for the Audit Committee and Compensation Committee, which are required to include all of the statutory externaldirectors.A statutory external director is entitled to compensation determined by the board within the scope provided in regulations adopted under the IsraeliCompanies Law.Linda Benshoshan and Elli Streit currently serve as statutory external directors on the Company’s Board. Our Board has determined that LindaBenshoshan possesses accounting and financial expertise, whereas Elli Streit possesses professional competence, as required of our statutory externaldirectors under the Israeli Companies Law.Exemption from Statutory External Director RequirementUnder regulations recently promulgated under the Israeli Companies Law, Israeli public companies whose shares are traded on certain U.S. stockexchanges, such as the NYSE, and that lack a controlling shareholder (as defined under the Israeli Companies Law) are exempt from the requirement toappoint statutory external directors. Any such company is also exempt from the Israeli Companies Law requirements related to the composition of the auditand compensation committees of the Board. Eligibility for these exemptions is conditioned on compliance with U.S. stock exchange listing rules related tomajority Board independence and the composition of the audit and compensation committees of the Board, as applicable to all listed domestic U.S.companies. Because we have a controlling shareholder (Sun), we are not eligible for these new exemptions.Qualifications of Directors Generally Under the Israeli Companies LawUnder the Israeli Companies Law, the board of directors of a publicly traded company is required to make a determination as to the minimum numberof directors (not merely statutory external directors) who must have accounting and financial expertise (according to the same criteria described above withrespect to statutory external directors). In accordance with the Israeli Companies Law, the determination of the board should be based on, among otherthings, the type of the company, its size, the volume and complexity of its activities and the number of directors. Based on the foregoing considerations, ourBoard of Directors determined that the number of directors with accounting and financial expertise in our company shall not be less than one. As describedabove, currently Linda Benshoshan has been determined by the board to possess such accounting and financial expertise.Unaffiliated Directors Under the Israeli Companies LawUnder the Israeli Companies Law, the audit committee of a publicly traded company must consist of a majority of unaffiliated directors. An“unaffiliated director” is defined as a statutory external director or a director who meets the following criteria: •he or she meets the qualifications for being appointed as a statutory external director, as approved by the audit committee, except for (i) therequirement that the director be an Israeli resident (in the case of a company such as ours whose securities have been offered outside of Israel orare listed outside of Israel) and (ii) the requirement for accounting and financial expertise or professional qualifications; and •he or she has not served as a director of the company for a period exceeding nine consecutive years. For this purpose, a break of less than twoyears in the service shall not be deemed to interrupt the continuation of the service.The Israeli Companies Law further provides that a company may also elect to impose, via the adoption of a proposed set of corporate governancerules, certain independence requirements with respect to the composition of the board of directors as a whole. Those requirements, if undertaken by acompany, mandate that (i) if the company has no controlling shareholder or no shareholder that holds at least 25% of the company’s voting rights, most ofthe members of the board must be unaffiliated directors, whereas (ii) if the company has a controlling shareholder or a shareholder that holds at least 25% ofthe voting rights, then at least one-third of the directors need to be unaffiliated directors. As of the date of this 2017 Annual Report, we have not elected toadopt these corporate governance rules.Alternate DirectorsPursuant to our Articles of Association and the Israeli Companies Law, any director may appoint, by written notice to us, any person who is notserving as a director, or as an alternate director, to serve as an alternate director and may also remove such alternate director. An alternate director possessesall of the rights and obligations of the appointing director except that the alternate, in his57capacity as such, has no standing at any meeting if the appointing director is present. Unless the appointing director limits the time or scope of theappointment, it shall be effective for all purposes until the appointing director ceases to be a director or terminates the appointment. The appointment of analternate director does not diminish the responsibility of the appointing director as a director. A statutory external director may not appoint an alternateexcept in certain circumstances provided by the Israeli Companies Law.CommitteesSubject to the provisions of the Israeli Companies Law, our Board may delegate its powers to certain committees comprised exclusively of Boardmembers. Pursuant to the Israeli Companies Law, any committee of the board of directors that is authorized to perform any function of the board (other thancommittees constituted solely as advisory committees), must include at least one statutory external director and the audit committee and compensationcommittee must be composed of at least three directors and include all statutory external directors. Our Board currently has three committees—an AuditCommittee, a Compensation Committee and a Social Responsibility Committee.Audit CommitteeUnder the Israeli Companies Law and our Articles of Association, our Board is required to appoint an audit committee of at least three directors, amajority of whom must be unaffiliated directors, and which must include all statutory external directors (at least two), but excluding: •the chairman of the board of directors and a director employed by our company, or by the company’s controlling shareholder, directly orindirectly, or who provides services to any of the foregoing on a regular basis and a director whose main livelihood stems from the controllingshareholder; and •a controlling shareholder or a relative of a controlling shareholder.The chairman of the audit committee is required to be a statutory external director.A person who is not qualified to serve as a member of the audit committee may not be present at the committee’s meetings and at the time resolutionsare adopted thereby, unless such person’s participation is required in order to present to the committee a particular matter.Currently, our Audit Committee consists of the following directors: Linda Benshoshan, Elli Streit, and Dov Pekelman, all of whom have beendetermined by our Board to be independent as defined by the applicable rules of the NYSE and the SEC. Linda Benshoshan and Elli Streit are statutoryexternal directors. Linda Benshoshan is the chairwoman of our Audit Committee.Under the Israeli Companies Law and our Audit Committee charter, our Audit Committee is responsible for (i) determining whether there aredelinquencies in the business management practices of the company, including, in consultation with the company’s internal auditor or the independentauditor, making recommendations to the Board to improve such practices, (ii) determining whether to approve certain related party transactions ortransactions in which an office holder has a personal interest, (iii) determining standards and policies for determining whether a transaction with a controllingshareholder or a transaction in which a controlling shareholder has a personal interest is deemed negligible or not and the approval requirements (including,potentially, the approval of the audit committee) for transactions that are not negligible including the types of transactions that are not negligible; (iv) wherethe Board approves the working plan of the internal auditor, examining such working plan before its submission to the Board and proposing amendmentsthereto, (v) examining the company’s internal controls and internal auditor’s performance, including whether the internal auditor has sufficient resources andtools to dispose of his responsibilities (taking into consideration the company’s special needs and size), (vi) examining the scope of the company’s auditor’swork and compensation and submit its recommendation with respect thereto to the corporate organ considering the appointment thereof (either the Board orthe general meeting of shareholders) and (vii) determining procedures with respect to the treatment of company employees’ complaints as to the managementof the company’s business and the protection to be provided to such employees. Our Audit Committee also approves our financial statements in its role as acommittee of the Board. Our Audit Committee may not approve an action or a related party transaction, or take any other action required under the IsraeliCompanies Law, unless at the time of approval a majority of the committee’s members are present, a majority of whom consists of unaffiliated directorsincluding at least one statutory external director.In accordance with Sarbanes-Oxley requirements and our Audit Committee charter, our Audit Committee is directly responsible for the appointment,compensation and oversight of our independent auditors. In addition, the Audit Committee is also responsible for, among other things, assisting the Board inreviewing, and recommending actions to the Board with respect to, our financial statements, the effectiveness of our internal controls and our compliancewith legal and regulatory requirements.The Audit Committee has reviewed and discussed with our Management our audited consolidated financial statements as of and for the year endedMarch 31, 2017. The Audit Committee has also discussed with our independent registered public accounting firm58the matters required to be discussed by Auditing Standards No. 16, “Communications with Audit Committees,” issued by the Public Company AccountingOversight Board. Based on the reviews and discussions referred to above, the Audit Committee has recommended to the Board that the audited consolidatedfinancial statements referred to above be included in this 2017 Annual Report.Approval of Interested Party TransactionsUnder the Israeli Companies Law, the approval of the Audit Committee (or, for transactions involving compensatory matters, the approval of theCompensation Committee) is required to effect certain actions and transactions with office holders, controlling shareholders and entities in which they have apersonal interest. Such interested party transactions (including matters described in the following paragraph) require the approval of the Audit Committee (orthe Compensation Committee, if involving a compensatory matter), the Board and in certain cases, the shareholders. Such shareholders’ approval, in certaincases, also requires a special voting majority. See “Disclosure of Personal Interests of a Controlling Shareholder” in Item 10.B below.Internal AuditorUnder the Israeli Companies Law, the board of directors of a public company is required to appoint an internal auditor proposed by the AuditCommittee. The internal auditor may not be an interested party (i.e., a holder of 5% or more of the voting rights in the company or of the issued sharecapital), the chief executive officer of the company or any of its directors, or a person who has the authority to appoint the company’s chief executive officeror any of its directors, or a relative of an office holder or of an interested party, nor may the internal auditor be our external independent auditors or theirrepresentatives. The Audit Committee is required to oversee the activities and to assess the performance of the internal auditor, as well as to review theinternal auditor’s work plan. The role of the internal auditor is to examine, among other things, whether our actions comply with the law and orderly businessprocedure. Ms. Rita Gerson is the internal auditor of the Company. The internal auditor has the right to demand that the chairman of the Audit Committeeconvene an Audit Committee meeting and the internal auditor may participate in all Audit Committee meetings.Compensation CommitteeOn February 4, 2013, the Company established a Compensation Committee to comply with the requirements of Amendment No. 20 to the IsraeliCompanies Law (“Amendment 20”), which was effective as of December 2012. Currently our Compensation Committee consists of the following directors:Elli Streit (who serves as chairman of the committee), Linda Benshoshan, and Dov Pekelman, each of whom has been determined by our Board to beindependent as defined by the applicable rules of the NYSE and the SEC, and all of our statutory external directors are members of the CompensationCommittee.Amendment 20 also required us to adopt a compensation policy regarding the terms of office and employment of office holders, includingcompensation, equity awards, severance and other benefits, and exemption from liability and indemnification. For a company such as ours that is not a newpublic company, the Israeli Companies Law (based on Amendment 20) requires that we adopt a new compensation policy, or renew our existingcompensation policy, at least once every three years, via the approval of our Compensation Committee, Board and shareholders (including a special majorityof our non-controlling, disinterested shareholders). Under the Israeli Companies Law, the Board may adopt the compensation policy even if it is notapproved by the shareholders, provided that following non-approval of such policy by the shareholders, the Compensation Committee and the Board revisitthe matter and determine that the adoption of the compensation policy is beneficial to the company. Our initial compensation policy was approved by ourBoard, upon the recommendations of our Compensation Committee, and was approved by our shareholders on September 12, 2013, and ratified andapproved again on March 27, 2014. In December 2016, following its approval by our Compensation Committee and Board, our renewed compensationpolicy was approved by a majority of our shareholders, but not by the requisite special majority of the non-controlling, disinterested shareholders. Aspermitted under the foregoing provision of the Israeli Companies Law, our Compensation Committee and Board reconsidered the renewed compensationpolicy, determined that its adoption was beneficial to our Company based on several factors, and adopted it on February 9, 2017. Despite that approval, wehave committed to reviewing our renewed compensation policy in light of the feedback that we received from our shareholders and shareholder advocacyorganizations, and intend to bring an amended version for shareholder vote once again at our 2017 annual shareholder meeting.The compensation policy serves as the basis for setting the employment and compensation terms of our officers. The compensation policy also relatesto certain other factors, including advancement of our objectives, our work schedule and long-term strategy, and creation of appropriate incentives forexecutives. The policy also takes into account our risk management, size and the nature of our operations. The compensation policy also considers thefollowing factors: •the knowledge, skills, expertise and accomplishments of the relevant director or executive; •the director’s or executive’s roles and responsibilities and prior compensation agreements with him or her;59 •the relationship between the terms offered and the average compensation of the other employees of our company, including any personsemployed through manpower companies; •the impact of disparities in salary upon work relationships at our company; •the possibility of reducing variable compensation at the discretion of the board of directors, and the possibility of setting a limit on the exercisevalue of non-cash variable compensation; and •as to severance compensation, the period of service of the director or executive, the terms of his or her compensation during such serviceperiod, our company’s performance during their period of service, the person’s contribution towards our company’s achievement of its goalsand the maximization of its profits, and the circumstances under which the person is leaving our company.The compensation policy also addresses the following principles: •the link between variable compensation and long-term performance and measurable criteria; •the relationship between variable and fixed compensation, and a cap on the value of variable compensation; •the conditions under which a director or executive would be required to repay compensation paid to him or her if it was later shown that thedata upon which such compensation was based was inaccurate and was required to be restated in our financial statements; and •the minimum holding or vesting period for variable, equity-based compensation.The compensation policy also considers appropriate incentives from a long-term perspective and maximum limits for severance compensation.Our Compensation Committee is responsible for recommending the compensation policy to our Board for its approval (and subsequent approval byour shareholders) and is charged with duties related to the compensation policy and to the compensation of our office holders as well as functions related toapproval of the terms of engagement of office holders, including: •recommending whether our compensation policy should continue in effect, if the then-current policy has a term of greater than three years(approval of either a new compensation policy or the continuation of an existing compensation policy must in any case occur every three yearsfor a company such as ours); •recommending to our Board periodic updates to the compensation policy; •assessing implementation of the compensation policy; and •determining whether the compensation terms of our Chief Executive Officer need not be brought to approval of the shareholders (under specialcircumstances).Under Amendment 20, the terms of employment office holders require the approval of the Compensation Committee and the Board (assuming thatthey are consistent with the then-effective compensation policy). The terms of employment of directors and the chief executive officer (or any other officeholder whose compensation deviates from the then-effective compensation policy, as described below) must also be approved by shareholders.Changes to existing terms of employment of office holders (other than directors) can be made with the approval of the Compensation Committee only,if the committee determines that the change is not substantially different from the existing terms.Under certain circumstances, the Compensation Committee and the Board may approve an arrangement that deviates from the compensation policy,provided that such arrangement is approved by the special majority of the company’s shareholders mentioned above, or, in certain cases, even if thatshareholder approval is not achieved.Social Responsibility CommitteeOn February 9, 2017, the Board established a Social Responsibility Committee to assist the Company in overseeing its corporate social responsibilityactivities at its sites worldwide. These activities may include community outreach programs, philanthropy, employee volunteer activities, academic relationsand patient assistance. Dov Pekelman is the chairman of our Social Responsibility Committee. 60Nominating CommitteeOur Board does not currently have a nominating committee, as director nominations are made in accordance with the terms of our articles, as describedin “Board of Directors” above. We rely upon the exemption available to foreign private issuers under the Listed Company Manual of the NYSE from theNYSE listing requirements related to creation of a nominating committee. Also see Item 16.G “Corporate Governance” below.D. EMPLOYEESThe following table sets forth the number of full-time equivalents as of March 31, 2017*: United States Canada Israel Total Sales and Marketing 134 38 33 205 Administration 64 34 41 139 Research and Development 15 72 139 226 Production and Quality Control — 350 493 843 Total 213 494 706 1,413 The following table sets forth the number of full-time equivalents as of March 31, 2016*: United States Canada Israel Total Sales and Marketing 137 36 35 208 Administration 61 33 42 136 Research and Development 13 65 129 207 Production and Quality Control — 353 504 857 Total 211 487 709 1,407 The following table sets forth the number of full-time equivalents as of March 31, 2015*: United States Canada Israel Total Sales and Marketing 141 30 35 206 Administration 53 30 43 126 Research and Development 14 57 135 206 Production and Quality Control — 318 484 802 Total 208 435 696 1,339 *In the United States, distribution employees are included in the Sales and Marketing category.In general, we believe that our relationship with our employees is satisfactory. Since we are members of the Manufacturers Association, certain generalcollective agreements apply to us. These agreements concern principally the length of the workday, minimum daily wages for professional workers,insurance for work-related accidents, procedures for dismissing employees, pension payments, and other conditions of employment. We generally provideour employees with benefits and working conditions beyond the required minimums.The Board approved a new collective bargaining agreement dated January 5, 2017, (the “Collective Bargaining Agreement”) that amends and extendsthe collective bargaining agreement dated as of April 6, 2011 among Taro, the Histadrut Trade Union and Taro’s Employees Committee on behalf of Taro’sIsraeli employees. The Collective Bargaining Agreement has a term of three years and automatically renews for two-year periods unless notice is provided byeither side prior to the end of a term. The Collective Bargaining Agreement memorializes current employee-employer relations practices of Taro as well asadditional rights relating to job security, compensation and other benefits. Israeli law generally requires severance pay upon the retirement or death of anemployee or termination of employment in certain other circumstances. In addition, as of May 2006, under a collective agreement signed by theManufacturers Association, we are obligated to contribute to a pension plan, amounts equal to a certain percentage of the employees’ wages, and Section 14of the Severance Pay Law (“Section 14”) applies to most of our employees. Since 2011, the Company’s obligations to the employees’ pension plan havebeen governed by the Collective Bargaining Agreement, including the applicability of Section 14 to the Company’s employees and the provision rates to thevarious provident funds. We are complying with these obligations. We fund our ongoing severance obligations by contributing a sum equal to 8.3% of theemployee’s wages to funds61known as Pension Funds or the Managers’ Insurance. These funds provide different combinations of savings plan, life insurance and severance pay benefitsto our employees, and each employee, according to the fund chosen by them, receives a pension or a lump sum payment upon retirement and severance pay,if the employee is legally entitled to it, upon termination of employment. Under Section 14 of the Severance Pay Law, in the event of dismissal, all paymentsmade to pension funds or any other similar funds serve as severance pay and the Company is not obliged to pay the employee any other severance pay. Inaddition to the severance pay, each employee contributes an amount equal to 5.75%-7.0% of their salary towards their pension plan. The Companycontributes an additional sum between 6.25% - 7.5% of the employee’s salary. Beginning in July 2016, the minimum numbers increased according to Israelilaw. Employees will currently contribute at least 5.75% of their salary toward their pension plan, and the Company contributes an additional sum of at least6.25% of the employee's salary. Israeli employees and employers are required to pay predetermined sums to the National Insurance Institute (an agencysimilar to the United States Social Security Administration), which include payments for national health insurance. The payments to the National InsuranceInstitute are approximately 19.5% of an employee’s wages (up to a specified amount), of which the employee contributes approximately 12.0% and wecontribute approximately 7.5%.E. SHARE OWNERSHIPThe following table sets forth certain information regarding the ownership of our ordinary shares by our directors and executive officers as ofMarch 31, 2017. The percentage of ownership is based on ordinary shares outstanding as of March 31, 2017. None of the ordinary shares owned by any ofour directors and executive officers has voting rights different from those possessed by other holders of our ordinary shares. Percentage of Number ofOrdinary OutstandingOrdinary Name Shares Shares Dilip Shanghvi (1) — 0.00%Abhay Gandhi — 0.00%Sudhir Valia (2) — 0.00%Uday Baldota — 0.00%Linda Benshoshan — 0.00%Elli Streit — 0.00%Dov Pekelman — 0.00%James Kedrowski — 0.00%Mariano Balaguer — 0.00%Stephen Manzano, Esq. — 0.00%Avi Avramoff, Ph.D. — 0.00%Itamar Karsenti — 0.00%Michael Teiler — 0.00%Daryl LeSueur — 0.00%Michael Perfetto — 0.00%Michele Visosky * * Jayesh Shah — 0.00%Chantal LeBlanc — 0.00%Total for all directors and officers (18 persons) listed above, asa group * * *Less than 1%(1)Dilip Shanghvi, as the Managing Director of Sun Pharma’s board of directors and along with entities controlled by him and members of his family,control 54.4% of Sun Pharma. As of March 31, 2017, Sun Pharma and its affiliates owned 72.8% of Taro’s outstanding ordinary shares.(2)Sudhir Valia is also a director of Sun Pharma. As of March 31, 2017, Sun Pharma and its affiliates owned 72.8% of Taro’s outstanding ordinary shares.62The following table sets forth certain information regarding the ownership of our founders’ shares as of March 31, 2017. The percentage of ownershipis based on 2,600 founders’ shares outstanding as of March 31, 2017. Name Number ofFounders’Shares Percentage ofOutstandingFounders’Shares Alkaloida Chemical Company Exclusive Group Ltd. (1) 2,600 100.00% (1)Alkaloida Chemical Company Exclusive Group Ltd. (“Alkaloida”), a subsidiary of Sun, owns all 2,600 of our outstanding founders’ shares and isentitled to exercise one-third of the total voting power in our company regardless of the number of ordinary shares then outstanding. As a result of thecontrol that may be deemed to be held by Alkaloida, each of Dilip Shanghvi and Sudhir Valia may be deemed to beneficially own the founders’ sharesheld by Alkaloida. Each of Mr. Shanghvi and Mr. Valia disclaims beneficial ownership of such shares, except to the extent of his pecuniary interesttherein.As of March 31, 2017, the directors and executive officers listed above held no options to purchase our ordinary shares. ITEM 7.MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONSA. MAJOR SHAREHOLDERSOrdinary SharesThe following table sets forth certain information as of March 31, 2017, with respect to the ownership of our ordinary shares by all persons who areknown to us to beneficially own 5% or more of our outstanding ordinary shares. Beneficial ownership is determined in accordance with rules of the SEC andgenerally includes voting and investment power with respect to our ordinary shares, as well as the right to receive the economic benefit of ownership of suchshares. The holder of the ordinary shares listed in the below table does not have voting rights with respect to such shares that are different from thosepossessed by other holders of our ordinary shares. Percentage ownership is based on 40,513,209 ordinary shares outstanding as of March 31, 2017. OrdinaryShares Percent ofOrdinary Name BeneficiallyOwned SharesOutstanding Sun 29,497,813 (1) 72.8% (1)As reported on the Schedule 13D/A filed by Sun on November 27, 2013.During the year ended March 31, 2014, the percent of ordinary shares owned by Sun increased from 65.9% to 68.9% due to our repurchase of1,959,514 ordinary shares in December 2013. During each of the years ended March 31, 2015 and 2016, there was no significant change in Sun’s ownershipof our ordinary shares. During the year ended March 31, 2017, the percentage of ordinary shares owned by Sun increased to 72.8% due to the repurchase of2,252,725 shares during the year. As of May 31, 2017, Sun’s ownership percentage increased an additional 0.1% to 72.9%, due to our continued repurchaseof additional ordinary shares. Founders’ SharesAt the formation of our Company in 1959, two classes of shares were created, founders’ shares and ordinary shares. One-third of the voting power ofall of our voting shares is allocated to the founders’ shares. Alkaloida, which is a subsidiary of Sun Pharma, owns all of the 2,600 outstanding founders’shares.Voting PowerAs of March 31, 2017, Sun controls 81.9% of the voting power in our Company by reason of its (i) beneficial ownership of an aggregate of 72.8% ofour ordinary shares and (ii) ownership of the founders’ shares. As of May 31, 2017, Sun controls 81.9% of the voting power in our Company due to theadditional ordinary shares repurchased by the Company.B. RELATED PARTY TRANSACTIONSIn addition to Sun controlling 81.9% of the voting power in our Company as of March 31, 2017, Taro has substantial relationships with Sun. Certainof Taro Board members are also members of various Sun entities board of directors, including our63Chairman, Dilip Shanghvi, who is also Managing Director of Sun Pharma’s board of directors. In addition, certain of Taro’s officers and executives are alsoexecutives of Sun.Arrangements with SunSince 2013, Taro has entered into various commercial transactions, including product distribution and logistics, manufacturing and serviceagreements with Sun in the ordinary course of our business. The Company does not currently deem any of these transactions material or unusual and believesthat the terms of these transactions are comparable to those offered by or that could be obtained from unrelated third parties. Additionally, pursuant to Israelirequirements, each of the material transactions was presented to the Audit Committee, which determined that each such transaction was not consideredextraordinary, as defined in the Israeli Companies Law and therefore did not require shareholder approval. The Audit Committee further determined theapproval requirements for the different types of transactions.In April 2016, Sun and Taro affiliates entered into a services arrangement (the “Services Agreement”) that is intended to allow the companies to sharethe services of certain employees of the respective companies involved in certain North American management and operations functions in North Americaand Israel in the following areas: Human Resources, Information Technology, Legal (including intellectual property matters), Management, Procurement,and certain aspects of Commercial and Customer Service, Finance (including Accounts Receivable and Accounts Payable processing and Tax compliance),Regulatory Affairs. Supply Chain and Operations (Management Services only) (each a “Service Area” and collectively, “Service Areas”). The companies are required to maintain records (the “Service Reports”) of the costs associated with the provision of the services under the ServicesAgreement, and allocate such costs to the applicable Services Areas, based upon the established allocation methodologies for each Service Area. TheServices Agreement requires our Audit Committee to review the Service Reports on a semi-annual basis and the Services Agreement as a whole, on an annualbasis to determine its efficacy and whether it is in our best interests.Each of the employees providing services under the Services Agreement is required to sign a written acknowledgment of his/her receipt of andagreement to be bound by (a) the confidentiality and non-disclosure agreement between Sun and Taro, and (b) guidelines for consideration in theperformance of such services, including the identification of potential conflicts of interest.In April 2017, the Board of Directors approved for Taro to negotiate an agreement with Sun whereby Taro's U.S. branded products team will promote acombined portfolio of Taro and Sun corticosteroid products. Under this agreement, Sun will sell its products to customers and will pay Taro a percentage ofthe net sales for Taro's promotional services.C. INTERESTS OF EXPERTS AND COUNSELNot applicable. ITEM 8.FINANCIAL INFORMATIONA. CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATIONThe financial statements required by this item are found at the end of this 2017 Annual Report, beginning on page F-1.Other Financial InformationWe manufacture pharmaceutical products in our facilities in Israel and Canada. A substantial amount of these products are exported, both to ouraffiliates and non-affiliates. For a breakdown of our sales by geographic market for the past three years, see “Item 4—Information on the Company—BusinessOverview—Sales and Marketing.”Legal Proceedings From time to time, we are a party to routine litigation incidental to our business, including patent litigation resulting from our use of the patentchallenge procedures set forth in the Hatch Waxman Act, product liability litigations, and employment litigations, none of which, individually or in theaggregate, is expected to have a material effect on our financial position or profitability. Other litigation, as disclosed herein, may have a material adverseeffect on our financial position or profitability.On September 8, 2016, Taro U.S.A. received a grand jury subpoena from the United States Department of Justice, Antitrust Division, seekingdocuments relating to corporate and employee records, generic pharmaceutical products and pricing, communications with competitors and others regardingthe sale of generic pharmaceutical products, and certain other related64matters. Taro U.S.A. is in the process of responding to the grand jury subpoena. Certain current and former officers in Taro U.S.A.’s commercial team havealso received related subpoenas.The Company and Taro U.S.A. have been named as defendants in numerous putative class action lawsuits brought by purchasers and payors of genericClobetasol, Desonide, Fluocinonide, Econazole, and Clomipramine alleging that the Company and/or Taro U.S.A. have conspired with competitors to fixprices, rig bids or allocate customers in these markets. Each of these cases has been transferred to the United States District Court for the Eastern District ofPennsylvania for coordinated proceedings under the caption In re: Generic Drug Pricing Antitrust Litigation, MDL No. 2724.The Company and two of its former officers were named as defendants in a putative shareholder class action entitled Speakes v. Taro PharmaceuticalIndustries, Ltd., No. 16-CV-08318, filed October 25, 2016, which is now pending in the United States District Court for the Southern District of New York. The Company has not yet responded to the Complaint in the Speakes action. In February 2017, the Company filed an appeal pursuant to Section 153 of the Income Tax Ordinance (New Version), 1961 in the Haifa District Courtchallenging the Israel Tax Authority’s (“ITA”) tax assessment and capital loss denial for the period January 1, 2010 through March 31, 2014. The ITA issueda tax assessment for the defined period in the amount of $40.8 million (before interest, linkage and penalties) and determined that an unutilized capital lossin an amount of $74.6 million that has been claimed by the Company has been denied. The Company has consulted with its tax advisors and believes it hasa good position on the appeal.Dividend PolicyWe have never paid cash dividends and we do not anticipate paying any cash dividends in the foreseeable future. We currently intend to retain ourearnings to finance the development of our business, but such policy may change depending upon, among other things, our earnings, financial condition andcapital requirements.B. SIGNIFICANT CHANGESSubsequent to March 31, 2017, the Company received approvals from the FDA for four additional ANDAs: Tazarotene Cream, 0.1%, FelbamateTablets, 400 mg and 600 mg, Felbamate Oral Suspension USP, 600 mg/5 mL, and Betamethasone Valerate Foam, 0.12%.On April 25, 2017, Crescita Therapeutics Inc. (“Crescita”), announced it had entered into a development and commercialization license agreementwith Taro, under which, Crescita has granted Taro an exclusive license to the rights to sell and distribute Pliaglis® in the U.S. market and for a second-generation enhanced version with patent pending.During the period of June 1, 2017 through June 16, 2017, the Company repurchased 45,814 shares at an average price of $106.44 under its November2016 authorization. There is $187.2 million remaining for this authorization. As a result of the repurchases, Sun’s ownership increased to 73.0% and itsvoting ownership increased to 82.0% as of June 16, 2017. ITEM 9.THE OFFER AND LISTINGA. OFFER AND LISTING DETAILSOur ordinary shares are listed on the NYSE as of March 22, 2012, under the symbol “TARO.” The following table sets forth the high and low closingsale prices of our ordinary shares as quoted on the NYSE during the last five fiscal years as of the end of the reporting period of this 2017 Annual Report: Year ended High Low 3/31/2013 $59.31 $35.55 3/31/2014 $121.32 $54.03 3/31/2015 $171.77 $103.80 3/31/2016 $156.98 $129.09 3/31/2017 $150.10 $93.68 65The following table sets forth the high and low closing sale prices of our ordinary shares as quoted on the NYSE, during each fiscal quarter of the mostrecent two fiscal years, as of the end of the respective reporting period of this 2017 Annual Report, and any subsequent period: High Low Year end March 31, 2016 First Quarter $151.00 $135.50 Second Quarter $154.50 $129.09 Third Quarter $156.98 $135.44 Fourth Quarter $154.74 $131.80 Year end March 31, 2017 First Quarter $150.10 $130.08 Second Quarter $146.01 $110.51 Third Quarter $111.00 $93.68 Fourth Quarter $123.39 $100.00 The following table sets forth the high and low closing sale prices of our ordinary shares as quoted on the NYSE during the last six months: High Low December 2016 $107.55 $100.31 January 2017 $108.21 $100.00 February 2017 $119.91 $104.25 March 2017 $123.39 $111.72 April 2017 $118.28 $114.21 May 2017 $117.26 $103.88 B. PLAN OF DISTRIBUTIONNot applicable.C. MARKETSOur ordinary shares have been listed on the NYSE under the symbol “TARO” since March 22, 2012. Our ordinary shares are not offered, listed ortraded on any other exchange or regulated market.D. SELLING SHAREHOLDERSNot applicable.E. DILUTIONNot applicable.F. EXPENSES OF THE ISSUENot applicable. ITEM 10.ADDITIONAL INFORMATIONA. SHARE CAPITALNot applicable.B. MEMORANDUM AND ARTICLES OF ASSOCIATIONOur registration number at the Israeli Registrar of Companies is 52-002290-6.66Objects and PurposesOur Memorandum of Association provides that our main objects and purposes include any business connected with the developing, manufacturing,processing, supplying, marketing and distributing of Rx, OTC medical and other health care products.In February 2000, the Israeli Companies Ordinance (New Version—1983) was replaced with the Israeli Companies Law. Because our Articles ofAssociation were adopted before the enactment of the Israeli Companies Law, they are not always consistent with the provisions of the new law. In allinstances in which the Israeli Companies Law changes or amends provisions in the Companies Ordinance, and, as a result, our Articles of Association are notconsistent with the Israeli Companies Law, the provisions of the Israeli Companies Law apply unless specifically stated otherwise in the Israeli CompaniesLaw.Approval of Specified Related Party Transactions Under Israeli Law and Our Articles of AssociationThe Israeli Companies Law requires the approval of the audit committee, the board of directors and, in certain cases, the approval of the shareholdersin that sequence, in order to effect specified related parties transactions, other than compensatory arrangements, for which the approval of the compensationcommittee, board of directors and, in certain cases, the shareholders is required.Pursuant to the provisions of the Israeli Companies Law, our Audit Committee has (i) preapproved criteria for the classification of transactions withrelated parties as extraordinary or ordinary transactions, (ii) with respect to those classified as ordinary transactions, determined whether they are negligible ornon-negligible, as defined in the Israel Companies Law, and (iii) determined the approval requirements for transactions that are not negligible. According tothe Company’s policy, if a transaction is deemed an ordinary transaction as per the preapproved criteria, the transaction will only require approval by ourBoard; if, however, a transaction is not covered by the preapproved criteria, it has to be first brought before the Audit Committee for its determination. Underthe Israeli Companies Law, an “extraordinary transaction” is generally a transaction other than in the ordinary course of business, other than according toprevailing market terms, or that is likely to have a material impact on a company’s profitability, assets or liabilities.Fiduciary Duties of Office HoldersThe Israeli Companies Law imposes fiduciary duties that “office holders” (as defined in the Israeli Companies Law and described above in this 2017Annual Report) owe to a company. An office holder’s fiduciary duties consist of a duty of care and a duty of loyalty. The duty of care requires an officeholder to act with the level of care that a reasonable office holder in the same position would have acted with under the same circumstances. The duty of careincludes a duty to use reasonable means to obtain: •information on the advisability of a given action brought for the office holder’s approval or performed by the office holder by virtue of his orher position; and •all other information of importance with respect to these actions.The duty of loyalty generally requires an office holder to act in good faith and for the benefit of the company, and this includes a duty to: •refrain from any conflict of interest between the performance of his or her duties to the company and his or her other positions or personalaffairs; •refrain from any activity that is competitive with the company; •refrain from exploiting any business opportunity of a company to receive personal gain for himself, herself or others; and •disclose to the company any information or documents relating to the company’s affairs that the office holder has received as a result of his orher position in the company.Compensation of Office HoldersUnder the Israeli Companies Law, arrangements as to compensation of a public company’s office holders who are directors or the chief executiveofficer require the approval of the compensation committee, the board of directors and the shareholders, in that order, except where the regulations adoptedunder the Israeli Companies Law provide for certain easements from those requirements. Arrangements as to compensation of a public company’s officeholders who are not directors or the chief executive officer generally (assuming that the arrangement conforms to the then-effective compensation policy)require the approval of the compensation committee and the board of directors in that order as detailed above in “Approval of Interested Party Transactions”in Item 6.C.67Disclosure of Personal Interest of an Office HolderThe Company’s Articles of Association provide that a director must disclose his interest in a contract or arrangement at the meeting of the Board ofDirectors at which such contract or arrangement is first taken into consideration. The Israeli Companies Law requires that an office holder (including adirector) or a controlling shareholder who is aware that he or she has a personal interest in connection with any existing or proposed transaction by thecompany, promptly disclose to the company the nature of any personal interest that he or she may have, including all related material information ordocuments known to him or her. “Personal Interest”, as defined by the Israeli Companies Law, includes an interest of any person in an act or transaction ofthe company, including interest of his relative or of a corporate body in which such person or his relative is either a holder of 5% or more of the corporatebody shares or voting power, is a director or the chief executive officer (referred to as a “general manager” under the Israeli Companies Law), or is entitled toappoint at least one director or the general manager and including the personal interest of a person voting by a proxy granted to him/her by another person,even if the person so granting the proxy does not have a personal interest in the transaction. In addition, the vote of a person who was granted a proxy fromthe shareholder who has a personal interest shall be deemed the vote of a shareholder having a personal interest, even if proxy holder has discretion on how tovote. An interest stemming merely from ownership of shares in the company is not deemed a Personal Interest. In the case of a non-extraordinary transaction,the office holder’s duty to disclose does not apply to a personal interest of the office holder’s relative. Under the Israeli Companies Law, the office holder must disclose his personal interest without delay and no later than the first meeting of thecompany’s board that discusses the particular transaction. Once disclosure is made in compliance with the above disclosure requirement, the board ofdirectors may approve the transaction between the company and an office holder or a third party in which an office holder has a personal interest, unless thecompany’s articles of association provide otherwise. A transaction that is adverse to the company’s interest or that is not performed by the officer holder ingood faith may not be approved. Approval first by the company’s audit committee and subsequently by the board of directors is required for an extraordinarytransaction with an office holder. If the transaction concerns compensation, exemption, indemnification or insurance of an office holder, then it must first beapproved by the company’s compensation committee and then by the board of directors, and, under certain circumstances (for directors, the chief executiveofficer, and any executive officer whose compensation terms do not conform to the then-existing compensation policy), by the shareholders of the company,in that order. Compensation of an individual office holder, including the chief executive officer (but excluding a director), that does not conform to thecompany’s compensation policy may be adopted under special circumstances despite failure to obtain shareholder approval if, following the relevantshareholder vote, the compensation committee followed by the board once again approves the compensation, based on renewed and specific analysis ofrelevant factors.A director who has a personal interest in a matter that is considered at a meeting of the board of directors or the audit committee (other than a non-extraordinary transaction) or the compensation committee may not be present at this meeting, unless the chairman of the audit committee, compensationcommittee or the board of directors determined that the participation of such director is required in order to present the transaction. A director who has apersonal interest in a matter that is considered at a meeting of the board of directors, the audit committee or compensation committee may not vote on thismatter, unless a majority of the members of the board of directors or such committee, as the case may be, has a personal interest in the matter, in which caseshareholder approval is also required.Disclosure of Personal Interests of a Controlling ShareholderUnder the Israeli Companies Law, the disclosure requirements that apply to an office holder also apply to a controlling shareholder of a publiccompany. For these purposes, a controlling shareholder is a shareholder who has the ability to direct the activities of a company (other than solely from his orher position on the board of directors or any other position with the company), including a shareholder who holds 25% or more of the voting rights if noother shareholder owns more than 50% of the voting rights. For purposes of attribution, the Israeli Companies Law provides that if two or more persons,holding voting rights in the company, each have a personal interest in the approval of the same transaction, such persons will be deemed to be one holder.Extraordinary transactions with a controlling shareholder or in which a controlling shareholder has a personal interest, including a private offering inwhich the controlling shareholder has a personal interest, and the engagement of a controlling shareholder or his or her relative with a public company, as anoffice holder or employee, require the approval of the audit committee, the board of directors and the shareholders of the company, in that order. Thecompensation or indemnification of a controlling shareholder or his or her relative with a public company requires the approval of the compensationcommittee, the board of directors and the shareholders, in that order.68The shareholder approval must, in each case be by a majority of the votes cast at the meeting, whether in person or by proxy, provided that: •the majority includes at least the majority of the total votes of the non-controlling shareholders who lack a personal interest in approval of thetransaction or compensation (as applicable), or anyone voting on their behalf present at the meeting in person or by proxy; or •the total number of votes of the non-controlling, disinterested shareholders that are voted against the transaction does not exceed two percent(2%) of the voting rights in the company.To the extent that any such transaction with a controlling shareholder is for a period extending beyond three years, approval is required once everythree years, unless the audit committee determines that the duration of the transaction is reasonable given the circumstances related thereto.All transactions (other than compensatory transactions, which are subject to approval by the compensation committee) with a controlling shareholder,or in which a controlling shareholder has a personal interest, regardless of whether such transactions are extraordinary, are subject to the oversight of the auditcommittee. The audit committee is required to establish procedures for a competitive process to be used by the company prior to entering into any suchtransaction, or other procedures where appropriate.Director QualificationsOur Articles of Association do not require directors to hold shares in the Company. According to the Articles, the number of directors of the Companyshould be not less than five or more than twenty-five. Under the Israeli Companies Law, we must have at least two statutory external directors on the Board ofDirectors. See Item 6.C. “Qualifications of Statutory External Directors.”Voting, Rights Attached to Shares, Shareholders’ Meetings and ResolutionsOur directors, other than our statutory external directors, are elected at annual general meetings of our shareholders. A director holds office until thenext annual general meeting, unless he or she resigns or is earlier removed from office by an ordinary resolution passed at an extraordinary general meeting ofour shareholders.Our share capital is divided into founders’ shares and ordinary shares. Holders of each paid-up share are entitled to participate equally in the paymentof dividends and other distributions and, in the event of liquidation, in all distributions after the discharge of liabilities to creditors. All ordinary sharestogether entitle their holders to two-thirds of the voting power of our Company. All founders’ shares together entitle their holders to one-third of the votingpower of our Company. Under our Articles of Association, an increase to the share capital, creation of preferred shares or shares with special rights,consolidation or division of share capital, cancellation of shares and reduction in share capital, require a special resolution of the shareholders, i.e. anaffirmative vote of 75% of the voting power voting in person or by proxy. The rights attached to any class of shares may be modified with the consent inwriting of the holders of three-fourths of the issued shares of that class or by way of a special resolution of the shareholders.Under our Articles of Association, dividends on our ordinary shares may be paid out of profits and other surplus, as defined in the Israeli CompaniesLaw or as otherwise approved by a court of law, provided that there is no reasonable concern that the dividend will prevent us from satisfying our existingand foreseeable obligations as they become due.Under the Israeli Companies Law and our Articles of Association, an ordinary resolution of the shareholders (for example, with respect to theappointment of auditors) requires the affirmative vote of a majority of the voting power voting in person or by proxy, whereas a special resolution (forexample, a resolution amending the Articles of Association or authorizing changes in capitalization or in the rights attached to a class of shares) requires theaffirmative vote of at least 75% of the voting power voting in person or by proxy. Rights pertaining to a particular class of shares require the vote of 75% ofsuch class of shares in order to change such rights in addition to the approval of 75% of the voting power of the shareholders voting in person, or by proxy,on such resolution. The quorum required for a meeting of shareholders consists of at least three shareholders present, in person or by proxy, who hold orrepresent between them at least one-third of the outstanding voting power unless otherwise required by applicable rules. A meeting adjourned for lack of aquorum generally is adjourned to the same day in the following week at the same time and place or any time and place as the board of directors maydesignate. If at such reconvened meeting the required quorum is not present, any two shareholders present in person, or by proxy, shall constitute a quorum.Shareholder MeetingsUnder our Articles of Association, a general meeting of the shareholders must be held at least once in every calendar year, but not more than 15months after the last preceding meeting. All general meetings must be held in Israel. The Board of Directors may69call an extraordinary general meeting of the shareholders at any time. The Board shall convene an extraordinary general meeting of the shareholders, at therequest of (i) any two of our directors or one-quarter of the members of our board of directors or (ii) one or more shareholders holding, in the aggregate, either(a) 5% or more of our outstanding issued shares and 1% of our outstanding voting power or (b) 5% or more of our outstanding voting power, provided thatthe request complies with the requirements provided by the Articles of Association, including but not limited to statement of the object of the meeting. Anyshareholder may appoint by power of attorney a person to act as his representative at a meeting. The original instrument appointing a representative or anotarized copy must be deposited at the principal office of the Company at least 48 hours before the meeting.The Israeli Companies Law requires that notice of any annual general meeting or extraordinary general meeting be provided to shareholders at least 21days prior to the meeting and if the agenda of the meeting includes, among other matters, the appointment or removal of directors, the approval oftransactions with office holders or interested or related parties, approval of the company’s general manager to serve as the chairman of its board of directors oran approval of a merger, notice must be provided at least 35 days prior to the meeting.The Israeli Companies Law allows one or more of our shareholders holding at least 1% of the voting power of a company to request the inclusion of anadditional agenda item for an upcoming shareholders meeting, assuming that it is appropriate for debate and action at a shareholders meeting. Under recentlyadopted regulations, such a shareholder request must be submitted within three days or, for certain requested agenda items, seven days following ourpublication of notice of the meeting. If the requested agenda item includes the appointment of director(s), the requesting shareholder must comply withparticular procedural and documentary requirements. If our board of directors determines that the requested agenda item is appropriate for consideration byour shareholders, we must publish an updated notice that includes such item within seven days following the deadline for submission of agenda items by ourshareholders. The publication of the updated notice of the shareholders meeting does not impact the record date for the meeting. In lieu of this process, wemay opt to provide pre-notice of our shareholders meeting at least 21 days prior to publishing official notice of the meeting. In that case, our 1%shareholders are given a 14-day period in which to submit proposed agenda items, after which we must publish notice of the meeting that includes anyaccepted shareholder proposals.Under the Israeli Companies Law, shareholders are not permitted to take action by way of written consent in lieu of a meeting.Restriction on VotingIn order to reduce our risk of being classified as a Controlled Foreign Corporation under the Code, we amended our Articles of Association in 1999 toprovide that no owner of any of our ordinary shares is entitled to any voting right of any nature whatsoever with respect to such ordinary shares if (a) theownership or voting power of such ordinary shares was acquired, either directly or indirectly, by the owner after October 21, 1999, and (b) the ownershipwould result in our being classified as a Controlled Foreign Corporation. This provision has the practical effect of prohibiting each citizen or resident of theUnited States who acquired or acquires our ordinary shares after October 21, 1999, from exercising more than 9.9% of the voting power in our company, withrespect to such ordinary shares, regardless of how many shares the shareholder owns. The provision may therefore discourage United States persons fromseeking to acquire, or from accumulating, 15% or more of our ordinary shares (which, due to the voting power of the founders’ shares, would represent 10% ormore of the voting power of our company).Duties of ShareholdersUnder the Israeli Companies Law, each and every shareholder has a duty to act in good faith and in an acceptable manner in exercising his, her or itsrights and fulfilling his, her, or its obligations towards the company and other shareholders and to refrain from abusing his, her or its power, such as in votingin the general meeting of shareholders and/or in a meeting of a different class of shares, on the following matters: •any amendment to the articles of association; •an increase of the authorized share capital; •a merger; or •the approval of actions of office holders in breach of their duty of loyalty and of interested party transactions.In addition, each and every shareholder has the general duty to refrain from depriving other shareholders of their rights.Furthermore, a duty to act in fairness towards the company applies to any controlling shareholder, any shareholder who knows that he possesses thepower to determine the outcome of a shareholder vote and any shareholder that, pursuant to the provisions of the Articles of Association, has the power toappoint or to prevent the appointment of an office holder in the company or any other power in regard to the company. The Israeli Companies Law does notdescribe the substance of this duty to act in fairness.70These various shareholder duties may restrict the ability of a shareholder to act in what the shareholder perceives to be his, her or its own best interests.Transfer of SharesFully paid ordinary shares are issued in registered form and may be freely transferred under our Articles of Association unless the transfer is restrictedor prohibited by another instrument (or by any other limitation described herein).Mergers and Acquisitions under Israeli LawThe Israeli Companies Law and the regulations promulgated thereunder include provisions that allow a merger transaction, in general, and require thateach company that is a party to a merger has the transaction approved by its board of directors and a vote of the majority of the voting power of its shares at ashareholders’ meeting called on at least 35 days’ prior notice by each of the merger parties. Under the Articles of Association, the required shareholder vote isa supermajority of at least 75% of the shares voting in person or by proxy on the matter. A court may determine that a company duly approved a merger, incertain cases, upon the request of shareholders holding 25% or more of the voting power in the company. A court may not approve a merger unless it isconvinced that the merger offer is fair and reasonable, in light of the valuation of the merging companies and the consideration which has been offered to theshareholders. Upon the request of a creditor of either party of the proposed merger, the court may delay or prevent the merger if it concludes that there existsa reasonable concern that as a result of the merger the surviving company will be unable to satisfy the obligations of any of the parties to the merger. Inaddition, a merger may not be completed unless at least 30 days have passed from the time that the shareholders of each company have approved the mergerand 50 days have passed from the time that a merger proposal has been delivered to the Israeli Registrar of Companies.In general, the Israeli Companies Law also provides that an acquisition of shares of a public company is to be made by means of a special tender offerif, as a result of the acquisition, the purchaser would become a holder of 25% or more of the voting rights in the company if there is no existing holder of 25%or more of the voting rights in the company. If there is no existing holder of more than 45% of the voting rights in the company, in general, the IsraeliCompanies Law provides that an acquisition of shares of a public company is to be made by means of a special tender offer if as a result of the acquisition thepurchaser would become a holder of more than 45% of the voting rights in the company.These requirements do not apply if, in general, the acquisition (1) was made in a private placement that received shareholders’ approval (confirmingthat the purchaser would become a holder of 25% or greater than 45%, of the voting power in the company, unless there is already a holder of 25% or more ormore than 45% of the voting power in the company), (2) was from a holder of 25% or more, of the voting power in the company which resulted in the acquirerbecoming a holder of 25% or more of the voting power in the company, or (3) was from a holder of greater than 45% of the voting power in the companywhich resulted in the acquirer becoming a holder of greater than 45% of the voting power in the company. The tender offer must be extended to allshareholders, but the offeror is not required to purchase more than 5% of the company’s outstanding shares, regardless of how many shares are tendered byshareholders. The tender offer may be consummated only if (i) at least 5% of the company’s outstanding shares will be acquired by the offeror and (ii) thenumber of shares tendered in the offer exceeds the number of shares whose holders objected to the offer.If as a result of any acquisition of shares, the acquirer will hold more than 90% of the company’s issued and outstanding share capital or of a class ofshares or more than 90% of the voting power of the company, the acquisition may not be made other than through a tender offer to acquire all of the shares orall of the shares of such class. If the shares represented by the shareholders who did not tender their shares in the tender offer constitute less than 5% of theissued and outstanding share capital of the company or of a class of shares (or voting power thereof), and a majority of the shareholders offered such tenderwho do not have a personal interest in receipt of such tender accepted such tender (which condition shall not apply if, following consummation of the tenderoffer, the acquirer holds at least 98% of all of the company’s outstanding shares or voting rights), all of the shares that the acquirer offered to purchase will betransferred to the acquirer by operation of law. If the dissenting shareholders hold 5% or more of the issued and outstanding share capital (or voting power) ofthe company or of a class of shares, the acquirer may not acquire additional shares of the company from shareholders who accepted the tender offer to theextent that following such acquisition the acquirer would then own over 90% of the company’s issued and outstanding share capital or of a class ofshares. Shareholders may petition the court to alter the consideration for the acquisition to reflect a fair value. Such petition may be submitted within sixmonths from the date the tender offer has been accepted. However, the acquirer may provide in the tender offer documents that a shareholder that accepts theoffer may not seek such a court appraisal.Israeli tax law may treat stock-for-stock acquisitions between an Israeli company and a foreign company less favorably than does United States taxlaw. For example, unless the stock-for-stock transaction is considered a tax-deferred merger which relates to a transfer of at least 80% of the shares in thetransferred company, Israeli tax law subjects a shareholder who exchanges his ordinary shares for shares in another corporation (which is listed for trading ona stock exchange) to taxation on half the shareholder’s shares two years following the exchange and on the balance four years thereafter even if theshareholder has not yet sold the new shares.71Indemnification and Insurance of Office HoldersInsurance of Office HoldersSubject to the provisions of the Israeli Companies Law, our Articles of Association provide that we may enter into an insurance contract that wouldprovide coverage in respect of liability imposed on any of our office holders with respect to an act performed in the capacity of an office holder for: •a breach of the office holder’s duty of care to the company or to another person, to the extent such a breach arises out of the negligent conductof the officer holder; •a breach of the office holder’s duty of loyalty to the company, provided that the office holder acted in good faith and had reasonable cause toassume that his or her act would not prejudice the good of the company; or •a financial liability imposed upon him or her in favor of another person.We have obtained liability insurance covering our officers and directors.Indemnification of Office HoldersSubject to the provisions of the Israeli Companies Law, our Articles of Association provide that we may indemnify any of our office holders, inadvance and retroactively, against the following liabilities imposed or expenses incurred on the office holder with respect to an act performed in the capacityof an office holder: •a monetary obligation imposed on him or her in favor of another person by a court judgment, including a compromise judgment or anarbitrator’s award approved by the court; •reasonable litigation expenses, including attorneys’ fees, expended by the office holder due to an investigation or a proceeding institutedagainst him or her by an authority competent to administer such an investigation or proceeding that was either finalized without the filing of anindictment (as defined in the Israeli Companies Law) against him or her and “without any monetary obligation imposed in lieu of criminalproceedings” (as defined in the Israeli Companies Law) or finalized “without the filing of an indictment” against him or her with a “monetaryobligation imposed in lieu of criminal proceedings” relating to an offense that does not require proof of criminal intent; and •reasonable litigation expenses, including attorneys’ fees, expended by the office holder or charged to him or her by a court in connection withproceedings we institute against him or her or that are instituted on our behalf or by another person or a criminal charge from which he or she isacquitted, or a criminal charge in which he or she is convicted of an offense that does not require proof of criminal intent.Under the Israeli Companies Law, indemnification in advance in respect to monetary liabilities to third parties are limited to those events which, in theopinion of the board of directors, are to be expected in light of the company’s actual activities when the indemnification is granted and to a sum or a standardwhich the board of directors determines that are reasonable in the circumstances.Exemption of Office HoldersThe Israeli Companies Law provides that a company may exempt an office holder in advance from liability for damages flowing from breach of hisduty of care to the company, but only if a provision authorizing such exemption is included in its articles of association. Our Articles of Association includesuch a provision. The company may not exempt in advance a director from liability arising out of a prohibited dividend or distribution to shareholders.Limitations on Exemption, Insurance and IndemnificationThe Israeli Companies Law provides that a company may not exempt or indemnify an office holder for, or enter into an insurance contract that wouldprovide coverage for any monetary liability incurred as a result of, any of the following: •a breach by the office holder of his or her duty of loyalty unless, with respect to indemnification and insurance coverage, the office holder actedin good faith and had a reasonable basis to believe that the act would not prejudice the good of the company; •a breach by the office holder of his or her duty of care which was committed intentionally or recklessly, except when it was committed solelyby negligence; •any act or omission done with the intent to derive an illegal personal benefit; or •any civil fine, monetary sanction or forfeiture imposed against the office holder.72In addition, under the Israeli Companies Law, exemption, indemnification, and procurement of insurance coverage (except where the regulationsprovide for certain easements from such requirements with respect to insurance) for office holders must be approved by the compensation committee andboard of directors of a company and, if the beneficiary is a director or the chief executive officer (or a controlling shareholder and his or her relative), by theshareholders, in that order.Prior to Amendment 20 becoming effective and following approval by the Audit Committee and Board of Directors and, in the case of directors,approval by our shareholders, we entered into exemption and indemnification agreements with our directors and certain officers.C. MATERIAL CONTRACTSDuring the two years preceding the date of this 2017 Annual Report, neither we nor any of our affiliates and subsidiaries entered into any materialcontracts, other than contracts entered into in the ordinary course of business.On December 23, 2016, the Company announced the sale of U.S. rights to Keveyis® (dichlorphenamide) to Strongbridge Biopharma plc(Strongbridge). Keveyis was approved by the U.S. FDA in August 2015 to treat primary hyperkalemic and hypokalemic periodic paralysis, a group of rarehereditary disorders that cause episodes of muscle weakness or paralysis. Keveyis has orphan designation status through August 2022. In accordance withthe terms of the purchase agreement, Strongbridge has paid Taro a total of $8,500 through upfront payments; Taro is also eligible to receive additional futurepayments upon the achievement of certain sales unit milestones. Taro has agreed to continue to manufacture Keveyis for Strongbridge, under an exclusivesupply agreement at least for the period of Keveyis orphan exclusivity, subject to certain commercial terms and conditions, including minimum supplypurchases.D. EXCHANGE CONTROLSIsraeli law and regulations do not impose any material foreign exchange restrictions on non-Israeli holders of our ordinary shares.Dividends, if any, paid to our ordinary shareholders, and any amounts payable upon our dissolution, liquidation or winding up, as well as the proceedsof any sale in Israel of our ordinary shares to an Israeli resident, may be paid in non-Israeli currency or, if paid in Israeli currency, may be converted into freelyrepatriated dollars at the rate of exchange prevailing at the time of conversion. Payments of dividends may be subject to withholding taxes.E. TAXATIONGeneralThe following is a summary of the current tax structure applicable to companies in Israel with reference to its effect on us. The following also containsa discussion of material Israeli and United States tax consequences to our shareholders and Israeli government programs benefiting us. We cannot assure youthat the tax authorities will accept the views expressed in the discussion in question. The discussion is not intended, and should not be construed, as legal orprofessional tax advice and is not exhaustive of all possible tax considerations. Holders of our ordinary shares should consult their own tax advisors as tothe United States, Israeli or other tax consequences of the purchase, ownership and disposition of ordinary shares, including, in particular, the effect ofany foreign, state or local taxes.Israeli Tax Considerations and Government ProgramsGeneral Corporate Tax StructureGenerally, Israeli companies are subject to corporate tax at the rate on their taxable income. As of 2017, the corporate tax rate is 24.0% (in 2016 and2015 the corporate tax rate was 25.0% and 26.5%, respectively). However, the effective tax rate payable by a company that derives income from anApproved Enterprise, a Benefited Enterprise or a Preferred Enterprise, as discussed below, may be considerably less. In general, Israeli companies are subjectto regular corporate tax rate for their capital gain.Tax Benefits under the Law for the Encouragement of Capital Investments, 1959The Law for the Encouragement of Capital Investments, 5719-1959 (the “Investment Law”), provides certain incentives for capital investments inproduction facilities (or other eligible assets) of an “Industrial Enterprise”, as defined under the Investment Law. Generally, an investment program that isimplemented in accordance with the provisions of the Investment Law, referred to as an Approved Enterprise, a Benefited Enterprise or a Preferred Enterprise,is entitled to benefits as discussed below. These benefits73may include cash grants from the Israeli government and tax benefits, based upon, among other things, the location of the facility within Israel in which theinvestment is made or the election of the grantee. In order to qualify for these incentives, an Approved Enterprise, a Benefited Enterprise or a PreferredEnterprise is required to comply with the requirements of the Investment Law. Various production and development facilities of our companies in Israel havebeen granted “Approved Enterprise” and “Benefited Enterprise” status, which provides certain benefits, including tax exemptions and reduced tax rates for adefined period.The Investment Law was significantly amended as of April 1, 2005 (the “2005 Amendment”) and as of January 1, 2011 (the “2011Amendment”). Pursuant to the 2005 Amendment, tax benefits granted in accordance with the provisions of the Investment Law prior to its revision by the2005 Amendment remained in force, but any benefits granted subsequently were subject to the provisions of the 2005 Amendment. Similarly, the 2011Amendment introduced new benefits instead of the benefits granted in accordance with the provisions of the Investment Law in effect prior to the 2011Amendment. However, companies entitled to benefits under the Investment Law in effect up to January 1, 2011, were entitled to choose to continue to enjoysuch benefits, provided that certain conditions are met, or elect instead irrevocably, to forego such benefits and elect the benefits of the 2011 Amendment.The following discussion is a summary of the Investment Law prior to the 2005 Amendment and 2011 Amendment as well as the relevant changescontained in such amendments and in the new legislation.Tax Benefits Before the 2005 AmendmentAn investment program that is implemented in accordance with the provisions of the Investment Law prior to the 2005 Amendment, generally referredto as an “Approved Enterprise”, is entitled to certain benefits. These benefits may include cash grants from the Israeli government and tax benefits, basedupon, among other things, the location of the facility within Israel in which the investment is made or the election of the grantee. A company that wished toreceive benefits had to receive an approval from the Investment Center of the Israel Ministry of Economy (formerly the Ministry of Industry, Trade and Labor)(the “Investment Center”), in order to obtain such Approved Enterprise status. Each certificate of approval for an Approved Enterprise relates to a specificinvestment program, delineated both by the financial scope of the investment, including sources of funds, and by the physical characteristics of the facility orother assets. The tax benefits available under any certificate of approval relate only to taxable income attributable to the specific program and are contingentupon meeting the criteria set forth in the certificate of approval. Income derived from activity that is not integral to the activity of the Approved Enterprisewill not enjoy tax benefits.A company owning an Approved Enterprise may elect to forego certain government cash grants extended to an Approved Enterprises in return for analternative package of tax benefits, or the Alternative Benefits Program. Under the Alternative Benefits Program, a company’s undistributed income derivedfrom an Approved Enterprise is exempt from corporate tax for a period of between two and ten years, or the Exemption Period, beginning on the first year inwhich the company derives taxable income under the program after the commencement of production, depending on the geographic location of theApproved Enterprise in Israel. After the Exemption Period, the company will be eligible for the reduced tax rates of 10%-25% for the remainder of thebenefits period, depending on the level of foreign investment in the company in each year. These tax benefits are granted for a limited period not exceedingseven years, or ten years for a company whose foreign investment level exceeds 25%, from the first year in which the Approved Enterprise has taxableincome, after the year in which production commenced (as determined by the Investment Center). However, the benefits period may in no event exceed thelesser of 12 years from the year in which the production commenced (as determined by the Investment Center) or 14 years from the year of receipt ofApproved Enterprise status, whichever ends earlier. If a company has more than one Approved Enterprise program or if only a portion of its capitalinvestments are approved, the company’s effective tax rate reflects the weighted-average of the applicable rates. The tax benefits available under anycertificate of approval relate only to taxable income attributable to the specific program and are contingent upon meeting the criteria set out in the certificateof approval.The tax benefits under the Investment Law also apply to a company’s income that is generated from (i) the grant of a right of use with respect to know-how developed by the Approved Enterprise, (ii) income generated from royalties and (iii) income derived from a service which is ancillary to such right of useor royalties, provided that such income is attributable to the Approved Enterprise’s ordinary course of business. The tax benefits under the Investment Laware generally not available with respect to income derived from products manufactured outside of Israel.A company that has an Approved Enterprise program is eligible for further tax benefits if it qualifies as a Foreign Investors’ Company (“FIC”). A FICthat is eligible for benefits is essentially a company with a level of foreign investment, as defined in the Investment Law, of more than 25%. The level offoreign investment is measured as the percentage of rights in the company (in terms of shares, rights to profits, voting and appointment of directors), and ofcombined share and loan capital, that are owned, directly or indirectly, by persons who are not residents of Israel. The determination as to whether or not acompany qualifies as an FIC is made on an annual basis. A FIC that has an Approved Enterprise program will be eligible for an extension of the periodduring which it is entitled to tax benefits under its Approved Enterprise status (so that the benefit periods may be up to ten years) and for further tax benefitsif the level of foreign investment is 49% or more. If a company that has an Approved Enterprise program is a wholly-owned74subsidiary of another company, then the percentage of foreign investments is determined based on the percentage of foreign investment in the parentcompany.The following table sets forth the corporate tax rates and related levels of foreign investments with respect to a FIC that has an Approved Enterpriseprogram. Percentage of non-Israeli ownership Corporate Tax Rate Over 25% but less than 49% 25%49% or more but less than 74% 20%74% or more but less than 90% 15%90% or more 10% Dividends paid out of income attributed to an Approved Enterprise (or out of dividends received from a company whose income is attributed to anApproved Enterprise) are generally subject to withholding tax at source at the rate of 15%, or at the lower rate under an applicable tax treaty (subject to thereceipt in advance of a valid certificate from the ITA). This withholding tax is deducted at source by the company. The 15% tax rate is limited to dividendsand distributions out of income derived during the benefits period and actually paid at any time up to 12 years thereafter. After such period, the withholdingtax is applied at a rate of up to 30%, or at the lower rate under an applicable tax treaty (subject to the receipt in advance of a valid certificate from the ITA). Inthe case of an FIC, the 12-year limitation on reduced withholding tax on dividends does not apply. Under the Investment Law, a company that has electedthe Alternative Benefits Program is not obligated to distribute retained profits, and may generally decide from which year’s profits to declare dividends. Inaddition, a company that pays a dividend out of tax-exempt income attributed to its Approved Enterprise will be subject to tax in respect of the amount of thedividend distributed (grossed up to reflect the pre-tax income that it would have had to earn in order to distribute the dividend) at the corporate tax rate thatwould have otherwise been applicable. This rate generally ranges from 10% to 25%, depending on the level of foreign investment in the company in eachyear, as explained above. We have elected to use the Alternative Benefits Program, but currently intend to reinvest any income derived from our ApprovedEnterprise program and not to distribute such income as a dividend.The Investment Law also provides that an Approved Enterprise is entitled to accelerated depreciation on its property and equipment that are includedin an Approved Enterprise during the first five years in which the equipment is used. This benefit is an incentive granted by the Israeli government regardlessof whether an Alternative Benefits Program is elected.The benefits available to an Approved Enterprise are subject to the fulfillment of the conditions stipulated in the Investment Law and its regulationspublished thereunder and criteria in the specific certificate of approval with respect thereto, as described above. In the event of failure to comply with theseconditions, the company is required to refund the amount of tax benefits, adjusted to the Israel consumer price index and interest, or other monetary penalty.Tax Benefits Subsequent to the 2005 AmendmentThe 2005 Amendment applies to new investment programs commencing in 2004 and thereafter, but does not apply to investment programs approvedprior to April 1, 2005. The 2005 Amendment provides that terms and benefits included in any certificate of approval that was granted before the date onwhich the 2005 Amendment entered into effect (April 1, 2005) will remain subject to the provisions of the Investment Law as in effect on the date of suchapproval. Pursuant to the 2005 Amendment, the Investment Center will continue to grant Approved Enterprise status to qualifying investments. The 2005Amendment, however, limits the scope of enterprises that may be approved by the Investment Center by setting criteria for the approval of a facility as anApproved Enterprise.The 2005 Amendment provides that a certificate of approval from the Investment Center is required only for Approved Enterprises that receive cashgrants. As a result, a company is no longer required to obtain the advance approval of the Investment Center in order to receive the tax benefits previouslyavailable under the Alternative Benefits Program. Rather, a company may claim the tax benefits offered by the Investment Law directly in its tax returns,provided that its facilities meet the criteria for tax benefits set forth in the 2005 Amendment (a “Benefited Enterprise”). A company that has a BenefitedEnterprise may, at its discretion, approach the ITA for a pre-ruling confirming that it is in compliance with the provisions of the Capital Investment Law.Tax benefits are available under the 2005 Amendment for production facilities (or other eligible facilities), which are generally required to derivemore than 25% of their business income from export to specific markets with a population of at least 14 million people in 2012 (such export criteria will befurther increased in the future by 1.4% per annum). In order to receive the tax benefits, the amendment states that a company must make an investment infixed assets in the Benefited Enterprise that meets all the conditions set forth in the amendment for tax benefits and that exceeds a minimum investmentamount specified in the Investment Law. Such investment entitles a company to receive a Benefited Enterprise status with respect to the investment, and maybe made over a period75of no more than three years from the end of the year in which the company requested to have the tax benefits apply to the Benefited Enterprise (the “Year ofElection”). Where a company requests to have the tax benefits apply to an expansion of existing facilities, then only the expansion will be considered aBenefited Enterprise and the company’s effective tax rate will be the result of a weighted-average of the applicable rates.The benefits period is subject to a limitation of 7 to 10 years from the Commencement Year (the Commencement Year being defined as the later of:(i) the first tax year in which the company derives income for tax purposes from the Benefited Enterprise or (ii) the Year of Election) provided that 12 yearshave not elapsed from the first day of the Year of Election. The tax benefits granted to a Benefited Enterprise depend on, among other things, the geographiclocation in Israel of the Benefited Enterprise, according to one of the following new tax routes, which may be applicable to a company: •Similar to the Alternative Benefits Program, exemption from corporate tax on undistributed income for a period of 2 to 10 years, depending onthe geographic location of the Benefited Enterprise in Israel, and a reduced corporate tax rate of 10% to 25% for the remainder of the benefitsperiod, depending on the level of foreign investment in a company in each year. The benefits period is limited to 12 or 14 years from the yearthe company requested to have the tax benefits apply, depending on the location of the company. A company qualifying for tax benefits underthe 2005 Amendment which pays a dividend out of income attributed to its Benefited Enterprise during the tax Exemption Period, will besubject to corporate tax in respect of the amount of the dividend distributed (grossed-up to reflect the pre-tax income that it would have had toearn in order to distribute the dividend) at the corporate tax rate which would have otherwise been applicable. Dividends paid out of incomeattributed to a Benefited Enterprise (or out of dividends received from a company whose income is attributed to a Benefited Enterprise) aregenerally subject to withholding tax at source at a rate of 15%, or at a lower rate as may be provided in an applicable tax treaty (subject to thereceipt in advance of a valid certificate from the ITA). •A special tax route, which enables companies owning facilities in certain geographical locations in Israel to pay corporate tax at the rate of11.5% on income of the Benefited Enterprise. The benefits period is 10 years. Upon payment of dividends, the company is required towithhold tax at source at a rate of 15% for Israeli residents and at a rate of 4% for foreign residents.The Investment Law also provides that a Benefited Enterprise is entitled to accelerated depreciation on its property and equipment that are productiveassets as defined by the 2005 Amendment.The benefits available to a Benefited Enterprise are subject to the fulfillment of conditions stipulated in the Investment Law and its regulations. If acompany does not meet these conditions, then it would be required to refund the amount of tax benefits, adjusted to the Israeli consumer price index andinterest, or other monetary penalty.Our facilities in Israel have received Approved Enterprise status which entitles us to receive certain tax benefits. We currently have three active plans,two Approved Enterprises under the Alternative Benefits Programs (Plans 3-4 and Plan 5) and one Benefited Enterprise (Plan 6), granting us a package ofbenefits, subject to compliance with applicable requirements. Under Plan 3-4 (benefit period starting 2003), we were entitled to an exemption from corporateincome tax on undistributed profits for a period of two years following implementation of the plan and to a reduced tax rate of between 10% and 25%(depending on the level of foreign investment) for an additional 13 years thereafter. Under Plan 5 (benefit period starting 2007), we were entitled to anexemption from corporate income tax on undistributed profits for a period of two years following implementation of such plan and to a reduced tax rate of10% to 25% (depending on the level of foreign investment) for eight additional years thereafter. We filed a request for an additional five years of reduced taxrates for such plan. Approval is still pending. Under Plan 6 (benefit period starting 2010), we were entitled to an exemption from corporate income tax onundistributed profits for a period of two years and a reduced tax rate of 10% to 25% (depending on the level of foreign investment) for eight additional yearsthereafter. All of these programs are subject to the time limits imposed by the Investment Law and based upon the level of foreign ownership in the company ineach tax year. To retain the most favorable rates we must maintain a foreign shareholders’ level of at least 90%. We believe that we currently exceed thislevel but there can be no assurance that we will be able to reach or maintain this level of foreign ownership for each subsequent year.Tax benefits under the 2011 AmendmentThe 2011 Amendment cancelled the availability of the benefits granted in accordance with the provisions of the Investment Law prior to 2011 and,instead, introduced new benefits for income generated by a “Preferred Company” through its Preferred Enterprise (as such terms are defined in the InvestmentLaw) as of January 1, 2011. A Preferred Company is defined as either (i) a company incorporated in Israel which is not wholly-owned by a governmentalentity or (ii) a limited partnership that (a) was registered under the Israeli Partnerships Ordinance and (b) all of its limited partners are companies incorporatedin Israel, but not all of them are governmental entities; which has, among other things, Preferred Enterprise status and is controlled and managed fromIsrael. Pursuant76to the 2011 Amendment, a Preferred Company is entitled to a reduced corporate tax rate of 15% with respect to its preferred income attributed to its PreferredEnterprise in 2011-2012, unless the Preferred Enterprise is located in a specified development zone, in which case the rate will be 10%. These corporate taxrates were reduced to 12.5% and 7%, respectively, in 2013 and increased to 16% and 9%, respectively, in 2014 until 2016. Pursuant to the 2017Amendment, in 2017 and thereafter, the corporate tax rate for a Preferred Enterprise which is located in a specified development zone was decreased to 7.5%while the reduced corporate tax rate for other development zones remains 16%. Income derived by a Preferred Company from a “Special Preferred Enterprise”(as that term is defined in the Investment Law) would be entitled, during a benefits period of 10 years, to further reduced tax rates of 8%, or to 5%, if theSpecial Preferred Enterprise is located in a specified development zone. As of January 1, 2017, the definition for ‘Special Preferred Enterprise’ includes lessstringent conditions.Dividends paid out of preferred income attributed to a Preferred Enterprise or to a Special Preferred Enterprise are generally subject to withholding taxat source at the rate of 20% or such lower rate as may be provided in an applicable tax treaty (subject to the receipt in advance of a valid certificate from theITA allowing for a reduced tax rate). However, if such dividends are paid to an Israeli company, no tax will be withheld (although if such dividends aresubsequently distributed to individuals or a non-Israeli company, withholding tax at a rate of 20%, will apply, subject to any lower rate as may be providedin an applicable tax treaty subject to the receipt in advance of a valid certificate from the ITA allowing for a reduced tax rate). In 2017-2019 dividends paidout of preferred income attributed to a Special Preferred Enterprise, directly to a foreign parent company, are subject to withholding tax at source at the rate of5% (temporary provisions).The 2011 Amendment also included transitional provisions to address companies already enjoying existing tax benefits under the InvestmentLaw. These transitional provisions provide, among other things, that unless an irrevocable request is made to apply the provisions of the Investment Law asamended in 2011 with respect to income to be derived as of January 1, 2011: (i) the terms and benefits included in any certificate of approval that wasgranted to an Approved Enterprise, which chose to receive grants, before the 2011 Amendment became effective, will remain subject to the provisions of theInvestment Law as in effect immediately prior to the date of the 2011 Amendment, and subject to certain conditions; (ii) the terms and benefits included inany certificate of approval that was granted to an Approved Enterprise, which had participated in an Alternative Benefits Program, before the 2011Amendment became effective will remain subject to the provisions of the Investment Law as in effect immediately prior to the date of the 2011 Amendment,provided that certain conditions are met.; and (iii) a Benefited Enterprise can elect to continue to benefit from the benefits provided to it before the 2011Amendment became effective, provided that certain conditions are met.We have evaluated the likely effect of the 2011 Amendment and have currently decided not to file a request to apply the new benefits under the 2011Amendment. We may decide in the future to make the above-mentioned election.The New Technological Enterprise Incentives Regime – Amendment 73 to the Investment LawAmendment 73 to the Investment Law (“Amendment 73”), which came into effect as of January 1, 2017, stipulates that regulations to be promulgatedwhich will implement the "Nexus Principles", based on OECD guidelines recently published as part of the Base Erosion and Profit Shifting (BEPS)project. The new incentives regime will apply to "Preferred Technological Enterprises" that meet certain conditions, including all of the following: •A company's average R&D expenses in the three years prior to the current tax year must be greater than or equal to 7% of its total revenue orexceed NIS 75 million (approximately $19 million) per year; and •A company must also satisfy one of the following conditions: (1) at least 20% of the workforce (or at least 200 employees) are employed inR&D; (2) a venture capital investment of an amount approximately equivalent to at least $2 million was previously made in the company; or(3) growth in sales or workforce by an average of 25% over the three years preceding the tax year.A "Special Preferred Technological Enterprise" is an enterprise that meets conditions one and two above, and in addition is a part of a group ofcompanies that have total annual consolidated revenues above NIS 10 billion (approximately $2.5 billion).Preferred Technological Enterprises will be subject to a corporate tax rate of 7.5% for operations in Development Zone A or 12% for operationsoutside of Development Zone A with respect to the portion of their income derived from IP developed in Israel, while Special Preferred TechnologicalEnterprises will be subject to 6% with respect to income related to such IP. The withholding tax on dividends from these enterprises will be 4% for dividendspaid to a foreign parent company holding at least 90% of the shares of the distributing company. For other dividend distributions, the withholding tax rateshall be 20% (or a lower rate under a tax treaty, if applicable).The Company will evaluate the effect of such regime on its activities once the regulations are published.77Tax Benefits under the Law for the Encouragement of Industry (Taxes), 1969The Law for the Encouragement of Industry (Taxes), 1969 (the “Industry Encouragement Law”) provides several tax benefits for IndustrialCompanies. Pursuant to the Industry Encouragement Law, a company qualifies as an Industrial Company if it is an Israeli resident company, and at least 90%of its income in any tax year (other than income from certain government loans), is generated from an “Industrial Enterprise” located in Israel that it owns. AnIndustrial Enterprise is defined as an enterprise whose major activity in a given tax year is industrial production.Under the Industry Encouragement Law, an Industrial Company is entitled to certain corporate tax benefits, including: •Deduction of the cost of purchase of know-how, patents and rights to use a patent or know-how used for the development or promotion of theIndustrial Enterprise, over an eight-year period commencing on the year in which such rights were first exercised; •The right to elect, under specified conditions, to file a consolidated tax return together with Israeli industrial companies controlled by it; •Accelerated depreciation rates on equipment and buildings; and •A straight-line deduction of expenses related to a public offering over a three-year period commencing in the year of offering.Under some tax laws and regulations, an Industrial Enterprise may be eligible for special depreciation rates for machinery, equipment andbuildings. These rates differ based on various factors, including the date the operations begin and the number of work shifts. An Industrial Company owningan Approved Enterprise may choose between these special depreciation rates and the depreciation rates available to the Approved Enterprise.Eligibility for benefits under the Industry Encouragement Law is not subject to receipt of prior approval from any governmental authority.We believe that we currently qualify as an Industrial Company within the definition of the Industry Encouragement Law. We cannot assure you thatthe ITA will agree that we qualify, or, if we qualify, that we will continue to qualify as an Industrial Company or that the benefits described above will beavailable to us in the future.Grants under the Encouragement of Research, Development and Technological Innovation Law, 5744-1984 On January 1, 2016, the Encouragement of Research, Development and Technological Innovation Law, 5744-1984 (the “Research Law”, asamended”), was enacted, which amended the Encouragement of Industrial Research and Development Law, 1984. Under the Research Law developmentprograms that meet specified criteria and are approved by a governmental committee of the Authority are generally eligible for grants of up to 50% of theproject’s expenditures, as determined by the research committee, in exchange for the payment of royalties from the sale of products developed as part of theprograms under which the grants were given. Regulations under the Research Law, as amended generally provide for the payment of royalties to the Authority of 3-6% on sales of products andservices derived from a technology developed using these grants until 100% of the dollar-linked grant is repaid. Our obligation to pay these royalties iscontingent on our actual sale of such products and services. In the absence of such sales, no payment of such royalties is required. Effective for grantsreceived from the Authority under programs approved after January 1, 1999, the outstanding balance of the grants will be subject to interest at a rate equal tothe 12 month LIBOR applicable to dollar deposits that is published on the first business day of each calendar year in which the program has beenapproved. Following the full repayment of all the outstanding liabilities in connection with such grants, including the accrued interest thereof, there is nofurther liability for such royalties. However, even the repayment of such liabilities in full, we will remain subject to the limitations set forth under theResearch Law, including on the sale, transfer or assignment outside of Israel of know-how developed as part of the programs under which the grants weregiven. 78The terms of the grants under the Research Law, also require that generally the manufacture of products developed as part of the programs under whichthe grants were given, be undertaken in Israel. However, under the regulations pursuant to the Research Law, the manufacturing may be undertaken outsideof Israel, assuming we receive prior approval from the Authority for the foreign manufacturing, which approval is given in special circumstances upon thefulfillment of certain conditions. If we receive that approval and manufacture outside of Israel we may be required to pay increased royalties. The increase inroyalties depends upon the extent of the manufacturing volume that is performed outside of Israel, as follows: Extent of manufacturing volume outside of Israel Royalties to the Authority as a percentage of grant Less than 50% 120% between 50% and 90% 150% 90% and more 300% Despite the general approval requirement, a transfer outside of Israel of up to 10% of the manufacturing rights will not require the approval of theAuthority, but rather a notification to the Authority, which may block such transfer within 30 days.We currently have grants that were awarded under the Research Law. The Research Law, provides for an interim transition period (which has not yetexpired). After such transition time, our grants will be subject to terms of the Research Law, as amended. Under the Research Law, the Authority is grantedpower to amend the terms of existing grants. Therefore, we cannot predict whether further changes, if any, will be introduced by the Authority, which mayimpact the terms governing our grants in the future.Tax Benefits and Grants for Research and DevelopmentIsraeli tax law allows, under certain conditions, a tax deduction for research and development expenditures, including capital expenditures, for theyear in which they are incurred, such expenditures must relate to scientific research and development projects, and must be approved by the relevant Israeligovernment ministry, determined by the field of research and the research and development is for the promotion or development of thecompany. Furthermore, the research and development must be carried out by or on behalf of the company seeking the deduction. The amount of suchdeductible expenses is reduced by the sum of any funds received through government grants for the finance of such scientific research and developmentprojects.Expenditures not so approved, but otherwise qualifying for deduction, are deductible over a three-year period, from the first year that the expenditureswere made. However, the amount of any government grants made available are subtracted from the amount of expenses which may be deducted.Taxation of Non-Israeli Resident Holders of our Ordinary SharesTaxation of Non-Israeli Resident Shareholders on Receipt of Dividends. Non-Israeli residents (whether individuals or corporations) are generallysubject to Israeli income tax on the receipt of dividends paid on our ordinary shares at the rate of 25% or 30% (if the dividend recipient is a “substantialshareholder” at the time of distribution or at any time during the preceding 12-month period). Such dividends are generally subject to Israeli withholding taxat the rate of 25% so long as the shares are registered with a Nominee Company (whether the recipient is a substantial shareholder or not). A “substantialshareholder” is generally a person who alone or together with such person’s relative or another person who collaborates with such person on a permanentbasis, holds, directly or indirectly, at least 10% of any of the “means of control” of the corporation. “Means of control” generally includes the right to vote,receive profits, nominate a director or an officer, receive assets upon liquidation, or order someone who holds any of the aforesaid rights how to act, and allregardless of the source of such right. However, distribution of dividends from income attributed to an Approved Enterprise or a Benefited Enterprise issubject to Israeli income tax at a rate of 15% (and 20% with respect to Preferred Enterprise), unless a reduced tax rate is provided under an applicable taxtreaty (subject to the receipt in advance of a valid certificate from the ITA). For example, under the Convention Between the Government of the United Statesof America and the Government of Israel with Respect to Taxes on Income, as amended (the “U.S.-Israel Tax Treaty”), the maximum rate of tax withheld inIsrael on dividends paid to a holder of our ordinary shares who is a U.S. resident (for purposes of the U.S.-Israel Tax Treaty) is 25%. However, generally, themaximum rate of withholding tax on dividends, not generated by an Approved Enterprise, Benefited Enterprise or Preferred Enterprise, that are paid to a U.S.corporation holding 10% or more of the outstanding voting rights throughout the tax year in which the dividend is distributed as well as the previous taxyear, is 12.5%, provided that not more than 25% of the gross income for such preceding year consists of certain types of dividends andinterest. Notwithstanding the foregoing, dividends distributed from income attributed to an Approved Enterprise or Benefited Enterprise are subject, undercertain conditions, to withholding at the rate of 15%. We cannot assure you that we will designate the profits that are being distributed in a way that willreduce shareholders’ tax liability. If the dividend is partly attributable to income derived from an Approved Enterprise, Benefited Enterprise or PreferredEnterprise, and partly to other sources of income, the withholding rate will be a blended rate reflecting the relative portions of the two types of income. U.S.residents who are subject to Israeli withholding tax on a dividend may be entitled to a credit or deduction for79United States federal income tax purposes in the amount of the taxes withheld, subject to detailed rules contained in U.S. tax legislation.A non-Israeli resident who receives dividends from which tax was duly withheld is generally exempt from the duty to file returns in Israel in respect ofsuch income, provided that (i) such income was not derived from a business conducted in Israel by the taxpayer, and (ii) the taxpayer has no other taxablesources of income in Israel with respect to which a tax return is required to be filed.Capital Gains Taxes Applicable to Non-Israeli Resident Shareholders. Israeli capital gain tax is imposed on the disposal of capital assets by a non-Israeli resident if such assets either (i) are located in Israel; (ii) are shares or rights to shares in an Israeli company, or (iii) represent, directly or indirectly,rights to assets located in Israel, unless a specific exemption is available or unless a tax treaty between Israel and the shareholder’s country of residenceprovides otherwise. The law distinguishes between real gain and inflationary surplus. The inflationary surplus is a portion of the total capital gain which isequivalent to the increase of the relevant asset’s purchase price which is attributable to the increase in the Israeli consumer price index, between the date ofpurchase and the date of sale. The real gain is the excess of the total capital gain over the inflationary surplus. Real capital gain on a disposition of listedshares is generally subject to tax at the corporate tax rate of 24.0% as of 2017 (in 2016 and 2015 the corporate tax rate was 25.0% and 26.5%, respectivelyand in 2018 and thereafter, it will be 23.0%), if generated by a company, or at the rate of 25.0% (or 30.0% for persons who hold 10% or more of thecompany’s shares), if generated by an individual from the sale of an asset purchased on or after January 1, 2003. Individual and corporate shareholdersdealing in securities in Israel are taxed at the tax rates applicable to business income (a corporate tax rate for a corporation and a marginal tax rate of up to48% for an individual in 2014 onwards).Notwithstanding the foregoing, shareholders that are not Israeli residents (individuals and corporations) are generally exempt from Israeli capital gainstax on any gains derived from the sale, exchange or disposition of shares listed on a non-Israel stock exchange, provided, inter alia, that certain conditions aremet. The main conditions are that (i) such gains are not derived through a permanent establishment that the non-Israeli resident maintains in Israel; (ii) theshares were purchased after being listed; and (iii) the capital gains are neither subject to section 101 of the Israeli Tax Ordinance, nor to the Israeli IncomeTax Law (Inflationary Adjustments) 5745-1985. However, non-Israeli corporations will not be entitled to the foregoing exemption if Israeli residents (i) havea controlling interest of more than 25% in such non-Israeli corporation, or (ii) are the beneficiaries of or are entitled to 25% or more of the revenues or profitsof such non-Israeli corporation, whether directly or indirectly. Furthermore, such an exemption is not applicable to a person whose gains from selling orotherwise disposing of the shares are deemed to be business income.Additionally, a sale of shares may be exempt from Israeli capital gains tax under the provisions of an applicable tax treaty (subject to the receipt inadvance of a valid certificate from the ITA). For example, under the U.S.-Israel Tax Treaty, the sale, exchange (whether from merger, acquisition or similartransaction) or disposition of our ordinary shares by a shareholder who is both a U.S. resident (for purposes of that treaty) holding the ordinary shares as acapital asset and entitled to claim the benefits afforded to such resident by the U.S.-Israel Tax Treaty (called a “Treaty U.S. Resident”) is generally exemptfrom Israeli capital gains tax unless either (i) such Treaty U.S. Resident if an individual has been present in Israel for a period or periods aggregating to 183days or more during the applicable taxable year; or (ii) such Treaty U.S. Resident holds, directly or indirectly, shares representing 10% or more of our votingrights during any part of the 12-month period preceding such sale, exchange or disposition, subject to certain conditions; or (iii) the capital gain arising fromsuch sale, exchange or disposition is attributable to a permanent establishment of the Treaty U.S. Resident maintained in Israel. In any of these cases, thesale, exchange or disposition of our ordinary shares would be subject to Israeli tax, to the extent applicable; however, under the U.S.-Israel Tax Treaty, suchTreaty U.S. Resident would be permitted to claim a credit for the tax against the U.S. federal income tax imposed with respect to the sale, exchange ordisposition, subject to the limitations in U.S. laws applicable to foreign tax credits.In some instances, whether or not our shareholders are liable for Israeli tax on the sale of their ordinary shares, the payment of the consideration may besubject to the withholding of Israeli tax at source. Shareholders may be required to demonstrate that they are exempt from tax on their capital gain in order toavoid withholding at source at the time of sale. Specifically, in transactions involving a sale of all of the shares of an Israeli resident company, in the form ofa merger or otherwise, the ITA may require from shareholders who are not liable for Israeli tax to sign declarations in forms specified by this authority orobtain a specific exemption from the ITA to confirm their status as non-Israeli resident, and, in the absence of such declarations or exemptions, may requirethe purchaser of the shares to withhold taxes at source.Excess Tax. Individuals who are subject to tax in Israel are also subject to an additional tax at a rate of 2% on annual income exceeding NIS 803,520for 2016, (and as of 2017, the additional tax will be at a rate of 3% on annual income exceeding NIS 640,000) which amount is linked to the annual changein the Israeli consumer price index, including, but not limited to, dividends, interest and capital gain.80Israeli Transfer Pricing RegulationsOn November 29, 2006, Income Tax Regulations (Determination of Market Terms), 2006, promulgated under Section 85A of the Tax Ordinance, cameinto effect (“TP Regulations”). Section 85A of the Tax Ordinance and the TP Regulations generally require that all cross-border transactions carried outbetween related parties be conducted on an arm’s length principle basis and will be taxed accordingly.United States Federal Income Tax ConsiderationsSubject to the limitations described in the next paragraph, the following discussion describes the material United States federal income taxconsequences to a holder of our ordinary shares (a “U.S. Holder”) that is: •a citizen or resident of the United States; •a corporation, or other entity taxable as a corporation for United States federal income tax purposes, created or organized in the United States orunder the laws of the United States, any state thereof or the District of Columbia; •an estate, the income of which is includable in gross income for United States federal income tax purposes regardless of its source; or •a trust, if a court within the United States is able to exercise primary supervision over the administration of the trust and one or more UnitedStates persons have the authority to control all substantial decisions of the trust or if the trust has validly elected to be treated as a United Statesperson under applicable Treasury regulations.In addition, certain material aspects of United States federal income tax relevant to a holder who is not a partnership and is not a U.S. Holder (a “Non-U.S. Holder”) are discussed below.If a partnership, or other entity treated as a partnership for United States federal income tax purposes, holds ordinary shares, the tax treatment of apartner generally will depend upon the status of the partner and the activities of the partnership. A partner in a partnership that holds ordinary shares is urgedto consult its own tax advisor regarding the specific tax consequences of owning and disposing of ordinary shares.This summary is for general information purposes only. It does not purport to be a comprehensive description of all of the tax considerations that maybe relevant to each person’s decision to own our ordinary shares.This discussion is based on current provisions of the Code, current and proposed Treasury regulations promulgated thereunder, and administrative andjudicial decisions as of the date hereof, all of which are subject to change, possibly on a retroactive basis. Any such change could materially affect thecontinued validity of this discussion and the tax consequences described herein. This discussion does not address all aspects of United States federal incometaxation that may be relevant to any particular shareholder based on such shareholder’s individual circumstances. In particular, this discussion considersonly U.S. Holders that will own ordinary shares as capital assets and does not address the potential application of the alternative minimum tax or UnitedStates federal income tax consequences to U.S. Holders that are subject to special treatment, including U.S. Holders that: •are broker-dealers or insurance companies; •are certain former citizens or long-term residents of the United States.; •are persons subject to the alternative minimum tax; •have elected mark-to-market accounting; •are tax-exempt organizations; •are financial institutions or financial services entities; •hold ordinary shares as part of a straddle, hedge or conversion transaction with other investments; •own directly, indirectly or by attribution at least 10% of our voting power; •have a functional currency that is not the U.S. dollar; •are carrying on a trade or business in Israel through a permanent establishment; or •acquire ordinary shares as compensation.81In addition, this discussion does not address any aspect of state, local or non-United States tax laws and does not consider the possible application ofUnited States federal gift or estate tax or the Medicare tax on net investment income.Each holder of ordinary shares is advised to consult such person’s own tax advisor with respect to the specific tax consequences to such person ofpurchasing, holding or disposing of our ordinary shares.Taxation of Ordinary SharesTaxation of Distributions Paid On Ordinary SharesSubject to the discussion below under “Tax Consequences if We Are a Passive Foreign Investment Company,” a U.S. Holder will be required toinclude in gross income as ordinary income the amount of any distribution paid on our ordinary shares, including any Israeli taxes withheld from the amountpaid, on the date the distribution is actually or constructively received to the extent the distribution is paid out of our current or accumulated earnings andprofits as determined for United States federal income tax purposes. Distributions in excess of such earnings and profits will be applied against and willreduce the U.S. Holder’s basis in the ordinary shares and, to the extent in excess of such basis, will be treated as gain from the sale or exchange of ordinaryshares.With respect to non-corporate U.S. Holders, including individual U.S. Holders, dividends may constitute “qualified dividend income” eligible to betaxed at the preferential rate applicable to long-term capital gains (currently a maximum rate of 20%), provided that (1) (a) our ordinary shares are readilytradable on an established securities market in the United States or (b) we qualify for benefits under an income tax treaty with the United States whichincludes an information exchange program and such treaty is determined by the United States Internal Revenue Service (“IRS”), to be satisfactory, (2) we arenot a passive foreign investment company (“PFIC”) (as discussed below) for either our taxable year in which the dividend was paid or the preceding taxableyear, and (3) the U.S. holders satisfy certain minimum holding period requirements. Our shares are now traded on the NYSE and we believe the requirementsof 1(a), (1)(b) and (2) are met. Therefore, dividends on our shares would qualify as qualified dividend income so long as a U.S. Holder meets requirement (3).You should consult your tax advisor regarding the availability of the lower rate for any dividends paid with respect to our ordinary shares.Any dividends paid by us to a U.S. Holder on our ordinary shares will be treated as foreign source income and will generally be categorized as“passive income” for United States foreign tax credit purposes. Subject to the limitations in the Code, as modified by the U.S.-Israel Tax Treaty, a U.S. Holdermay elect to claim a foreign tax credit against its United States federal income tax liability for Israeli income tax withheld from dividends received in respectof ordinary shares. U.S. Holders who do not elect to claim the foreign tax credit may instead claim a deduction for Israeli income tax withheld, but only for ayear in which the U.S. Holder elects to do so with respect to all foreign income taxes. A deduction does not reduce United States tax on a dollar-for-dollarbasis like a tax credit. The deduction, however, is not subject to the limitations applicable to foreign tax credits. The rules relating to the determination ofthe foreign tax credit are complex. Accordingly, if you are a U.S. Holder of ordinary shares you should consult your own tax advisor to determine whetherand to what extent you would be entitled to the credit.Taxation of the Disposition of Ordinary SharesSubject to the discussion below under “Tax Consequences if We Are a Passive Foreign Investment Company,” upon the sale, exchange or othertaxable disposition of our ordinary shares, a U.S. Holder will recognize a capital gain or loss in an amount equal to the difference between such U.S. Holder’sbasis in the ordinary shares, which is usually the cost of such shares in U.S. dollars, and the amount realized on the disposition in U.S. dollars. Any gain orloss recognized upon the sale, exchange or other taxable disposition of the ordinary shares will be treated as long-term capital gain or loss if, at the time ofthe sale, exchange or other taxable disposition, the holding period of the ordinary shares exceeds one year. In the case of individual U.S. Holders, capitalgains generally are subject to United States federal income tax at preferential rates if specified minimum holding periods are met. The deductibility of capitallosses is subject to significant limitations. U.S. Holders should consult their own tax advisors in this regard.In general, gain or loss recognized by a U.S. Holder on the sale, exchange or other taxable disposition of our ordinary shares will be United Statessource income or loss for United States foreign tax credit purposes. In certain instances, a U.S. Holder who is subject to tax in Israel on the sale of our sharesand who is entitled to the benefits of the U.S.–Israel Tax Treaty may treat such gain as Israeli source income and thus could, subject to other United Statesforeign tax credit limitations, credit the Israeli tax on such sale against such U.S. Holder’s United States federal income tax on the gain from that sale.82Tax Consequences if We Are a Passive Foreign Investment CompanyWe will be a PFIC if 75% or more of our gross income in a taxable year, including the pro rata share of the gross income of any company, United Statesor foreign, in which we are considered to own, directly or indirectly, 25% or more of the shares by value, is passive income. Alternatively, we will beconsidered to be a PFIC if at least 50% of our assets in a taxable year, averaged quarterly over the year and ordinarily determined based on fair market valueand including the pro rata share of the assets of any company in which we are considered to own, directly or indirectly, 25% or more of the shares by value,are held for the production of, or produce, passive income. Passive income includes, among other amounts, amounts derived by reason of the temporaryinvestment of funds raised in our public offerings.We do not believe that we are a PFIC. However, the tests for determining PFIC status are applied annually and it is difficult to make accuratepredictions of future income and assets, which are relevant to this determination. Accordingly, there can be no assurance that we will not become a PFIC. Ifwe were characterized as a PFIC for any taxable year, a U.S. Holder would suffer adverse tax consequences. These consequences may include having thegains that are realized on the disposition of ordinary shares treated as ordinary income rather than capital gains and being subject to punitive interest chargeswith respect to certain dividends and gains and on the sale or other disposition of the ordinary shares. Furthermore, dividends paid by a PFIC are not eligibleto be treated as “qualified dividend income” (as discussed above). In addition, if a U.S. Holder holds ordinary shares in any year in which we are treated as aPFIC, such U.S. Holder will be subject to additional tax form filing and reporting requirements (including additional filing requirements under recently-enacted legislation).If we determine that we have become a PFIC, we will notify our U.S. Holders and provide them with the information necessary to comply with the“qualified electing fund” (“QEF”) rules (which can mitigate some of the adverse effects of our being a PFIC). U.S. Holders are urged to consult their taxadvisors about the PFIC rules, including the consequences to them of making any elections with respect to our ordinary shares in the event that we qualify asa PFIC.Tax Consequences for Non-U.S. Holders of Ordinary SharesExcept as described in “Information Reporting and Backup Withholding” below, a Non-U.S. Holder of ordinary shares will not be subject to UnitedStates federal income or withholding tax on the payment of dividends on, and the proceeds from the sale, exchange or other taxable disposition of ourordinary shares, unless: •such item is effectively connected with the conduct by the Non-U.S. Holder of a trade or business in the United States and, in the case of aresident of a country which has a treaty with the United States, such item is attributable to a permanent establishment or, in the case of anindividual, a fixed place of business, in the United States; •the Non-U.S. Holder is an individual who holds the ordinary shares as a capital asset and is present in the United States for 183 days or more inthe taxable year of the disposition and certain other conditions are met; or •the Non-U.S. Holder is subject to tax pursuant to the provisions of United States tax law applicable to United States expatriates.Information Reporting and Backup WithholdingU.S. Holders generally are subject to information reporting requirements with respect to dividends paid in the United States on, or the proceeds fromthe taxable disposition of, our ordinary shares, unless the U.S. Holder is an exempt recipient. U.S. Holders are also generally subject to backup withholdingon dividends paid in the United States on, or the proceeds from the taxable disposition of, our ordinary shares unless the U.S. Holder provides IRS Form W-9or otherwise establishes an exemption.Non-U.S. Holders generally are not subject to information reporting or backup withholding with respect to dividends paid on, or upon the taxabledisposition of, ordinary shares. Such holders, however, may be required to provide certification of non-U.S. status (generally on IRS Form W-8BEN) inconnection with payments received in the United States or through certain U.S.-related financial intermediaries.The amount of any backup withholding may be allowed as a credit against a U.S. or Non-U.S. Holder’s United States federal income tax liability andmay entitle such holder to a refund, provided that certain required information is timely furnished to the IRS.U.S. Holders should also be aware that additional reporting requirements apply with respect to the holding of certain foreign financial assets,including stock of foreign issuers that is not held in an account maintained by a financial institution, if the aggregate value of all such assets exceeds U.S.$50,000. U.S. Holders should consult their own tax advisors regarding the application of these and other information reporting rules applicable to aninvestment in our ordinary shares based on their particular situation.83F. DIVIDENDS AND PAYING AGENTSNot applicable.G. STATEMENT BY EXPERTSNot applicable.H. DOCUMENTS ON DISPLAYWe are subject to the informational requirements of the Exchange Act applicable to foreign private issuers and fulfill the obligation with respect tosuch requirements by filing reports with the SEC. You may inspect and copy such material at the public reference facilities maintained by the SEC, 100 FStreet, N.E., Washington, D.C. 20549. You may also obtain copies of such material from the SEC at prescribed rates by writing to the Public ReferenceSection of the SEC, 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the public referenceroom. The SEC maintains an Internet website at http://www.sec.gov that contains reports, proxy statements, information statements and other material thatare filed through the SEC’s Electronic Data Gathering, Analysis and Retrieval (“EDGAR”) system.As a foreign private issuer, we are exempt from the rules under the Exchange Act prescribing the furnishing and content of proxy statements, and ourofficers, directors and principal shareholders are exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of theExchange Act. In addition, we are not required under the Exchange Act to file periodic reports and financial statements with the SEC as frequently or aspromptly as United States companies whose securities are registered under the Exchange Act. A copy of each report submitted in accordance with applicableUnited States law is available for public review at our principal executive offices and on our website at www.taro.com. The information contained on ourwebsite does not constitute part of this 2017 Annual Report.I. SUBSIDIARY INFORMATIONNot applicable. ITEM 11.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKWe are exposed to market risk, which primarily consists of interest rate and foreign exchange risk. We use derivative instruments to partially mitigateour exposure to these risks. Our objective is to reduce volatility in cash flows due to changes in interest and foreign exchange rates.Foreign Exchange Rate RiskWe and Taro U.S.A. use the U.S. dollar as our reporting currency and are exposed to foreign exchange rate risk from transactions conducted in differentcurrencies.In 2017, 89% of our revenue was generated in U.S. dollars. However, the remainder of our sales was denominated in the local currencies of thecountries in which the sales occurred. As a result, our reported profits and cash flows are exposed to changing exchange rates. If these foreign currenciesweaken relative to the U.S. dollar, the earnings generated in these foreign currencies will, in effect, decrease when converted into U.S. dollars, and viceversa. Therefore, from time to time we attempt to manage exposures that arise in the normal course of business related to fluctuations in foreign currencyexchange rates by entering into offsetting positions through the use of foreign exchange forward contracts.Due to the relatively low level of non-U.S. dollar revenues, the effects of currency fluctuations on consolidated net sales and operating income werenot significant in 2017.Intercompany Foreign Exchange TransactionsOur most significant foreign exchange rate risk relates to our Canadian subsidiary’s transactions with Taro U.S.A. that are denominated and settled inU.S. dollars. These transactions increase the volatility of our earnings since our Canadian subsidiary records gains or losses on foreign exchange transactionsunder U.S. GAAP as its functional currency is the Canadian dollar. During the year ended March 31, 2017, the Company recorded a gain of $23.3 millioncompared to $2.6 million in 2016, reflecting the favorable impact of the change in foreign currency exchange rates related primarily to cash and cashequivalents, short-term bank deposits and intercompany balances in Canada.84As of March 31, 2016, the Company did not have any forward contracts in place to purchase either the NIS or Canadian dollar. However, theCompany settled contracts throughout the year to purchase the NIS totaling $26.2 million and the Canadian dollar totaling $24.9 million and recorded netgains of $0.8 million and $3.4 million, respectively.In April 2016, the Company began entering into separate forward contracts to purchase the NIS and the Canadian dollar on a monthly basis at agreedupon spot rates to hedge the variability of cash flows in U.S. dollars due to changes in the respective exchange rates.As of March 31, 2017, the forward contracts to purchase the Canadian dollar are for a total amount of $69.5 million, at a weighted-average forward rateof 1.28 Canadian dollars per U.S. dollar. These contracts are settled in 17 monthly installments of approximately $5.2 million for the first five months, $4.2million for one month, $3.7 million for six months and $3.5 million for the remaining five months. The Company recorded a net loss of $3.2 million for theyear ended March 31, 2017, for the contracts to purchase the Canadian dollar.As of March 31, 2017, the forward contracts to purchase the NIS are for a total amount of $30.4 million, at a weighted-average forward rate of 3.68 NISper U.S. dollar. These contracts are settled in 17 monthly installments of $2.1 million for the first five months and $1.7 million for the remaining 12months. The Company recorded a net gain of $.6 million for the year ended March 31, 2017 for the contracts to purchase the Shekel.We do not account for these derivatives as a hedge and are therefore subject to earnings volatility due to fluctuations in the fair value of the forwardcontracts. There is no collateral for these hedges.Interest Rate RiskUnder current conditions, we do not believe that our exposure to market risks will have a material impact on future earnings. ITEM 12.DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIESNot applicable. PART II ITEM 13.DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIESNone. ITEM 14.MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDSNot applicable. ITEM 15.CONTROLS AND PROCEDURESa.Disclosure Controls and ProceduresTaro’s Chief Executive Officer and Chief Financial Officer, after evaluating the effectiveness of Taro’s disclosure controls and procedures (as definedin Exchange Act Rule 13a-15(e)) as of the end of the period covered by this 2017 Annual Report, have concluded that, as of such date, Taro’s disclosurecontrols and procedures were effective to ensure that the information required in the reports that it files or submits under the Exchange Act is recorded,processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and such information is accumulated and communicatedto its Management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.b.Report of Taro Management on Internal Control Over Financial ReportingTaro’s Board and Management are responsible for establishing and maintaining adequate internal control over financial reporting. Taro’s internalcontrol system was designed to provide reasonable assurance to Taro’s Management and Board regarding the reliability of financial reporting and thepreparation and fair presentation of its published consolidated financial statements.85Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of anyevaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degreeof compliance with the policies or procedures may deteriorate.Taro’s Management assessed the effectiveness of the Company’s internal control over financial reporting as of March 31, 2017. In making thisassessment, it used the criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of theTreadway Commission (COSO). Based on such assessment, Management has concluded that, as of March 31, 2017, Taro’s internal control over financialreporting is effective based on those criteria.c.Attestation Report of the Registered Public Accounting FirmTaro’s internal control over financial reporting as of March 31, 2017, has been audited by Ziv Haft, a BDO Member Firm (“Ziv Haft”), an independentregistered public accounting firm in Israel, as stated in their report, which is included under “Item 18 – Financial Statements” on Page F-3 of this 2017Annual Report.d.Changes in Internal Control Over Financial ReportingThere were no changes to Taro’s internal control over financial reporting that occurred during the period covered by this 2017 Annual Report thathave materially affected, or are reasonably likely to materially affect, Taro’s internal control over financial reporting. ITEM 16.[RESERVED] ITEM 16A.AUDIT COMMITTEE FINANCIAL EXPERTOur Board has determined that Linda Benshoshan, the Chairwoman of the Audit Committee, is an audit committee financial expert, as defined byapplicable SEC regulations, and is independent in accordance with applicable SEC and NYSE regulations. See Item 6.A for a summary of LindaBenshoshan’s relevant professional experience. ITEM 16B.CODE OF ETHICSWe have adopted a code of conduct applicable to our directors and all employees. We have also adopted a code of ethics that applies to our ChiefExecutive Officer, Chief Financial Officer and other senior officers. A copy of the code of conduct or the code of ethics may be obtained, without charge,upon a written request addressed to: Corporate Affairs Department, Taro Pharmaceutical Industries Ltd., c/o Taro Pharmaceuticals U.S.A., Inc., 3 SkylineDrive, Hawthorne, NY 10532. The code of conduct is also available on the Company’s website at www.taro.com. Any waivers of the code of conduct or thecode of ethics for executive officers or directors will be disclosed through the filing of a Report on Form 6-K. ITEM 16C.PRINCIPAL ACCOUNTANT FEES AND SERVICESPrincipal Accountant Fees and ServicesWe paid the following fees for professional services rendered by Ziv Haft – BDO Member Firm, for the years ended March 31, 2017 and 2016,respectively. Year ended Year ended March 31, 2017 March 31, 2016 (in millions) Audit fees $0.69 $0.68 Tax fees 0.06 0.06 Total $0.75 $0.74 The audit fees for the years ended March 31, 2017 and 2016, respectively, represent fees for professional services rendered for the audits of our annualconsolidated financial statements, statutory or regulatory audits of us and our subsidiaries, consents and assistance with review of documents filed with theSEC. All services provided by the Company’s independent auditors were approved by the Audit Committee.86Tax fees represents fees for professional services related to tax compliance, including the preparation of tax returns and claims for refund, and taxplanning and tax advice, including assistance with tax audits and appeals, tax services for employee benefit plans and assistance with respect to requests forrulings from tax authorities.Policy on Pre-Approval of Audit and Non-Audit Services of Independent AuditorsOur Audit Committee is responsible for the oversight of our independent auditors’ work. The Audit Committee’s policy is to pre-approve all audit andnon-audit services provided by our independent registered public accounting firm, Ziv Haft. These services may include audit services, audit-relatedservices, tax services and other services, as further described below. The Audit Committee sets forth the basis for its pre-approval in detail, listing theparticular services or categories of services that are pre-approved, and setting forth a specific budget for such services. Additional services may be pre-approved by the Audit Committee on an individual basis. Once services have been pre-approved, Ziv Haft and our Management then report to the AuditCommittee on a periodic basis regarding the extent of services actually provided in accordance with the applicable pre-approval, and regarding the fees forthe services performed. ITEM 16D.EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEESNot applicable. ITEM 16E.PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERSOn December 23, 2013, we completed a modified “Dutch” tender offer through which it repurchased 1,959,514 ordinary shares at a price of $97.50 pershare for total consideration of $193.0 million (including fees and expenses).On March 15, 2016, the Company announced that its Board of Directors approved a $250 million share repurchase of ordinary shares. On August 19,2016, we announced the completion of this program, with the last shares being purchased on August 18, 2016. Under the new program, the Company boughtback 1,801,099 of its ordinary shares in open market transactions, in accordance with a 10b5-1 program, at an average price of $138.80 per share, asrepresented in the following table. Period Total Number of SharesPurchased Average Price Paid perShare March 17, 2016 - March 31, 2016 67,339 $140.30 April 1, 2016 - April 30, 2016 117,515 $141.46 May 1, 2016 - May 31, 2016 552,474 $134.86 June 1, 2016 - June 30, 2016 290,298 $142.32 July 1, 2016 - July 31, 2016 318,080 $141.28 August 1, 2016 - August 18, 2016 455,393 $138.71 Total 1,801,099 $138.80 87On November 23, 2016, the Company announced that its Board of Directors approved a new $250 million share repurchase of ordinaryshares. Repurchases may be made from time to time at the Company’s discretion, based on ongoing assessments of the capital needs of the business, themarket price of its stock, and general market conditions. No time period has been set for the repurchase program, and any such program may be suspended ordiscontinued at any time. The repurchase authorization enables the Company to purchase its ordinary shares from time to time through open marketpurchases, negotiated transactions or other means, including 10b5-1 trading plans in accordance with applicable securities laws or other restrictions. Thetable below presents a summary of the ordinary shares repurchased by the Company under the new authorization and classified as treasury stock, as of May31, 2017, in accordance with a 10b5-1 program: Period Total Number ofShares Purchased Average Price Paidper Share Total Number ofShares Purchased asPart of the CurrentProgram Dollar Value of Sharesthat May Yet BePurchased Under theProgram(in thousands) November 25, 2016 - November 30, 2016 68,641 $105.21 68,641 December 1, 2016 - December 31, 2016 242,821 $104.87 311,462 January 1, 2017 - January 31, 2017 156,353 $103.33 467,815 February 1, 2017 - February 28, 2017 51,150 $106.02 518,965 March 1, 2017 - March 31, 2017 — $— 518,965 April 1, 2017 - April 30, 2017 — $— 518,965 May 1, 2017 - May 31, 2017 34,193 $105.58 553,158 Total 553,158 $104.63 $192,125 During the year ended March 31, 2017, the Company repurchased 2,252,725 shares between the two programs at an average price of $130.87. ITEM 16F.CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANTNot applicable. 88ITEM 16G.CORPORATE GOVERNANCEUnder the NYSE Listed Company Manual, foreign private issuers may elect to be subject to a more limited set of corporate governance requirementsthan U.S. domestic issuers. Despite any such election, Taro, as a foreign private issuer, must comply with four principal NYSE corporate governance rules:(1) Taro must satisfy the requirements of Exchange Act Rule 10A-3; (2) Taro’s Chief Executive Officer must promptly notify the NYSE in writing after anyexecutive officer becomes aware of any material non-compliance with the applicable NYSE corporate governance rules; (3) Taro must provide the NYSE withannual and interim written affirmations as required under the NYSE corporate governance rules; and (4) Taro must provide a brief description of anysignificant differences between its corporate governance practices and those followed by U.S. companies under NYSE listing standards. The table belowbriefly describes the significant differences between Taro’s domestic practice and the NYSE corporate governance rules. Section NYSE Corporate Governance Rule forU.S. Domestic Issuers Taro’s Approach 303A.01 A listed company must have a majority of independent directors.“Controlled companies” are not required to comply with thisrequirement. Taro is a controlled company because more than a majority of itsvoting power is controlled by Sun. As a controlled company,Taro would not be required to comply with the majority ofindependent directors’ requirements if it were a U.S. domesticissuer. There is not a similar requirement under Israeli practice orthe Israeli Companies Law that requires Taro to have a majorityof independent directors. Rather, the statutory external directorprovisions under the Israeli Companies Law only require Taro, asa public company, to have at least two external directors. 303A.03 The non-management directors of a listed company must meet atregularly scheduled executive sessions without management. There is not a similar requirement under Israeli practice or theIsraeli Companies Law, and non-management directors of Taro donot meet at regularly scheduled executive sessions withoutmanagement. 303A.04 A listed company must have a Nominating/CorporateGovernance Committee composed entirely of independentdirectors, with a written charter that covers certain minimumspecified duties.“Controlled companies” are not required to comply with thisrequirement. Taro does not have a nominating committee. As a controlledcompany, Taro would not be required to comply with thenominating/corporate governance committee requirements if itwere a U.S. domestic issuer. There is not a similar requirementunder the Israeli Companies Law. 303A.05 A listed company must have a compensation committeecomposed entirely of independent directors, with a writtencharter that covers certain minimum specified duties.“Controlled companies” are not required to comply with thisrequirement. Taro has a compensation committee currently comprised of threedirectors. Under the Israeli Companies Law, which providesstandards for the independence of the compensation committee,the compensation committee shall have no less than threemembers and all of the statutory external directors shall bemembers thereof. 303A.06/303A.07 A listed company must have an audit committee with a minimumof three independent directors who satisfy the independencerequirements of Rule 10A-3 under the Exchange Act, with awritten charter that covers certain minimum specified duties. Taro has an Audit Committee currently comprised of threedirectors. Under the Israeli Companies Law, which providesstandards for the Independence of the audit committee, the AuditCommittee shall have no less than three members and all of thestatutory external directors shall be members thereof. All of thedirectors that are members of the Audit Committee meet theNYSE independence requirements as well as the SECIndependence requirements that would apply to the AuditCommittee members in absence of our reliance on the exemptionprovided by Exchange Act Rule 10A-3(c)(3).89Section NYSE Corporate Governance Rule forU.S. Domestic Issuers Taro’s Approach 303A.07 The audit committee of a listed company must be directlyresponsible, to the extent permitted by law, for the appointment,compensation, retention and oversight of the work of anyregistered public accounting firm engaged for the purpose ofpreparing or issuing an audit report or performing other audit,review, or attest services, and each such firm must report directlyto the audit committee. Pursuant to the Israeli Companies Law, Taro’s Audit Committeeis responsible for determining the scope of the work of, and thecompensation to be paid to, Taro’s external auditors, whereas theactual appointment of the external auditors and approval of theircompensation is carried out by Taro’s shareholders at the annualmeeting of shareholders. Furthermore, pursuant to the IsraeliCompanies Law, Taro’s Audit Committee is responsible forsupervising the work of Taro’s external auditors with respect tothe audit of Taro’s financial statements, whereas actual finalapproval of the financial statements is provided by Taro’s Boardas a whole. 303A.08 Shareholders must be given the opportunity to vote on all equity-compensation plans and material revisions thereto, with limitedexemptions set forth in the NYSE rules. Under the Israeli Companies Law, shareholder pre-approval is notrequired for the adoption or material amendment of equitycompensation plans. Shareholder approval is required prior toany grants under the plan to directors or the chief executiveofficer of Taro. 303A.09 A listed company must adopt and disclose corporate governanceguidelines that cover certain minimum specified subjects. Taro does not have formal corporate governance guidelines thataddress all of the matters specified in the NYSE rules. There isnot a similar requirement under the Israeli Companies Law. 303A.10 A listed company must adopt and disclose a code of businessconduct and ethics for directors, officers and employees, andpromptly disclose any waivers of the code for directors orexecutive officers. Taro has adopted a formal code of ethical and compliant conduct,which applies to its directors, officers and employees.Taro reports each year under Item 16B of its Annual Report onForm 20-F any waivers of the code of ethical conduct granted fordirectors and executive officers. Taro’s code of ethical conducthas a scope that is similar, but not identical, to that required for aU.S. domestic company under the NYSE rules.Taro also has a code of ethics that applies specifically to Taro’sChief Executive Officer, Chief Financial Officer and other seniorofficers. 303A.12 Each listed company CEO must certify to the NYSE each yearthat he or she is not aware of any violation by the company ofNYSE corporate governance listing standards. Taro’s CEO will promptly notify the NYSE in writing if anyexecutive officer of Taro becomes aware of any materialnoncompliance with any applicable provisions of the NYSEcorporate governance rules. ITEM 16H.MINE SAFETY DISCLOSURENot applicable. 90PART III ITEM 17.FINANCIAL STATEMENTSWe have responded to Item 18 in lieu of this item. ITEM 18.FINANCIAL STATEMENTSThe financial statements required by this item are found at the end of this 2017 Annual Report, beginning on page F-1.The Financial Statement Schedule II—Valuation and Qualifying Accounts is found on page S-1 following the financial statements. ITEM 19.EXHIBITSThe exhibits filed with or incorporated into this 2017 Annual Report are listed on the index of exhibits below. ExhibitNo. Description 1.1 Memorandum of Association of Taro Pharmaceutical Industries Ltd. (1) 1.2 Articles of Association of Taro Pharmaceutical Industries Ltd., as amended (2) 2.1 Form of ordinary share certificate (1) 4.1 Taro Pharmaceutical Industries 1999 Stock Incentive Plan (3) 4.2 Amendment No. 1 to Taro Pharmaceutical Industries 1999 Stock Incentive Plan (4) 4.3 Amendment No. 2 to Taro Pharmaceutical Industries 1999 Stock Incentive Plan (4) 8 List of Subsidiaries (See “Organizational Structure” in Item 4.C of this Form 20-F) 12.1 Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 12.2 Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 13 Certification of the Chief Executive Officer, Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 ofthe Sarbanes-Oxley Act of 2002 15(a).3 Loan agreements dated May 20, 2003 and November 27, 2003 among Taro Pharmaceutical Industries Ltd. and various lenders (5) 101 INS XBRL Instance Document 101 SCH XBRL Taxonomy Extension Schema Document 101 CAL XBRL Taxonomy Extension Calculation Linkbase Document 101 DEF XBRL Taxonomy Extension Definition Linkbase Document 101 LAB XBRL Taxonomy Extension Label Linkbase Document 101 PRE XBRL Taxonomy Extension Presentation Linkbase Document (1)Previously filed as an exhibit to our Registration Statement on Form F-1 (No. 333-63464), as amended, and incorporated herein by reference.(2)Previously filed as an exhibit to our Annual Report on Form 20-F for the fiscal year ended March 31, 2013, and incorporated herein by reference.(3)Previously filed as an exhibit to our Registration Statement on Form S-8 (No. 333-13840) and incorporated herein by reference.(4)Previously filed as an exhibit to our Annual Report on Form 20-F for the fiscal year ended December 31, 2005, and incorporated herein by reference.(5)Previously filed as an exhibit to our Annual Report on Form 20-F for the fiscal year ended December 31, 2003 and incorporated herein by reference. 91SIGNATUREThe registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersignedto sign this 2017 Annual Report on its behalf. TARO PHARMACEUTICAL INDUSTRIES LTD. By: /s/ Mariano Balaguer Mariano Balaguer Vice President, Chief Financial Officer and ChiefAccounting Officer Dated: June 21, 2017 92 TARO PHARMACEUTICAL INDUSTRIES LTD. PageReport of Independent Registered Public Accounting Firm F-2 – F-3 Consolidated Balance Sheets F-4 – F-5 Consolidated Statements of Operations F-6 Consolidated Statements of Comprehensive Income F-7 Statements of Changes in Shareholders’ Equity F-8 Consolidated Statements of Cash Flows F-9 – F-10 Notes to Consolidated Financial Statements F-11 – F-411 TARO PHARMACEUTICAL INDUSTRIES LTD. Report of Independent Registered Public Accounting FirmTo the Board of Directors and Shareholders ofTaro Pharmaceutical Industries Ltd.We have audited the accompanying consolidated balance sheets of Taro Pharmaceutical Industries Ltd. (the “Company”) and its subsidiaries as of March 31,2017 and 2016, and the related consolidated statements of operations, of comprehensive income, changes in shareholders’ equity and cash flows for the yearsended March 31, 2017, 2016 and 2015. These financial statements are the responsibility of the Company’s Management. Our responsibility is to express anopinion on these financial statements based on our audits.We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require thatwe plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit also includesexamining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used andsignificant estimates made by Management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide areasonable basis for our opinion.In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company and itssubsidiaries as of March 31, 2017 and 2016, and the results of their operations, changes in comprehensive income, changes in shareholders’ equity and theircash flows for the years ended March 31, 2017, 2016 and 2015, in conformity with accounting principles generally accepted in the United States of America.We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal controlover financial reporting as of March 31, 2017, based on the criteria established in Internal Control—Integrated Framework (2013) issued by the Committeeof Sponsoring Organizations of the Treadway Commission and our report dated June 21, 2017, expressed an unqualified opinion on the Company’s internalcontrol over financial reporting. Tel Aviv, Israel /s/ Ziv Haft Ziv HaftJune 21, 2017 Certified Public Accountants (Isr)BDO Member Firm F-2TARO PHARMACEUTICAL INDUSTRIES LTD. REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMTo the Board of Directors and Shareholders ofTaro Pharmaceutical Industries Ltd.We have audited the internal control over financial reporting of Taro Pharmaceutical Industries Ltd. and its subsidiaries (the “Company”) as ofMarch 31, 2017, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations ofthe Treadway Commission (the COSO criteria). The Company’s Management is responsible for maintaining effective internal control over financialreporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report onInternal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based onour audit.We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standardsrequire that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained inall material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weaknessexists, testing and evaluating the design and operating effectiveness of internal control based on that risk, and performing such other procedures as weconsidered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive andprincipal financial officers, or persons performing similar functions, and effected by the company’s Board of Directors, Management, and other personnel toprovide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordancewith generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertainto the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generallyaccepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of Managementand Directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or dispositionof the company’s assets that could have a material effect on the financial statements.Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper managementoverride of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation ofthe effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because ofchanges in conditions, or that the degree of compliance with the policies or procedures may deteriorate.In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of March 31, 2017, based on theCOSO criteria.We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), financial position of theCompany and its subsidiaries as of March 31, 2017 and 2016, and the results of their operations, of comprehensive income, changes in shareholders’ equityand their cash flows for the years ended March 31, 2017, 2016 and 2015 and our report dated June 21, 2017, expressed an unqualified opinion on thoseconsolidated financial statements. Tel Aviv, Israel /s/ Ziv Haft Ziv HaftJune 21, 2017 Certified Public Accountants (Isr)BDO Member Firm F-3TARO PHARMACEUTICAL INDUSTRIES LTD. CONSOLIDATED BALANCE SHEETSU.S. dollars in thousands (except share and per share data) March 31, 2017 2016 ASSETS CURRENT ASSETS: Cash and cash equivalents $600,399 $576,757 Short-term and current maturities of long-term bank deposits 782,813 648,297 Marketable securities 3,548 3,572 Accounts receivable and other: Trade, net 203,924 238,611 Other receivables and prepaid expenses 266,280 270,724 Inventories 141,045 138,553 Long-term assets held for sale, net 1,015 1,081 TOTAL CURRENT ASSETS 1,999,024 1,877,595 LONG-TERM BANK DEPOSITS 70,685 115,173 PROPERTY, PLANT AND EQUIPMENT, NET 180,085 159,459 OTHER ASSETS 39,959 35,806 TOTAL ASSETS $2,289,753 $2,188,033 The accompanying notes are an integral part of these consolidated financial statements. F-4TARO PHARMACEUTICAL INDUSTRIES LTD. CONSOLIDATED BALANCE SHEETSU.S. dollars in thousands (except share and per share data) March 31, 2017 2016 LIABILITIES AND SHAREHOLDERS’ EQUITY CURRENT LIABILITIES: Accounts payable: Trade payables $16,394 $18,853 Other current liabilities 193,443 226,609 TOTAL CURRENT LIABILITIES 209,837 245,462 LONG-TERM LIABILITIES: Deferred income taxes 2,114 2,232 Other long-term liabilities 3,996 3,195 TOTAL LONG-TERM LIABILITIES 6,110 5,427 COMMITMENTS AND CONTINGENT LIABILITIES TOTAL LIABILITIES 215,947 250,889 SHAREHOLDERS’ EQUITY: Taro shareholders' equity: Ordinary shares of NIS 0.0001 par value: Authorized at March 31, 2017 and March 31, 2016: 200,000,000 shares; Issued at March 31, 2017 and March 31, 2016: 45,116,262 shares Outstanding at March 31, 2017 and March 31, 2016: 40,513,209 and 42,765,934 shares, respectively 679 679 Founders’ shares of NIS 0.00001 par value: Authorized, issued and outstanding at March 31, 2017 and March 31, 2016: 2,600 shares 1 1 Additional paid-in capital 262,445 262,445 Accumulated other comprehensive income, net of taxes (148,133) (123,026) Treasury stock at March 31, 2017 and March 31, 2016: 4,603,053 and 2,350,328 shares, respectively (498,675) (203,778)Accumulated earnings 2,451,177 1,994,821 Taro shareholders' equity 2,067,494 1,931,142 Non-controlling interest 6,312 6,002 TOTAL SHAREHOLDERS’ EQUITY 2,073,806 1,937,144 TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $2,289,753 $2,188,033 The accompanying notes are an integral part of these consolidated financial statements. F-5TARO PHARMACEUTICAL INDUSTRIES LTD. CONSOLIDATED STATEMENTS OF OPERATIONSU.S. dollars and shares in thousands (except per share data) Years ended March 31, 2017 2016 2015 Sales, net $879,387 $950,751 $862,944 Cost of sales 207,860 169,743 186,359 Impairment 276 2,042 — Gross profit 671,251 778,966 676,585 Operating expenses: Research and development 70,644 71,160 65,510 Selling, marketing, general and administrative 85,656 92,365 87,644 Settlements and loss contingencies — 973 (4,200) 156,300 164,498 148,954 Operating income 514,951 614,468 527,631 Financial income, net (34,636) (19,672) (51,311)Other gain, net 11,211 2,680 2,738 Income before income taxes 560,798 636,820 581,680 Tax expense 103,780 95,313 96,059 Income from continuing operations 457,018 541,507 485,621 Net loss from discontinued operations attributable to Taro (352) (236) (787)Net income 456,666 541,271 484,834 Net income attributable to non-controlling interest 310 339 577 Net income attributable to Taro $456,356 $540,932 $484,257 Net income from continuing operations attributable to Taro $456,708 $541,168 $485,044 Net loss from discontinued operations attributable to Taro (352) (236) (787)Net income attributable to Taro $456,356 $540,932 $484,257 Net income per ordinary share from continuing operations attributable to Taro: Basic $11.06 $12.63 $11.32 Diluted $11.06 $12.63 $11.32 Net loss per ordinary share from discontinued operations attributable to Taro: Basic $(0.01) $(0.01) $(0.01)Diluted $(0.01) $(0.01) $(0.01)Net income per ordinary share attributable to Taro: Basic $11.05 $12.62 $11.31 Diluted $11.05 $12.62 $11.31 Weighted-average number of ordinary shares used to compute net income per share: Basic 41,301 42,832 42,834 Diluted 41,301 42,832 42,834 The accompanying notes are an integral part of these consolidated financial statements. F-6TARO PHARMACEUTICAL INDUSTRIES LTD. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOMEU.S. dollars in thousands Years ended March 31, 2017 2016 2015 Net income attributable to Taro $456,356 $540,932 $484,257 Other comprehensive loss Foreign currency translation adjustments (25,038) (12,071) (88,153)Unrealized (loss) gain from marketable securities (69) 11 83 Total other comprehensive loss attributable to Taro (25,107) (12,060) (88,070) Total comprehensive income attributable to Taro $431,249 $528,872 $396,187 The accompanying notes are an integral part of these consolidated financial statements. F-7TARO PHARMACEUTICAL INDUSTRIES LTD. CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITYU.S. dollars and shares in thousands Taro Shareholders' Equity Accumulated Additional Other Total Taro Non- Total Number of Share Paid-in Comprehensive Treasury Retained Shareholders' controlling Shareholders’ Shares Capital Capital Income (Loss) Shares Earnings Equity Interest Equity Balance at March 31, 2014 42,832 $680 $262,419 $(22,896) $(194,328) $969,632 $1,015,507 $5,086 $1,020,593 Exercise of options 1 — * 26 — — — 26 — 26 Comprehensive loss, net of tax: — — — (88,070) — — (88,070) — (88,070)Net income — — — — — 484,257 484,257 577 484,834 Balance at March 31, 2015 42,833 $680 $262,445 $(110,966) $(194,328) $1,453,889 $1,411,720 $5,663 $1,417,383 Repurchase of treasury stock (67) — — — (9,450) — (9,450) — (9,450)Comprehensive loss, net of tax: — — — (12,060) — — (12,060) — (12,060)Net income — — — — — 540,932 540,932 339 541,271 Balance at March 31, 2016 42,766 $680 $262,445 $(123,026) $(203,778) $1,994,821 $1,931,142 $6,002 $1,937,144 Repurchase of treasury stock (2,253) — — — (294,897) — (294,897) — (294,897)Comprehensive loss, net of tax: — — — (25,107) — — (25,107) — (25,107)Net income — — — — — 456,356 456,356 310 456,666 Balance at March 31, 2017 40,513 $680 $262,445 $(148,133) $(498,675) $2,451,177 $2,067,494 $6,312 $2,073,806*Amount is less than $500The accompanying notes are an integral part of these consolidated financial statements. F-8TARO PHARMACEUTICAL INDUSTRIES LTD. CONSOLIDATED STATEMENTS OF CASH FLOWSU.S. dollars in thousands Years ended March 31, 2017 2016 2015 Cash flows from operating activities: Net income $456,666 $541,271 $484,834 Adjustments required to reconcile net income to net cash provided by operating activities: Depreciation and amortization 14,829 14,848 15,798 Impairment of long-lived assets 276 2,042 90 Accrued severance pay and other long-term liabilities, net 273 (53) 54 (Gain) loss on sale of long-lived assets (8,369) 42 22 Realized (gain) loss on sale of marketable securities (20) 32 (231)Change in derivative instruments, net 1,434 (6,137) 5,483 Effect of exchange differences on intercompany balances (6,017) (2,268) (18,167)Foreign exchange effect of bank deposits (15,157) (5,510) — Decrease in long-term debt due to currency fluctuations — — (1,030)Deferred income taxes, net 73,706 (11,976) (70,387)Decrease (increase) in trade receivables, net 34,413 (16,386) (85,277)Increase in other receivables, prepaid expenses and other (5,034) (3,509) (3,506)Increase in inventories, net (3,770) (19,013) (7,027)Decrease (increase) in other long-term assets 205 (9) 242 (Increase) decrease in income tax receivables (70,390) (39,340) 17,623 Decrease in trade payables (2,290) (679) (542)(Decrease) increase in other accounts payable and accrued expenses (28,377) (6,194) 18,731 (Decrease) increase in income tax payables (4,843) (52,033) 50,078 Net cash provided by operating activities 437,535 395,128 406,788 The accompanying notes are an integral part of these consolidated financial statements. F-9TARO PHARMACEUTICAL INDUSTRIES LTD. CONSOLIDATED STATEMENTS OF CASH FLOWSU.S. dollars in thousands Years ended March 31, 2017 2016 2015 Cash flows from investing activities: Purchase of property, plant and equipment (35,755) (18,972) (19,997)Investment in other intangible assets (68) (134) (158)Proceeds from (investment in) other assets 10 35,000 (31,050)Proceeds from (investment in) short-term bank deposits, net 196,170 (220,102) (43,344)Proceeds from restricted bank deposits — 199 28 (Investment in) proceeds from long-term deposits and other assets (286,617) (80,587) 2,112 (Investment in) proceeds from marketable securities, net (26) (135) 111 Proceeds from sale of long-lived assets 8,508 — 217 Net cash used in investing activities (117,778) (284,731) (92,081) Cash flows from financing activities: Proceeds from issuance of shares, net — — 26 Repurchase of treasury stock (294,897) (9,450) — Repayment of long-term debt — (5,888) (10,944)Net cash used in financing activities (294,897) (15,338) (10,918)Effect of exchange rate changes on cash and cash equivalents (1,218) 57 (32,115)Increase in cash and cash equivalents 23,642 95,116 271,674 Cash and cash equivalents at the beginning of the period 576,757 481,641 209,967 Cash and cash equivalents at the end of the period $600,399 $576,757 $481,641 Supplemental disclosure of cash flow transactions: Cash paid during the year for: Interest $— $85 $1,014 Income taxes $97,782 $192,964 $101,651 Non-cash investing and financing transactions: Purchase of property, plant and equipment included in accounts payable $692 $1,744 $645 The accompanying notes are an integral part of these consolidated financial statements. F-10TARO PHARMACEUTICAL INDUSTRIES LTD.Notes to consolidated financial statementsU.S. dollars in thousands (except share and per share data) NOTE 1: — GENERALTaro Pharmaceutical Industries Ltd. (the “Company” or “Taro”) is an Israeli corporation, which operates in Israel and elsewhere through itsIsraeli, North American, and European subsidiaries (the “Group”). The principal business activities of the Group are the production, research,development and marketing of pharmaceutical products. As of March 22, 2012, the Company’s ordinary shares are traded on the New YorkStock Exchange (the “NYSE”), under the symbol “TARO.” As used herein, the terms “we,” “us,” “our,” “Taro” and the “Company” mean TaroPharmaceutical Industries Ltd. and its subsidiaries, unless otherwise indicated.The activities of the Group in North America are performed by Taro Pharmaceuticals Inc., Taro Pharmaceuticals North America, Inc. and TaroPharmaceuticals U.S.A., Inc. (“Taro U.S.A.”). Taro Research Institute Ltd. in Israel provided research and development services to the Group,which, as of its merger with and into Taro in July 2012, is now performed by Taro. Taro International Ltd. in Israel and Taro’s subsidiary in theUnited Kingdom are engaged in the pharmaceutical activities of the Group outside North America.The Group manufactures generic and proprietary drug products in facilities located in Israel and Canada, and manufactures bulk activepharmaceutical ingredients in its Israel facility. The Group’s research and development facilities are located in Israel and Canada. Themajority of the Group’s sales are in North America, primarily in the U.S.A.In North America, the Company sells and distributes its products principally to drug industry wholesalers, drug store chains and massmerchandisers. In Israel, the Group sells and distributes its products principally to healthcare institutions, drug store chains, and privatepharmacies.In the generic pharmaceutical industry, selling prices and related profit margins tend to decrease as products mature due to increasedcompetition from other generic pharmaceutical manufacturers as they gain approval from the U.S. Food and Drug Administration (the “FDA”),the Canadian Health Products and Food Branch Inspectorate, and the Israeli and other Ministries of Health (“Government Agencies”) tomanufacture equivalent products. The Group’s future operating results are dependent on, among other things, its ability to introduce newproducts and maintain its approvals to market existing drugs.While non-compliance with Government Agencies’ regulations can result in refusal to allow country entry, seizure, fines or injunctive actionsto prevent the sale of products, no material actions against the Group or its products have recently occurred. The Group believes that it is inmaterial compliance with all Government Agencies’ regulations.While the majority of the Company’s products are either synthesized by the Company itself or are derived from multiple source materials, someraw materials and certain products are currently obtained from single suppliers. The Company does not believe that any interruption of supplyfrom a single supplier would have a material adverse effect on the Company’s results of operations and financial position. To date, the Grouphas not experienced difficulties in obtaining raw materials or other materials.Sun Pharmaceutical Industries Ltd., the Company’s majority shareholder, owns, or controls as of March 31, 2017, 29,497,813, or 72.8%, of theCompany’s ordinary shares, and with the Company’s founders’ shares, 81.9% of the vote attributable to the share equity of the Company. As ofMay 31, 2017, Sun owns, or controls 72.9% of the Company’s ordinary shares and controls 81.9% of the voting power in the Company due tothe additional ordinary shares repurchased by the Company (as described below).In December 2013, the Company completed a modified “Dutch auction” tender offer whereby, an aggregate of 1,959,514 ordinary shares werepurchased at the final purchase price of $97.50 per share, for an aggregate purchase price of $193.0 million (including fees and expensesrelating to the tender offer). These shares are classified as treasury stock.On October 1, 2015, Taro entered into a share purchase Agreement with EPIRUS Biopharmaceuticals, Inc. (“EPIRUS”) for all of the shares ofZalicus Pharmaceuticals Ltd. (“Zalicus”), including its product candidate Z944 and certain related assets, a novel, oral, T-type calcium channelmodulator in development for the treatment of pain. As a result of the acquisition, Taro paid CAD $5,000 in cash and a non-interest bearing,limited recourse promissory note in the amount of CAD $5,000 with a maturity date of July 1, 2017. If Taro elects to repay the Promissory Notein cash and continue development of the Z944 Assets, EPIRUS will also be entitled to additional payments. If Taro does not elect to repay thePromissory Note, the Z944 Assets will be transferred back to EPIRUS.F-11TARO PHARMACEUTICAL INDUSTRIES LTD.Notes to consolidated financial statementsU.S. dollars in thousands (except share and per share data) On March 15, 2016, the Company announced that its Board of Directors authorized a $250,000 share repurchase of ordinary shares. On August19, 2016, we announced the completion of this program, with the last shares being purchased on August 18, 2016. Under the program,the Company bought back 1,801,099 of its ordinary shares in open market transactions, in accordance with a 10b5-1 program, at an averageprice of $138.80 per share, as represented in the following table. Period Total Number of SharesPurchased Average Price Paid perShare March 17, 2016 - March 31, 2016 67,339 $140.30 April 1, 2016 - April 30, 2016 117,515 $141.46 May 1, 2016 - May 31, 2016 552,474 $134.86 June 1, 2016 - June 30, 2016 290,298 $142.32 July 1, 2016 - July 31, 2016 318,080 $141.28 August 1, 2016 - August 18, 2016 455,393 $138.71 Total 1,801,099 $138.80 On November 23, 2016, the Company announced that its Board of Directors authorized a new $250,000 share repurchase of ordinaryshares. Repurchases may be made from time to time at the Company’s discretion, based on ongoing assessments of the capital needs of thebusiness, the market price of its stock, and general market conditions. No time period has been set for the repurchase program, and any suchprogram may be suspended or discontinued at any time. The repurchase authorization enables the Company to purchase its ordinary sharesfrom time to time through open market purchases, negotiated transactions or other means, including 10b5-1 trading plans in accordance withapplicable securities laws or other restrictions. The table below presents a summary of the ordinary shares repurchased by the Company underthe new authorization and classified as treasury stock, as of May 31, 2017, in accordance with a 10b5-1 program: Period Total Number ofShares Purchased Average Price Paidper Share Total Number ofShares Purchased asPart of the CurrentProgram Dollar Value of Sharesthat May Yet BePurchased Under theProgram(in thousands) November 25, 2016 - November 30, 2016 68,641 $105.21 68,641 December 1, 2016 - December 31, 2016 242,821 $104.87 311,462 January 1, 2017 - January 31, 2017 156,353 $103.33 467,815 February 1, 2017 - February 28, 2017 51,150 $106.02 518,965 March 1, 2017 - March 31, 2017 — $— 518,965 April 1, 2017 - April 30, 2017 — $— 518,965 May 1, 2017 - May 31, 2017 34,193 $105.58 553,158 Total 553,158 $104.63 $192,125 During the year ended March 31, 2017, the Company repurchased 2,252,725 shares between the two programs. On December 23, 2016, the Company announced the sale of U.S. rights to Keveyis® (dichlorphenamide) to Strongbridge Biopharma plc(Strongbridge). Keveyis® was approved by the U.S. FDA in August 2015 to treat primary hyperkalemic and hypokalemic periodic paralysis, agroup of rare hereditary disorders that cause episodes of muscle weakness or paralysis. Keveyis® has orphan designation status throughAugust 2022. In accordance with the terms of the purchase agreement, Strongbridge paid Taro a total of $8,500 through upfront payments;Taro is also eligible to receive additional future payments upon the achievement of certain sales unit milestones. Taro has agreed to continueto manufacture Keveyis® for Strongbridge, under an exclusive supply agreement at least for the period of Keveyis® orphan exclusivity,subject to certain commercial terms and conditions, including minimum supply purchases. On March 16, 2017, the Company entered into a share purchase agreement with BELLUS Health Inc. (“BELLUS”) for the sale of BELLUS’wholly-owned subsidiary Thallion Pharmaceuticals Inc. (“Thallion”), including all the rights to theF-12TARO PHARMACEUTICAL INDUSTRIES LTD.Notes to consolidated financial statementsU.S. dollars in thousands (except share and per share data) drug candidate Shigamab™. Pursuant to the agreement, Taro acquired all issued and outstanding shares of Thallion for a potential totalconsideration of CAD $2,700. In addition, BELLUS will receive a portion of certain post-approval revenues related to the Shigamab™program. NOTE 2: — SIGNIFICANT ACCOUNTING POLICIESThe consolidated financial statements are prepared according to U.S. GAAP. a.Use of estimates:The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates, judgementsand assumptions. Management believes that the estimates, judgements and assumptions used are reasonable based upon information availableat the time they are made. These estimates, judgements and assumptions can affect the reported amounts of assets and liabilities and disclosureof contingent assets and liabilities at the dates of the financial statements, and the reported amounts of revenue and expenses during thereporting period. Actual results could differ from those estimates.The Company’s most critical estimates are used in its determination of its sales incentives reserves, inventory reserves, income taxes, fixedassets, intangible assets, derivative instruments and contingencies. b.Financial statements in U.S. dollars:A majority of the revenue of the Company and certain of its subsidiaries (exclusive of its Canadian, Irish, and U.K. subsidiaries – see below) isgenerated in U.S. dollars (“dollars”). In addition, a substantial portion of the costs of the Company and these subsidiaries is incurred indollars. Management believes that dollars is the primary currency of the economic environment in which the Company and these subsidiariesoperate. Thus, the functional and reporting currency of the Company and its subsidiaries is the dollar, requiring re-measurement from the localcurrency into dollars for each of these entities. All exchange gains and losses resulting from the re-measurement are reflected in theConsolidated Statements of Operations as financial income or expense, as appropriate.The functional currency of the Company’s Canadian, Irish, and U.K. subsidiaries are the Canadian dollar, the Euro, and the British pound,respectively.Accordingly, the financial statements of the Canadian, Irish, and U.K. subsidiaries have been translated into dollars. All balance sheet accountshave been translated using the exchange rates in effect at the balance sheet date. Amounts recorded in the Consolidated Statements ofOperations have been translated using the average exchange rate prevailing during the year. The resulting translation adjustments are reportedas a component of shareholders’ equity under accumulated other comprehensive income. c.Principles of consolidation:The consolidated financial statements include the accounts of the Company and its subsidiaries. Intercompany transactions and balances havebeen eliminated in consolidation and non-controlling interest is included in shareholders’ equity.Sun, through its wholly owned subsidiary, Taro Development Corporation (“TDC”) owns 3.1% of the shares that have economic rights and has50% of the voting rights in Taro U.S.A.; with the Company owning the remaining shares and voting rights. In 1993, TDC signed an agreementwith the Company to vote all of its shares in Taro U.S.A. in all elections of directors of Taro U.S.A. as the Company shall instruct. In May2017, TDC renewed its commitment to the Company. TDC may terminate the agreement upon one year written notice and no such notice oftermination has been provided. TDC is a minority shareholder in the Company by way of its ownership of Taro U.S.A. shares that haveeconomic rights. d.Cash and cash equivalents:Cash equivalents are short-term, highly-liquid investments that are readily convertible into cash with original maturities of three months or lessat the date acquired.F-13TARO PHARMACEUTICAL INDUSTRIES LTD.Notes to consolidated financial statementsU.S. dollars in thousands (except share and per share data) Short-term bank deposits:Bank deposits with maturities of more than three months, but less than one year, are included in short-term deposits. Such deposits are stated atcost which approximates market value and are invested at an average interest rate of 1.36% and 1.17% for March 31, 2017 and 2016,respectively. e.Marketable securities:Marketable securities are comprised primarily of bonds issued by government municipalities. These marketable securities were designated asavailable-for-sale. Accordingly, these securities are stated at fair value, with unrealized gains and losses reported in accumulated othercomprehensive income, a separate component of shareholders’ equity.Realized gains and losses on the sale of investments are included in financial income, net and are derived using the specific identificationmethod for determining the cost of securities.The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortizationtogether with interest and dividends on securities are included in financial income, net.The Company recognizes an impairment charge when a decline in the fair value of its investments in debt securities results in the value of theinvestments being below the cost basis of such securities and when such decline is judged to be other-than-temporary. Factors considered inmaking such a determination include the duration and severity of the impairment, the reason for the decline in value, the potential recoveryperiod and the Company’s intent to sell, including whether it is more likely than not that the Company will be required to sell the investmentbefore recovery of cost basis. For securities that are deemed other-than-temporarily impaired, the amount of impairment is recognized infinancial income, net in the Consolidated Statements of Operations and is limited to the amount related to credit losses, while impairmentrelated to other factors is recognized in other comprehensive income.During the years ended March 31, 2017, 2016 and 2015, the Company did not own or sell any marketable securities previously impaired. f.Allowance for doubtful accounts:The allowance for doubtful accounts is calculated primarily with respect to specific balances, for which, in the opinion of Management,collection of such balances is doubtful. The allowance, in the opinion of Management, is sufficient to cover probable uncollectible balances. g.Inventories:Inventories are stated at the lower of cost or net realizable value. Inventory reserves are provided to cover risks arising from slow-movingitems, short-dated inventory, excess inventory or obsolescence. Changes in these provisions are charged to cost of sales. Cost is determined asfollows:Raw and packaging materials – weighted-average cost basis.Finished goods and work in progress – weighted-average production costs including materials, labor and direct and indirect manufacturingexpenses.Purchased products for commercial purposes – weighted-average cost basis. h.Deferred income taxes:Deferred income taxes are determined utilizing the “asset and liability” method based on the estimated future tax effects of temporarydifferences between the financial accounting and tax basis of assets and liabilities under the applicable tax laws, and on tax rates anticipated tobe in effect when the deferred taxes are expected to be paid or realized. A valuation allowance is provided if, based upon the weight ofavailable evidence, it is “more likely than not” that a portion of the deferred tax assets will not be realized. Deferred tax liabilities and assetsare classified as current or non-current based on the classification of the related asset or liability for financial reporting, or according to theexpected reversal dates of the specific temporary differences where appropriate. i.Property, plant and equipment: (1)Property, plant and equipment is stated at cost, net of accumulated depreciation. Payroll and other costs that are direct incremental costsnecessary to bring an asset to the condition of its intended use incurred during the construction and validation period of property, plantand equipment are capitalized to the cost of such assets.F-14TARO PHARMACEUTICAL INDUSTRIES LTD.Notes to consolidated financial statementsU.S. dollars in thousands (except share and per share data) (2)Depreciation is calculated utilizing the straight-line method over the estimated useful lives of the assets, from the date the assets areready for their intended use, at the following annual rates: %Building 2.5 - 10Machinery and equipment 5 - 10Motor vehicles 20Furniture, fixtures, office equipment and computer equipment 6 - 33 Leasehold improvements are depreciated using the straight-line method over the shorter of their useful lives or the terms of the leases(generally 5-10 years). (3)Certain costs incurred for computer software developed or obtained for internal use is required to be capitalized. As of March 31, 2017and 2016, the Group capitalized $4,517 and $4,500 of software costs, respectively. Software costs are amortized using the straight-linemethod over their estimated useful life (generally three – five years). j.Lease of land from Israel Land Administration:The Company leases several parcels of land from the Israel Land Administration (“ILA”). The lease period of the industrial parcels endsbetween 2018 and 2060. The Company has the right to extend the lease agreement ending 2018 for an additional period of 49 years. The ILAlease agreements are standard agreements covering substantial portions of the land of Israel. The standard agreements call for a Lease Period of49 years, with an option for one additional Lease Period (i.e., total of 98 years). A majority of the Company’s leases are in the beginning of thesecond 49 year period, and the remaining leases still in the first 49 year period have the option for the one additional lease period. Theownership of the land is not transferred at the end of the lease period, however, in certain conditions the lessee may purchase the land from theILA. The expectation, based on practice and accumulated experience is that the renewal price would be substantially below fair marketvalue. Since such leases do not qualify as a capital lease, they are being accounted for as operating leases. The prepaid lease amount isincluded in long-term receivables and other assets and amortized over the term of the lease. k.Goodwill:The goodwill of the Company is not amortized, but rather is subject to an annual impairment test (or more frequently if impairment indicatorsarise).The Company operates in one operating segment, comprising its only reporting unit. The goodwill impairment tests are conducted in twosteps. In the first step, if it is determined that the net book value of the reporting unit exceeds its fair value, the Company would then performthe second step of the impairment test. This requires the allocation of the reporting unit’s fair value of all of its assets and liabilities in amanner similar to an acquisition cost allocation, with any residual fair value being allocated to goodwill. The implied fair value of thegoodwill is then compared to the carrying value to determine impairment, if any.The Company determined the fair value using the market approach, which is based on the market capitalization by using the share price of theCompany on the NYSE and an appropriate control premium. As of March 31, 2017, the market capitalization of the Company wassignificantly higher than the net book value, therefore there was no need to continue to step two. Taro determined the goodwill was notsubject to impairment as of March 31, 2017 and 2016. l.Contingencies:The Company may be involved in various patent, product liability, consumer, commercial or environmental claims, governmentinvestigations, and other legal proceedings that arise from time to time in the ordinary course of business. Except for income taxcontingencies, the Company records accruals for these types of contingencies to the extent that the Company concludes their occurrence isprobable and that the related liabilities are estimable. The Company records anticipated recoveries under existing insurance contracts that arevirtually certain of occurring and at the gross amount that is expected to be collected. m.Tax contingencies:The Company follows a two-step approach to recognizing and measuring a liability for uncertain tax positions. The first step is to evaluate thetax position taken or expected to be taken in a tax return by determining if the weight of availableF-15TARO PHARMACEUTICAL INDUSTRIES LTD.Notes to consolidated financial statementsU.S. dollars in thousands (except share and per share data) evidence indicates that it is more likely than not that, on an evaluation of the technical merits, the tax position will be sustained on audit,including resolution of any related appeals or litigation processes. The second step is to measure the tax benefit as the largest amount that ismore than 50% likely to be realized upon ultimate settlement. In addition, the Company classifies interest and penalties recognized in thefinancial statements relating to uncertain tax positions under the provision for income taxes. A liability for unrecognized tax benefits wasrecorded as a result of the implementation of ASC 740 amounting to $23,457 and $22,093 as of March 31, 2017 and 2016, respectively. n.Intangible assets and deferred charges and long-lived assets:Intangible assets and deferred charges:Acquired intangible assets and product rights to be held and used are amortized over their useful life of a weighted-average amortization periodof 14 years using a straight-line method of amortization that reflects the pattern in which the economic benefits of the intangible assets areconsumed or otherwise used up.Long-lived assets:The Group’s long-lived assets, excluding goodwill, are reviewed for impairment whenever events or changes in circumstances indicate that thecarrying amount of an asset may not be recoverable. Impairment exists when the carrying amount of the asset exceeds the aggregate futureundiscounted cash flows expected to be generated by the asset. The impairment to be recognized is measured by the amount by which thecarrying amount of the assets exceeds the fair value of the asset. During the year ended March 31, 2017, the Company recorded a $276impairment charge relating to product rights. In the year ended March 31, 2016, the Company recorded a $2,042 impairment charge primarilyrelated to certain intellectual property as the Company is no longer selling a certain product. In the year ended March 31, 2015, the Companyrecorded $90 impairment loss, related to the fixed assets of its Irish facility, which were included in discontinued operations. o.Comprehensive income:The comprehensive income statement establishes standards for the reporting and display of comprehensive income and its components in a fullset of general purpose financial statements. Comprehensive income generally represents all changes in shareholders’ equity during the periodexcept those resulting from investments by, or distributions to, shareholders. The Company determined that its items of other comprehensiveincome relates to unrealized gains and losses on available for sale securities and foreign currency translation adjustments. p.Treasury shares:The Company repurchases its ordinary shares from time to time on the open market and holds such shares as treasury stock. The Companypresents the cost to repurchase treasury stock as a reduction of shareholders’ equity.When treasury stock is reissued, the Company charges the excess of the purchase cost, including related share-based compensation expenses,over their issuance price (loss) to retained earnings. The purchase cost is calculated based on the specific identification method. The Companydid not reissue treasury shares during the year ended March 31, 2017.In cases where the purchase cost is lower than the re-issuance price, the Company credits the difference to additional paid-in capital. q.Revenue recognition:The Company generally recognizes revenue from product sales when title and risk of loss have transferred to its customers. Those criteriagenerally require that (i) persuasive evidence of an arrangement exists; (ii) product delivery has occurred; (iii) the price to customers is fixed ordeterminable; (iv) collectability is reasonably assured, and (v) the amount of product returns, chargebacks, rebates and other sales deductionscan be reasonably estimated. The Company ships products to its customers only in response to, and to the extent of, the orders that customerssubmit to the Company. Depending on the terms of our customer arrangements, revenue is generally recognized when the product is receivedby the customer (“FOB Destination Point”) or at the time of shipment (“FOB Shipping Point”).When the Company recognizes and records revenue from the sale of its pharmaceutical products, the Company, in the same financial reportingperiod, records an estimate of various future deductions related to the sale. This has the effect of reducing the amount of reported productsales. These deductions include the Company’s estimates, which may require significant judgement of chargebacks, product returns, rebates,cash discounts and other sales deductions.F-16TARO PHARMACEUTICAL INDUSTRIES LTD.Notes to consolidated financial statementsU.S. dollars in thousands (except share and per share data) Chargebacks result from pricing arrangements the Company has with end-user customers establishing contract prices which are lower than thewholesalers’ acquisition costs or invoice prices. When these customers buy the Company’s products from their wholesaler of choice, thewholesaler issues a credit memo (chargeback) to the Company for the difference between the invoice price and the end-user contractprice. Chargeback reserves are estimated using current wholesaler inventory data beyond the Company’s control, and historical data.Product returns result from agreements allowing the Company’s customers to return unsold inventory that is expired or close toexpiration. Product return reserves are calculated using the average lag period between sales and product expiry, historical product returnsexperience, and specific return exposures to estimate the potential obligation for returns of inventory in the distribution channel.Rebates result from contractual agreements with the Company’s customers and are earned based on the Company’s direct sales to customers orthe Company’s customers’ sales to third parties. Rebate reserves from the Company’s direct sales to customers and the Company’s customers’sales to third parties are estimated using historical and contractual data.The Company generally offers discounts to its customers for payments within a certain period of time. Cash discount reserves are calculated bymultiplying the specified discount percentage by the outstanding receivable at the end of each period.Reserves for returns, Medicaid and indirect rebates are included in current liabilities. All other sales deductions allowances are recorded asaccounts receivable reserves. The reserve for returns is included in current liabilities as substantially all of these returns will not be realizeduntil after the year-end accounts receivable balances are settled. Medicaid and indirect rebates are included in current liabilities because theCompany does not have direct customer relationships with any of the payees. The Company offers incentives to certain resellers and retailers through various marketing programs where the Company agrees to reimbursethem for advertising costs incurred to include the Company’s products. The Company accounts for these in accordance with FASB ASCSubtopic 605-50, “Revenue Recognition – Customer Payments and Incentives,” as reductions of revenue unless the customer receives anidentifiable benefit in exchange for the consideration that is sufficiently separable from the customer’s purchase of the products and the fairvalue of the benefits can be reasonably estimated. r.Research and development:Research and development expenses are charged to expense as incurred. Payments made for research and development services prior to theservices being rendered are recorded as prepaid expenses on our consolidated balance sheet and expensed as provided. s.Royalty-bearing grants:Royalty-bearing grants from the government of Israel through the National Technological Innovation Authority (the “Authority”) (formerlyoperating as Office of the Chief Scientist of the Ministry of Economy of the State of Israel (the “OCS”)) for funding approved research anddevelopment projects are recognized at the time the Company is entitled to such grants, on the basis of the related costs incurred. TheCompany did not earn any grants during the years ended March 31, 2017, 2016 and 2015. t.Advertising expenses:The Group expenses advertising costs as incurred. Product samples are recorded within prepaid expense on the consolidated balance sheet andrecorded within advertising expenses when provided to potential customers. Advertising expenses were $10,468, $15,504, and $8,370 for theyears ended March 31, 2017, 2016 and 2015, respectively.F-17TARO PHARMACEUTICAL INDUSTRIES LTD.Notes to consolidated financial statementsU.S. dollars in thousands (except share and per share data) u.Income taxes:Income taxes are accounted for in accordance with the use of the liability method, whereby deferred tax asset and liability account balances aredetermined for temporary differences between the financial reporting and tax basis of assets and liabilities, and for carryforward losses andcredits. Deferred taxes are measured using tax rates and laws that will be in effect when the differences are expected to reverse. In certain casesManagement determined that it was more likely than not that the Company will not benefit from the deferred tax assets in subsidiaries, and avaluation allowance was provided against the deferred tax assets carried by such subsidiaries. In future years, if it is more likely than not thatthe subsidiary will be in a position to utilize its deferred tax asset, the valuation allowance for such assets will be modified. v.Sales and other taxes collected and remitted to governmental authorities:The Company collects various taxes from customers and remits them to governmental authorities. These taxes are recorded on a net basis andtherefore do not impact the statement of operations. w.Basic and diluted net income per ordinary share attributable to Taro:Basic net income per ordinary share is calculated based on the weighted-average number of ordinary shares outstanding during eachyear. Diluted net income per ordinary share is calculated based on the weighted-average number of ordinary shares outstanding during eachyear, plus potential dilutive ordinary shares considered outstanding during the year (except where anti-dilutive). x.Freight and distribution costs:The Company’s accounting policy is to classify shipping and handling costs as a part of sales and marketing expense. Freight, distributioncosts, and distribution warehousing costs related to shipping and handling to customers, primarily through the use of common carriers orexternal distribution services amounted to $11,949, $11,540, and $10,900 for the years ended March 31, 2017, 2016 and 2015. y.Concentrations of credit risk:Financial instruments that potentially subject the Group to concentrations of credit risk consist principally of cash and cash equivalents, shortand long-term bank deposits and trade receivables. Cash and cash equivalents and bank deposits are principally invested in major banks inIsrael, the United States, Europe, Canada and the Cayman Islands. Such deposits in the United States may be in excess of insured limits and arenot insured in other jurisdictions. Management believes that the financial institutions that hold the Group’s cash and cash equivalents andbank deposits are financially sound and that low credit risk therefore exists with respect to these financial instruments. These deposits may beredeemed upon demand and, therefore, bear minimal risk.The Group’s trade accounts receivables are mainly derived from sales to customers in the United States, Canada, Europe and Israel. AtMarch 31, 2017, two different customers represented approximately 45.7% and 18.2% of the Company’s trade accounts receivable. The Grouphas adopted credit policies and standards intended to mitigate inherent risk while accommodating sales growth. The Group performs ongoingcredit evaluations of its customers’ financial condition when deemed necessary, but does not require collateral for its customers’ accountsreceivable. z.Fair value of financial instruments:The carrying amount of cash and cash equivalents, short-term bank deposits, trade and other receivables and trade and other payablesapproximate their fair value, due to the short-term maturities of these instruments.The carrying amount of long-term bank deposits approximates their fair value because such deposits bear market interest rates.The carrying amounts of the Group’s borrowing arrangements under its debt agreements approximate their fair value since the loans bearinterest at rates that approximate the Group’s incremental borrowing rates for similar types of borrowing arrangements. As of March 31, 2017and 2016, the Company did not have any amounts outstanding under borrowing arrangements.The fair value of currency and interest rate contracts is determined by discounting to the present all future cash flows of the currencies to beexchanged at interest rates prevailing in the market for the period the currency exchanges are due and expressing the results in U.S. dollars atthe current spot foreign currency exchange rate.F-18TARO PHARMACEUTICAL INDUSTRIES LTD.Notes to consolidated financial statementsU.S. dollars in thousands (except share and per share data) aa.Accounting for derivatives:The Company recognizes all of their derivative instruments as either assets or liabilities at fair value, in the statement of financialposition. The accounting for changes (i.e., gains or losses) in the fair value of a derivative instrument depends on whether the instrument hasbeen designated and qualifies as part of a hedging relationship and on the type of hedging relationship. For derivative instruments that aredesignated and qualify as hedging instruments, a company must designate the hedging instrument as a fair value hedge, cash flow hedge or ahedge of a net investment in a foreign operation. For derivatives which qualify as a fair value hedge, changes in fair value are reported with thecarrying amount of the hedged asset or liability with cash flows reported on the consolidated statement of cash flows consistent with theclassification of cash flows from the underlying items being hedged. For derivatives that qualify as a cash flow hedge, the effective portion ofthese derivatives’ fair value is initially reported as a component of other comprehensive income with cash flows reported on the consolidatedstatement of cash flows consistent with the classification of cash flows from the underlying items being hedged. The designation is based uponthe nature of the exposure being hedged. At March 31, 2017, 2016, and 2015, no derivative instruments were designated as hedginginstruments.For derivative instruments not designated as hedging instruments for accounting purposes, the gain or loss is recognized in financial income,net in the Consolidated Statement of Operations during the period of change with the cash flows reported on the Consolidated Statements ofCash Flows consistent with the classification of cash flows from the underlying items being hedged. See Note 10. bb.Fair value measurements:There is a fair value hierarchy that distinguishes between assumptions based on market data obtained from independent sources (observableinputs) and those based on an entity’s own assumptions (unobservable inputs). Additional disclosure about fair value measurements is alsorequired. cc.Discontinued operations:When a component of an entity, has been disposed of or is classified as held for sale, the results of its operations, including the gain or loss onthe disposed component, should be classified as discontinued operations and the assets and liabilities of such component should be classifiedas assets and liabilities attributed to discontinued operations; that is, provided the operations, assets and liabilities of the component have beeneliminated from the Company’s consolidated operations and the Company will no longer have any significant continuing involvement in theoperations of the component. dd.Impact of recently issued accounting standards:In January 2017, The Financial Accounting Standards Board (the “FASB”) issued ASU No.2017-04, “Intangibles—Goodwill and Other (Topic350).” The new guidance reduces the complexity of goodwill impairment tests by no longer requiring entities to determine goodwillimpairment by calculating the implied fair value of goodwill by assigning the fair value of a reporting unit to all of its assets and liabilities as ifthat reporting unit had been acquired in a business combination. The guidance will be effective for the fiscal year beginning on January 1,2020, including interim periods within that year (early adoption is permitted). We are currently evaluating the potential effect of the adoptionof ASU 2017-04 on our financial position and results of operations.In August 2016, the FASB issued ASU No.2016-15, “Statement of Cash Flows (Topic 230).” The guidance addresses eight specific issues:debt prepayment or debt extinguishment costs; settlement of certain debt instruments; contingent consideration payments made after abusiness combination; proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurancepolicies; distributions received from equity method investees; beneficial interest in securitization transactions; separately identifiable cashflows and application of predominance principle. The guidance will be effective for the fiscal year beginning on January 1, 2018, includinginterim periods within that year (early adoption is permitted). We are currently evaluating the potential effect of the adoption of ASU 2016-15on our financial position and results of operations.In June 2016, the FASB issued ASU No.2016-13, “Financial Instruments—Credit Losses (Topic 326).” The guidance replaces the currentincurred loss impairment methodology with a methodology that reflects expected credit losses and requires consideration of a broader range ofreasonable and supportable information to inform credit loss estimates. The guidance will be effective for the fiscal year beginning onJanuary 1, 2020, including interim periods within that year. We are currently evaluating the potential effect of the adoption of ASU 2016-13on our financial position and results of operations.F-19TARO PHARMACEUTICAL INDUSTRIES LTD.Notes to consolidated financial statementsU.S. dollars in thousands (except share and per share data) In February 2016, the FASB issued ASU No.2016-02, “Leases (Topic 842).” The new guidance requires that the lessee recognize the assets andliabilities that arise from leases. The guidance is effective for fiscal years beginning after December 15, 2018, including interim periods withinthose fiscal years (early adoption is permitted). The adoption of ASU 2016-02 is not expected to have a material impact on our financialposition or results of operations.In January 2016, the FASB issued ASU No.2016-01, "Financial Instruments-Overall (Subtopic 825-10).” The amended guidance focuses onthe recognition and measurement of financial assets and liabilities. The guidance is effective for fiscal years beginning after December 15,2017, including interim periods within those fiscal years. The adoption of ASU 2016-01 is not expected to have a material impact on ourfinancial position or results of operations.In November 2015, FASB issued ASU No.2015-17, “Income Taxes (Topic 740).” The amended guidance requires entities to present all deferredtax assets and liabilities, along with any related valuation allowance, as non-current on the balance sheet. The guidance is effective for interimand annual periods beginning after December 15, 2016 (early adoption is permitted). The adoption of ASU 2015-17 is not expected to have amaterial impact on the Company’s financial position or results of operations.In July 2015, the FASB issued ASU No.2015-11, “Inventory (Topic 330).” The amended guidance requires inventory to be measured at thelower of cost and net realizable value instead of at lower of cost or market. This guidance does not apply to inventory that is measured usinglast-in, first out (LIFO) or the retail inventory method but applies to all other inventory including those measured using first-in, first-out (FIFO)or the average cost method. The authoritative guidance will be effective in the first quarter of fiscal 2018 and should be appliedprospectively. Early adoption is permitted as of the beginning of an interim or annual reporting period. We are currently evaluating thepotential effect of the adoption of ASU 2015-11 on our financial position and results of operations.In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606), Section A—Summary andAmendments that Create Revenue from Contracts with Customers (Topic 606) and Other Assets and Deferred Costs—Contracts withCustomers (Subtopic 340-40).” The amended guidance will enhance the comparability of revenue recognition practices and will be applied toall contracts with customers. Improved disclosures related to the nature, amount, timing, and uncertainty of revenue that is recognized arerequirements under the amended guidance. The guidance is effective for the interim and annual periods beginning on or after December 15,2017 (early adoption is permitted for the interim and annual periods beginning on or after December 15, 2016), as a result of the FASBannouncing a one year deferral. Either a full retrospective method or modified retrospective method is permitted. We continue to monitor anyclarifications and modifications made by the FASB. The Company will adopt the new revenue standard effective April 1, 2018, and iscurrently evaluating the use of the modified retrospective method and its potential effect of the adoption on our financial position and resultsof operations. NOTE 3: — SHORT-TERM INVESTMENTS a.The following is a summary of marketable securities which are classified as available-for-sale: March 31, 2017 2016 Amortized Unrealized Market Amortized Unrealized Market cost (loss) value cost gain value Available-for-sale: Government debentures $3,617 $(69) $3,548 $3,561 $11 $3,572 F-20TARO PHARMACEUTICAL INDUSTRIES LTD.Notes to consolidated financial statementsU.S. dollars in thousands (except share and per share data) b.The estimated fair value of available-for-sale investments as of March 31, 2017 and 2016 by contractual maturity, are as follows: March 31, 2017 2016 Market Market Cost Value Cost Value Available-for-sale government debentures: Matures in less than five years $1,181 $1,001 $708 $599 Matures in more than five years 2,436 2,547 2,853 2,973 $3,617 $3,548 $3,561 $3,572 NOTE 4: — ACCOUNTS RECEIVABLE AND OTHER a.Trade, net:The following table summarizes the impact of accounts receivable reserves and allowance for doubtful accounts on the gross trade accountsreceivable balances at each balance sheet date: March 31, 2017 2016 Trade accounts receivable, gross $509,250 $530,010 Reserves for sales deductions: Chargebacks (112,071) (126,729)Other sales deductions (109,411) (97,328)Customer rebates (83,472) (67,188)Allowance for doubtful accounts (372) (154)Trade accounts receivable, net $203,924 $238,611 b.Other receivables and prepaid expenses: March 31, 2017 2016 Deferred income taxes $132,064 $212,222 Government authorities 112,301 41,449 Prepaid expenses 8,824 9,817 Interest receivable 5,266 3,514 Advances to suppliers 3,410 3,108 Due from related parties 2,927 475 Other 1,488 139 $266,280 $270,724 NOTE 5: — SALES INCENTIVESWhen the Company recognizes and records revenue from the sale of its pharmaceutical products, it records an estimate in the same financialreporting period for product returns, chargebacks, rebates and other sales deductions, which are reflected as reductions of the related grossrevenue. The Company regularly monitors customer inventory information at its three largest wholesale customers to assess whether anyexcess product inventory levels may exist. The Company reviews this information together with historical product and customer experience,third-party prescription data, industry and regulatory changes and other relevant information and revises its estimates as necessary.The Company’s estimates of inventory in the distribution channel are based on inventory information reported to it by its major wholesalecustomers, historical shipment and return information from its accounting records, and third-party dataF-21TARO PHARMACEUTICAL INDUSTRIES LTD.Notes to consolidated financial statementsU.S. dollars in thousands (except share and per share data) on prescriptions filled. The Company’s estimates are subject to inherent limitations pertaining to reliance on third-party information.The Company considers all information available subsequent to the balance sheet date, but before the issuance of the financial statements, thatprovides additional evidence with respect to conditions existing at the balance sheet date and adjusts the reserves accordingly.Product returns:Consistent with industry practice, the Company generally offers its customers the right to return inventory within three to six months prior toproduct expiration and up to 12 months thereafter (the “return period”). Product returns are identified by their manufacturing lotnumber. Because the Company manufactures in bulk, lot sizes are generally large and, therefore, shipments of a particular lot may occur over aone-to-three month period. As a result, although the Company cannot associate a product return with the actual shipment in which such lotwas included, the Company can reasonably estimate the period (in months) over which the entire lot was shipped and sold. The Company usesthis information to estimate the average time period between lot shipment (and sale) and return for each product, which the Company refers toas the “return lag.” The shelf life of most of the Company’s products ranges between 18-36 months. Because returns of expired products areheavily concentrated during the return period, and given the Company’s historical data, it is able to reasonably estimate return lags for each ofits products. These return lags are periodically reviewed and updated, as necessary, to reflect the Company’s best knowledge of facts andcircumstances. Using sales and return data (including return lags), the Company determines a rolling average monthly return rate to estimateits returns reserve. The Company supplements this calculation with additional information including customer and product specific channelinventory levels, competitive developments, external market factors, the Company’s planned introductions of similar new products and otherqualitative factors in evaluating the reasonableness of the returns reserve. The Company continuously monitors factors that could affect itsestimates and revises the reserves as necessary. The Company’s estimates of expected future returns are subject to change based on unforeseenevents and uncertainties.The Company monitors the levels of inventory in its distribution channels to assess the adequacy of the product returns reserve and to identifypotential excess inventory on hand that could have an impact on its revenue recognition. The Company does not ship products to itswholesalers when it appears they have an excess of inventory on hand, based on demand and other relevant factors, for that particularproduct. Additionally, as a general practice, the Company does not ship products that have less than 12 months until expiration (i.e., “short-dated sales”).Chargebacks:The Company has arrangements with certain customers that allow them to buy its products directly from its wholesalers at specificprices. Typically, these price arrangements are lower than the wholesalers’ acquisition costs or invoice prices. In exchange for servicing thesethird party contracts, the Company’s wholesalers can submit a “chargeback” claim to the Company for the difference between the price sold tothe third party and the price at which they purchased the product from us. The Company generally pays chargebacks on generic products,whereas branded proprietary products are typically not eligible for chargeback claims. The Company considers many factors in establishing itschargeback reserves including inventory information from its largest wholesale customers and the completeness of their reports, estimates ofTaro inventory held by smaller wholesalers and distributors, processing time lags, contract and non-contract sales trends, average historicalcontract pricing, actual price changes, actual chargeback claims received from the wholesalers, Taro sales to the wholesalers and other relevantfactors. The Company’s chargeback provision and related reserve varies with changes in product mix, changes in pricing, and changes inestimated wholesaler inventory. The Company reviews the methodology utilized in estimating the reserve for chargebacks in connection withanalyzing its product returns reserve each quarter and makes revisions as considered necessary to reasonably estimate its potential futureobligation.F-22TARO PHARMACEUTICAL INDUSTRIES LTD.Notes to consolidated financial statementsU.S. dollars in thousands (except share and per share data) Rebates and other deductions:The Company offers its customers various rebates and other deductions based primarily on their volume of purchases of its products. Chainwholesaler rebates are rebates that certain chain customers claim for the difference in price between what the chain customer paid a wholesalerfor a product purchase and what the chain customer would have paid if such customer had purchased the same product directly from theCompany. Cash discounts, which are offered to the Company’s customers, are generally 2% of the gross sales price, and provide theCompany’s customers an incentive for paying within a specified time period after receipt of invoice. Medicaid rebates are earned by statesbased on the amount of the Company’s products dispensed under the Medicaid plan. Billbacks are special promotions or discounts providedover a specific time period to a defined customer base and for a defined product group. Distribution allowances are a fixed percentage of grosspurchases for inventory shipped to a national distribution facility that the Company pays to its top wholesalers on a monthlybasis. Administration fees are paid to certain wholesalers, buying groups, and other customers for stocking the Company’s products andmanaging contracts and servicing other customers. Shelf-stock adjustments, which are customary in the generic pharmaceutical industry, arebased on customers’ existing levels of inventory and the decrease in the market price of the related product. When market prices for theCompany’s products decline, the Company may, depending on its contractual arrangements, elect to provide shelf-stock adjustments andthereby allow its customers with existing inventories to compete at the lower product price. The Company uses these shelf-stock adjustmentsto support its market position and to promote customer loyalty.The Company establishes reserves for rebates and other various sales deductions based on contractual terms and customer purchasing activity,tracking and analysis of rebate programs, processing time lags, the level of inventory in the distribution channel and other relevantinformation. Based on the Company’s historical experience, substantially all claims for rebates and other sales deductions are received within24 months.As discussed above, the Company believes it has the experience and information necessary to reasonably estimate the amounts of reserves forits sales incentives programs. Several of the assumptions used by the Company for certain estimates are based on information received fromthird parties, such as wholesale customer inventory levels, market data, and other factors beyond the Company’s control. The most criticalestimates in determining these reserves, and the ones therefore that would have the largest impact if these estimates were not accurate, arerelated to contract sales volumes, average contract pricing, customer inventories and return volumes. The Company regularly reviews theinformation related to these estimates and adjusts its reserves accordingly, if and when actual experience differs from previous estimates.Use of estimates in reserves:The Company believes that its reserves, allowances and accruals for items that are deducted from gross revenue are reasonable and appropriatebased on current facts and circumstances. Changes in actual experience or changes in other qualitative factors could cause the Company’sallowances and accruals to fluctuate, particularly with newly launched or acquired products. The Company regularly reviews the rates andamounts in its reserve estimates. If future estimated rates and amounts are significantly greater than those reflected in the Company’s recordedreserves, the resulting adjustments to those reserves would decrease the Company’s reported net revenue; conversely, if actual product returns,rebates and chargebacks are significantly less than those reflected in the Company’s recorded reserves, the resulting adjustments to thosereserves would increase the Company’s reported net revenue. If the Company were to change its assumptions and estimates, its reserves wouldchange, impacting the net revenue that the Company reports. The Company regularly reviews the information related to these estimates andadjusts its reserves accordingly, if and when actual experience differs from previous estimates.F-23TARO PHARMACEUTICAL INDUSTRIES LTD.Notes to consolidated financial statementsU.S. dollars in thousands (except share and per share data) The following tables summarize the activities for sales deductions and product returns for the years ended March 31, 2017, 2016, and 2015: For the year ended March 31, 2017 Beginningbalance Provisionrecorded forcurrent periodsales (1) Creditsprocessed/Payments Endingbalance Accounts Receivable Reserves Chargebacks $(126,729) $(1,153,406) $1,168,064 $(112,071)Rebates and Other (164,670) (522,791) 494,206 (193,255)Total $(291,399) $(1,676,197) $1,662,270 $(305,326) Current Liabilities Returns $(93,920) $(41,871) $53,297 $(82,494)Other (2) (60,428) (79,372) 96,430 (43,370)Total $(154,348) $(121,243) $149,727 $(125,864) For the year ended March 31, 2016 Beginningbalance Provisionrecorded forcurrent periodsales (1) Creditsprocessed/Payments Endingbalance Accounts Receivable Reserves Chargebacks $(64,119) $(1,032,248) $969,638 $(126,729)Rebates and Other (173,228) (439,654) 448,212 (164,670)Total $(237,347) $(1,471,902) $1,417,850 $(291,399) Current Liabilities Returns $(109,765) $(25,228) $41,073 $(93,920)Other (2) (55,317) (100,570) 95,459 (60,428)Total $(165,082) $(125,798) $136,532 $(154,348) For the year ended March 31, 2015 Beginningbalance Provisionrecorded forcurrent periodsales Creditsprocessed/Payments Endingbalance Accounts Receivable Reserves Chargebacks $(46,919) $(772,584) $755,384 $(64,119)Rebates and Other (136,449) (443,797) 407,018 (173,228)Total $(183,368) $(1,216,381) $1,162,402 $(237,347) Current Liabilities Returns $(64,144) $(85,990) $40,369 $(109,765)Other (2) (43,186) (73,768) 61,637 (55,317)Total $(107,330) $(159,758) $102,006 $(165,082) (1)Includes immaterial amounts of reversals of provisions recorded for prior years’ sales.(2)Includes Medicaid, indirect rebates, and amounts due to customers. Chargebacks at March 31, 2017, decreased $14,658 compared to March 31,2016. This decrease is primarily attributable to continuing pricingpressure during the year. F-24TARO PHARMACEUTICAL INDUSTRIES LTD.Notes to consolidated financial statementsU.S. dollars in thousands (except share and per share data) NOTE 6: — INVENTORIES March 31, 2017 2016 Finished goods $56,652 $60,249 Raw and packaging materials 53,436 48,329 Work in progress 27,200 26,756 Other 3,757 3,219 $141,045 $138,553 As of March 31, 2017 and 2016, reserves recorded against inventories for slow-moving, short-dated, excess and obsolete inventory totaled$24,482 and $16,627, respectively.As of March 31, 2017 and 2016, there were no pledges of inventory. NOTE 7: — PROPERTY, PLANT AND EQUIPMENT a.Composition of assets grouped by major classifications are as follows: March 31, 2017 2016 Cost: Land $7,633 $7,667 Buildings 158,510 151,054 Leasehold improvements 2,273 2,299 Machinery and equipment 181,176 176,852 Computer equipment 34,271 29,112 Motor vehicles 215 232 Furniture, fixtures and office equipment 14,052 9,355 398,130 376,571 Accumulated depreciation and impairment charges: Buildings $59,011 $54,440 Leasehold improvements 1,436 1,326 Machinery and equipment 121,717 125,822 Computer equipment 28,105 27,568 Motor vehicles 199 200 Furniture, fixtures and office equipment 7,577 7,756 218,045 217,112 Depreciated cost $180,085 $159,459 b.Depreciation expenses were $12,645, $11,901, and $12,480 for the years ended March 31, 2017, 2016 and 2015, respectively. For relatedimpairment charges, see Note 2.n. c.Cost of property, plant and equipment includes capitalized interest expense, capitalized direct incremental costs (such as payroll and relatedexpenses) and other internal costs incurred in order to bring the assets to their intended use in the amount of $16,234 and $16,417 as ofMarch 31, 2017 and 2016. There were no additional capitalized interest and other costs as of March 31, 2017 and 2016. d.Cost of computer equipment includes capitalized development costs of computer software developed for internal use in the amount of $4,517and $4,500 as of March 31, 2017 and 2016, respectively.F-25TARO PHARMACEUTICAL INDUSTRIES LTD.Notes to consolidated financial statementsU.S. dollars in thousands (except share and per share data) e.As for pledges – see Note 14. f.Asset disposals were $10,799 and $4,771 for the years ended March 31, 2017 and 2016, respectively, mainly relating to the write-offs of fullydepreciated production equipment. NOTE 8: — INTANGIBLE ASSETS AND DEFERRED COSTS a.Composition: March 31, 2017 2016 Cost: Product and distribution rights $77,224 $77,379 Other deferred costs 186 1,541 77,410 78,920 Accumulated amortization and impairment charges: Product and distribution rights 71,157 67,003 Impairment 139 2,042 Other deferred costs 186 1,541 71,482 70,586 $5,928 $8,334 b.Amortization expenses related to product and distribution rights were $2,184, $2,947 and $3,318 for the years ended March 31, 2017, 2016and 2015, respectively. c.As of March 31, 2017, the estimated amortization expense of product and distribution rights for 2018 to 2022 is as follows: 2018—$1,738;2019—$319; 2020—$301; 2021—$279; 2022—$276. d.The weighted-average amortization period for product rights is approximately 12 years. e.During the year ended March 31, 2017, the Company recorded a $276 impairment charge primarily related to product rights. During the yearended March 31, 2016, the Company recorded a $2,042 impairment charge primarily related to certain intellectual property as the Company isno longer selling a certain product. F-26TARO PHARMACEUTICAL INDUSTRIES LTD.Notes to consolidated financial statementsU.S. dollars in thousands (except share and per share data) NOTE 9: —OTHER ASSETS March 31, 2017 2016 Prepayment of land leased from ILA (1) $13,939 $14,038 Deferred income taxes 10,324 4,007 Goodwill 7,192 7,198 Intangible assets and deferred costs, net (2) 5,928 8,334 Severance pay fund (3) 2,118 1,873 Other 458 356 $39,959 $35,806 (1)The ILA lease agreements are standard agreements covering substantial portions of the land of Israel. The standard agreements call for a Lease Periodof 49 years, with an option for one additional Lease Period (i.e., total of 98 years). A majority of the Company’s leases are in the beginning of thesecond 49 year period, and the remaining leases still in the first 49 year period have the option for the one additional lease period. This amount wasprepaid. See Note 2.j.(2)See Note 8.(3)Under Israeli law, the Company is required to make severance or pension payments to dismissed employees and to employees terminatingemployment under certain other circumstances. Deposits are made with a pension fund or other insurance plans to secure pension and severance rightsfor the employees in Israel. These amounts represent the balance of the deposits in those funds (including profits) that will be used to cover theCompany’s severance obligations. See Note 12.b.The Company’s non-Israeli subsidiaries maintain defined contribution retirement savings plans covering substantially all of theiremployees. Under the plans, contributions are based on specific percentages of pay and are subject to statutory limits. The subsidiaries’matching contribution to the plan was $1,080, $958 and $976 for the years ended March 31, 2017, 2016 and 2015, respectively. Years ended March 31, 2017 2016 2015 Pension, retirement savings and severance expenses $5,751 $5,217 $5,979 NOTE 10: — DERIVATIVE INSTRUMENTS AND FINANCIAL RISK MANAGEMENTThe Company’s operations are exposed to market risks from changes in interest rates and currency exchange rates. Exposure to these risks ismanaged through normal operating and financing activities and, when appropriate, through derivative instruments. a.Interest rates:The Company managed its risk to fluctuating interest rates by using interest rate swaps to convert its floating rate debt into fixed rateobligations. These interest rate swaps were not designated as hedges for accounting purposes and changes in the fair value of these instrumentsare reflected in earnings. The Company does not have any interest rate swaps in place as of March 31, 2017.In September 2005, the Company entered into a mortgage agreement for its New York facility and concurrently entered into an interest rateswap with the intention to mitigate the variable mortgage interest rate risk by effectively establishing the mortgage rate at a fixed rate of6.16%. In December 2015, the Company repaid the full outstanding balance of the mortgage and interest rate swap. The Company recorded anet loss of $0, ($6) and ($150) within financial income, net for the years ended March 31, 2017, 2016 and 2015, respectively. These amountsinclude an unrealized gain of $147 for the year ended March 31, 2015, and in the years ended March 31, 2017 and March 31, 2016, there wererealized gains of $0 and $180, respectively.F-27TARO PHARMACEUTICAL INDUSTRIES LTD.Notes to consolidated financial statementsU.S. dollars in thousands (except share and per share data) b.Currency exchange rates:The Company managed its exposure to debt obligations denominated in currencies other than its functional currency by opportunisticallyusing cross-currency swaps to convert its foreign currency debt payments into its functional currency. The Company does not have any cross-currency swaps in place as of March 31, 2017.The following table sets forth the annual rate of inflation, the devaluation (appreciation) rate of the NIS and the Canadian dollar against theU.S. dollar and the exchange rates between the U.S. dollar and each of the NIS and the Canadian dollar at the end of the year indicated: Rate of Devaluation (Appreciation) Rate of Exchange of Rate of Inflation Against U.S. Dollar U.S. Dollar Period ended Israel (1) Canada (2) Israel (1) Canada (2) Israel (1) Canada (2) 3/31/2016 (0.71%) 1.27% (5.28%) 2.36% 3.77 1.30 3/31/2017 0.92% 1.56% (3.71%) 2.31% 3.63 1.33 (1)Per Bank of Israel(2)Per Bank of CanadaIn November 2003, the Company entered into loan agreements to borrow, in Israel, NIS 210,800 for an eleven-year term at an annual interestrate of 5.8%. At the same time, the Company entered into a USD/NIS, five-year, CPI-adjusted currency swap. This swap matured onNovember 28, 2008, and was replaced on the maturity date by a USD/NIS, CPI-adjusted, 6-year currency swap. In accordance with this swapagreement, the Company received NIS 201,270 in 6 annual payments (equivalent of the remaining debt balance as of November 28, 2008),which was linked to the CPI plus additional interest equal to 5.8% of the outstanding NIS balance. The Company was required to pay $51,344plus a fixed rate of 6.59%. These loans and the related swap matured in November 2014 and were retired. The Company recorded a net loss of$0, $0 and ($1,117) within financial income, net for the years ended March 31, 2017, 2016 and 2015, respectively, related to its swaparrangements.In October 2011, the Company began entering into separate forward contracts to offset the variability of our cash flows in U.S. dollars due tochanges in the NIS and the Canadian dollar which had its last settlement in the year ended March 31, 2016. In April 2016, the Company beganentering into separate forward contracts to purchase the NIS and the Canadian dollar on a monthly basis at agreed upon spot rates to hedge thevariability of cash flows in U.S. dollars due to changes in the respective exchange rates. At March 31, 2017, the forward contracts to purchasethe NIS are for a total amount of $30,417, at a weighted-average forward rate of 3.68 NIS per U.S. dollar, which are settled in 17 monthlyinstallments of $2,083 for the first five (5) months and $1,667 for the remaining 12 months. The Company recorded a net gain (loss) of $618,$813 and ($4,590) for the years ended March 31, 2017, 2016 and 2015, respectively, for the contracts to purchase the Shekel.The forward contracts to purchase the Canadian dollar are for a total amount of $69,510, at a weighted-average forward rate of 1.28 Canadiandollars per U.S. dollar, which are settled in 17 monthly installments of approximately $5,180 for the first five months, $4,200 for one month,$3,700 for six months and $3,450 for the remaining five months. The Company recorded a net (loss) gain of ($3,236), $3,413 and ($901), forthe years ended March 31, 2017, 2016 and 2015, respectively, for the contracts to purchase the Canadian dollar. There is no collateral for these hedges. NOTE 11: — FAIR VALUE MEASUREMENTSFASB ASC Topic 820 defines fair value as the price that would be received for an asset or paid to transfer a liability, from a selling party’sperspective, in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on themeasurement date. ASC Topic 820 requires that assets and liabilities carried at fair value be classified and disclosed in one of the followingthree categories:Level 1: Quoted market prices in active markets for identical assets and liabilities. Active market means a market in which transactions forassets or liabilities occur with “sufficient frequency” and volume to provide pricing information on an ongoing unadjusted basis.F-28TARO PHARMACEUTICAL INDUSTRIES LTD.Notes to consolidated financial statementsU.S. dollars in thousands (except share and per share data) Level 2: Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; or other inputs that are observable orcan be corroborated by observable market data for substantially the full term of the assets or liabilities. The Company’s Level 2 assetsprimarily include derivative instruments. The Level 2 asset values are determined using valuation techniques that maximize the use ofobservable inputs and minimize the use of unobservable inputs to the extent possible and consider counterparty credit risk in the assessment offair value.Level 3: Significant unobservable inputs that are not corroborated by market data. The Company has no Level 3 assets or liabilities.The fair value of the Company’s financial assets measured at fair value on a recurring basis as of March 31, 2017 and 2016 were as follows: March 31, 2017 March 31, 2016 Quoted MarketPrices of Identical Significant OtherObservable Quoted MarketPrices of Identical Significant OtherObservable Assets (Level 1) Inputs (Level 2) Assets (Level 1) Inputs (Level 2) Assets Marketable securities $3,548 $— $3,572 $— Forward contracts — 724 — — $3,548 $724 $3,572 $— Liabilities Forward contracts $— $(2,110) $— $— $— $(2,110) $— $— NOTE 12: — OTHER LIABILITIES a.Other current liabilities: March 31, 2017 2016 Returns reserve $82,494 $93,920 Medicaid and indirect rebates 36,884 48,090 Accrued income taxes 18,591 23,509 Employees and payroll accruals 18,577 19,131 Accrued expenses 14,609 17,244 Due to customers 6,486 12,338 Royalties 4,065 6,247 Derivative instruments 2,110 — Legal and audit fees 1,644 621 Deferred taxes 288 283 Deferred revenue 167 799 Other 7,528 4,427 $193,443 $226,609 b.Other long-term liabilities: March 31, 2017 2016 Accrued severance pay $2,360 $1,842 Deferred revenue 1,630 1,326 Other 6 27 $3,996 $3,195 F-29TARO PHARMACEUTICAL INDUSTRIES LTD.Notes to consolidated financial statementsU.S. dollars in thousands (except share and per share data) NOTE 13: — LONG-TERM DEBT In September 2005, the Company entered into a mortgage agreement for its New York facility and concurrently entered into an interest rateswap with the intention to mitigate the variable mortgage interest rate risk by effectively establishing the mortgage rate at a fixed rate of6.16%. The mortgage was for an original term of 15 years, bearing interest at the rate of LIBOR plus 1.25%, and has a graduating debt servicecoverage ratio covenant of 1.90. The mortgage and interest rate swap were fully repaid in December 2015. As of March 31, 2017, theCompany does not have any long-term debt. NOTE 14: — LIABILITIES COLLATERALIZED BY PLEDGESAs of March 31, 2017 and March 31, 2016, the Company does not have any liabilities collateralized by pledges. NOTE 15: — COMMITMENTS AND CONTINGENT LIABILITIES a.Companies of the Group have leased offices, warehouse space and equipment under operating leases for periods through 2022. The minimumannual rental payments, under non-cancelable lease agreements, are as follows: March 31, 2017 3/31/2018 $1,852 3/31/2019 1,026 3/31/2020 579 3/31/2021 224 3/31/2022 67 $3,748 Total rent expenses were $2,335, $2,442 and $2,576 for the years ended March 31, 2017, 2016 and 2015, respectively. b.Royalty commitments:The Company is committed to pay royalties at the rate of 3.0% to 3.5% to the government of Israel through the Authority on proceeds fromsales of products in which the government participates in the research and development by way of grants. The obligation to pay these royaltiesis contingent on actual sales of the products and, in the absence of such sales, no payment is required. The commitment is on a product byproduct basis, in an amount not exceeding the total of the grants received by the Company, including interest accrued thereon, and is linked tothe U.S. dollar. Grants are subject to interest at a rate of LIBOR (cost of borrowing funds in U.S. dollars). As of March 31, 2017 and 2016, theaggregate contingent liability to the Authority was $12,221 and $11,919, respectively.Royalty payments to the Authority were $112, $86 and $38 for the years ended March 31, 2017, 2016 and 2015, respectively. c.Legal proceedings:From time to time the Company is subject to litigation arising in the ordinary course of business, including patent litigation resulting from ouruse of the patent challenge procedures set forth in the Hatch Waxman Act. The Company records a provision in its financial statements to theextent that it concludes that a contingent liability is probable and the amount thereof is estimable. Based upon the status of these cases,management’s assessment of the likelihood of damages, and the advice of counsel, no provisions have been made except as notedbelow. Because litigation outcomes and contingencies are unpredictable, and because excessive verdicts can occur, these assessments involvecomplex judgments about future events and can rely heavily on estimates and assumptions. The Company is party to certain lawsuitsdisclosed herein, whose outcome the Company does not believe will have a material adverse effect on its consolidated financial statements.F-30TARO PHARMACEUTICAL INDUSTRIES LTD.Notes to consolidated financial statementsU.S. dollars in thousands (except share and per share data) 1.Legal actions commenced by the Company:Company’s lawsuit related to tax assessment:In February 2017, the Company filed an appeal pursuant to Section 153 of the Income Tax Ordinance (New Version), 1961 in the HaifaDistrict Court challenging the Israel Tax Authority’s (“ITA”) tax assessment and capital loss denial for the period January 1, 2010through March 31, 2014. The ITA issued a tax assessment for the defined period in the amount of $40,782 (before interest, linkage andpenalties) and determined that an unutilized capital loss in an amount of $74,551 that has been claimed by the Company has beendenied. The Company has consulted with its tax advisors and believes it has a good position on the appeal. 2.Other Legal Actions:On September 8, 2016, Taro U.S.A. received a grand jury subpoena from the United States Department of Justice, Antitrust Division,seeking documents relating to corporate and employee records, generic pharmaceutical products and pricing, communications withcompetitors and others regarding the sale of generic pharmaceutical products, and certain other related matters. Taro U.S.A. is in theprocess of responding to the grand jury subpoena. Certain current and former officers of Taro U.S.A.’s commercial team have alsoreceived related subpoenas.The Company and Taro U.S.A. have been named as defendants in numerous putative class action lawsuits brought by purchasers andpayors of generic Clobetasol, Desonide, Fluocinonide, Econazole, and Clomipramine alleging that the Company and/or Taro U.S.A.have conspired with competitors to fix prices, rig bids or allocate customers in these markets. Each of these cases has been transferred tothe United States District Court for the Eastern District of Pennsylvania for coordinated proceedings under the caption In re: GenericDrug Pricing Antitrust Litigation, MDL No. 2724.The Company and two of its former officers were named as defendants in a putative shareholder class action entitled Speakes v. TaroPharmaceutical Industries, Ltd., No. 16-CV-08318, filed October 25, 2016, which is now pending in the United States District Court forthe Southern District of New York. The Company has not yet responded to the Complaint in the Speakes action. d.Other:Payments to pharmacies for Medicaid-covered outpatient prescription drugs are set by the states. For multiple source drugs with respect towhich FDA has rated at least three drugs as therapeutically equivalent, the amount that states may reimburse pharmacies is subject to a Federalupper limit (FUL) ceiling. Health care reform legislation enacted in March 2010 changed the methodology by which the Centers forMedicare & Medicaid Services (CMS) calculates the FULs so that the FUL is based on 175 percent of the weighted-average of the averagemanufacturer prices (AMPs) reported to the government by manufacturers of each of the therapeutically equivalent multiple sourcedrugs. Effective October 1, 2010, the legislation also changed the definition of AMP to exclude sales to certain customer classes that werepreviously included. In addition, under the Medicaid Drug Rebate Program, manufacturers are required, as a condition of Federal payment fortheir drugs under Medicaid and Medicare Part B, to pay rebates to state Medicaid programs on drugs dispensed to Medicaid beneficiaries in thestate. The amount of the rebate is based on the AMP and (for innovator drugs) the best price of the drug. Besides changing the definition ofAMP, the health care reform legislation increased the minimum Medicaid Rebate, effective January 1, 2010.Before implementation of the new FUL methodology on April 1, 2016, CMS used average wholesale price (“AWP”) or Wholesale AcquisitionCost (“WAC”) in the calculation of FULs. States have also historically used AWP or WAC in setting Medicaid reimbursement rates for drugsthough they are required, beginning on April 1, 2017, to use actual acquisition cost instead. Many pharmaceutical companies have beennamed in civil lawsuits alleging generally that the defendants overstated AWPs or WACs, which were used by state agencies to calculate drugreimbursements to healthcare providers.The Board approved a new collective bargaining agreement dated January 5, 2017 (the “Collective Bargaining Agreement”) that amends andextends the collective bargaining agreement dated as of April 6, 2011 among Taro, the Histadrut Trade Union and Taro’s EmployeesCommittee on behalf of Taro’s Israeli employees. The Collective Bargaining Agreement has a term of three years and automatically renews fortwo-year periods unless notice is provided by either side prior to the end of a term. The Collective Bargaining Agreement memorializes currentemployee-employer relations practices of Taro as well as additional rights relating to job security, compensation and other benefits. TheCompany is currently negotiating a renewal of the Collective Bargaining Agreement.F-31TARO PHARMACEUTICAL INDUSTRIES LTD.Notes to consolidated financial statementsU.S. dollars in thousands (except share and per share data) NOTE 16: — SHAREHOLDERS’ EQUITY a.Pertinent rights and privileges of ordinary shares: 1.100% of the rights to profits are allocated to the ordinary shares. 2.100% of the dissolution rights are allocated to the ordinary shares. 3.Two-thirds of the voting power of all of the Company’s shares is allocated to the ordinary shares. b.Founders’ shares:One-third of the voting power of all of the Company’s shares is allocated to the founders’ shares. c.Stock option plans: 1.The Company’s 1999 Stock Incentive Plan (“1999 plan”) provided for the issuance of incentive stock options, non-qualified stockoptions, or stock appreciation rights to key employees and associates of the Group.The options were substantially granted with an exercise price equal to 100% of the fair market value of the stock on the date of grantand the aggregate amount of the options granted could not exceed 2,100,000 and none of the options granted included stockappreciation rights. The options were granted to employees and associates, had a four to five-year graded vesting term and expired 10years after the date of the grant. Each option entitled its holder the right to purchase one ordinary share of NIS 0.0001 par value (subjectto adjustments). The Company issued new shares to employees exercising their stock options. As of March 31, 2017, no options wereoutstanding. No further options in respect of the 1999 plan are available for future grants. There were 0, 0, and 1,000 options exercisedin the years ended March 31, 2017, 2016 and 2015, respectively, with a total intrinsic value of $0, $0, and $85, respectively. d.Dividends:The Company may declare and pay dividends from retained earnings. For restrictions on dividend distribution, see Note 17.c. e.Net income per share: Year ended March 31, 2017 Year ended March 31, 2016 Year ended March 31, 2015 Net income Net income Net income attributable toTaro Shares PerShare attributableto Taro Shares PerShare attributable toTaro Shares PerShare (numerator) (denominator) Amount (numerator) (denominator) Amount (numerator) (denominator) Amount Basic EPS: $456,356 41,300,797 $11.05 $540,932 42,832,241 $12.62 $484,257 42,833,533 $11.31 Effect of dilutive securities: Stockoptions — — — — — — — 217 — Diluted EPS: $456,356 41,300,797 $11.05 $540,932 42,832,241 $12.62 $484,257 42,833,750 $11.31 f.As of March 31, 2017, the accumulated other comprehensive income comprised of loss from foreign currency translation adjustments of$148,258 and unrealized gain from available for sale securities of $125. As of March 31, 2016, the accumulated other comprehensive incomecomprised of loss from foreign currency translation adjustments of $123,220 and unrealized gain from available for sale securities of $194. F-32TARO PHARMACEUTICAL INDUSTRIES LTD.Notes to consolidated financial statementsU.S. dollars in thousands (except share and per share data) NOTE 17: — INCOME TAXES a.Corporate income tax rate in Israel:Taxable income of Israeli companies is subject to income tax at the rate of 25.0%, 26.5% and 26.5% for the years ended March 31, 2017, 2016and 2015, respectively. b.Tax benefits under the Law for the Encouragement of Industry (Taxes), 1969:The Company is an “industrial company” as defined by this law and, as such, is entitled to certain income tax benefits, mainly increaseddepreciation rates in respect of machinery and equipment (as prescribed by regulations published under the Inflationary Adjustments Law) andthe right to claim public issuance expenses, amortization of acquired patents and other intangible property rights as deductions for taxpurposes. c.Tax benefits under the Law for the Encouragement of Capital Investments, 1959 (“the Investments Law”):Various production and development facilities of the Company have been granted “Approved Enterprise” and “Benefited Enterprise” status,which provides certain benefits, including tax exemptions and reduced tax rates for a defined period. The benefits available to an ApprovedEnterprise and Benefited Enterprise relate only to taxable income attributable to the specific investment program and are conditioned uponterms stipulated in the Investments Law and the related regulations and the criteria set forth in the applicable certificate of approval (for anApproved Enterprise). If the Company does not fulfill these conditions, in whole or in part, the benefits can be cancelled and the Companymay be required to refund the benefits, in an amount linked to the Israeli consumer price index plus interest.The Company qualifies as a foreign investors’ company, or FIC. FICs are entitled to further reductions in the tax rate normally applicable toApproved or Benefited Enterprises, depending on the level of foreign ownership. The tax rate ranges between 10% (when foreign ownership is90% or more) to 25% (when the foreign ownership is below 49%).The Company has three active plans, two Approved Enterprises under the Alternative Benefits Programs (Plans 3-4 and Plan 5) and oneBenefited Enterprise (Plan 6), granting us a package of benefits, subject to compliance with applicable requirements. Under Plan 3-4 (benefitperiod starting 2003), the Company was entitled to an exemption from corporate income tax on undistributed profits for a period of two yearsfollowing implementation of the plan and to a reduced tax rate of between 10% and 25% (depending on the level of foreign investment) for anadditional thirteen years thereafter. Under Plan 5 (benefit period starting 2007), the Company was entitled to an exemption from corporateincome tax on undistributed profits for a period of two years following implementation of such plan and to a reduced tax rate of 10% to 25%(depending on the level of foreign investment) for eight additional years thereafter. We filed a request for an additional five years of reducedtax rates for such plan. Approval is still pending. Under Plan 6 (benefit period starting 2010), the Company was entitled to an exemption fromcorporate income tax on undistributed profits for a period of two years and a reduced tax rate of 10% to 25% (depending on the level of foreigninvestment) for eight additional years thereafter.The entitlement to these benefits is conditional upon the Company fulfilling the requirements of the Investments Law, regulations publishedthereunder and the certificate of approval for the specific investments in the case of Approved Enterprises. In the event of failure to complywith these requirements, the benefits may be reduced or canceled and the Company may be required to refund the amount of the benefits itreceived, in whole or in part, including linkage and interest. As of March 31, 2017, Management believes that the Company complied with allof the aforementioned requirements.If the Company pays a dividend, the source of which is income derived from the Approved and/or Benefited Enterprises during the tax exemptperiod, the Company will be subject to corporate tax at the rate ordinarily applicable to the Approved/Benefited Enterprise from which it wasexempt, on the gross amount of such dividend.The Company has decided not to declare dividends out of such tax-exempt income. Accordingly, no deferred income taxes have beenprovided on income attributable to the Company’s Approved and/or Benefited Enterprises.Dividends paid by a company, the source of which is income derived from the Approved Enterprise accrued during the benefits period, aregenerally subject to withholding tax at a rate of 15% (which is withheld and paid by the company paying the dividend) if such dividends werepaid during the benefits period or at any time up to 12 years thereafter. The 12-year limitation does not apply to a FIC.F-33TARO PHARMACEUTICAL INDUSTRIES LTD.Notes to consolidated financial statementsU.S. dollars in thousands (except share and per share data) For the years ended March 31, 2017 and 2016, income not eligible for Approved and/or Benefited Enterprise benefits is taxed at the regularcorporate income tax rate. d.The New Incentives Regime—Amendment 68 to the Investment LawUnder Amendment 68 to the Investment Law (“Amendment 68”), upon an irrevocable election made by a company, a uniform corporate taxrate will apply to all qualifying industrial income of such company (an “Industrial Company”), as opposed to the previous law’s incentives,which were limited to income from Approved/Benefited Enterprises during the benefits period. Under the law, when the election is made, theuniform tax rate for 2014 and onwards will be 9% in areas in Israel designated as Development Zone A (scheduled to decrease to 7.5% as ofJanuary 1, 2017) and 16% elsewhere in Israel. The decrease of the uniform tax rate to 7.5% will be effective for the Company’s reportingperiods starting April 1, 2017. The profits of these Industrial Companies will be freely distributable as dividends, subject to withholding tax of20% or lower, under an applicable tax treaty. Certain “Special Industrial Companies” that meet more stringent criteria (significant investment,R&D or employment thresholds), and will enjoy further reduced tax rates of 5% in Zone A and 8% elsewhere. In order to be classified as a“Special Industrial Company,” the approval of three governmental authorities in Israel is required. We did not elect to apply for Amendment68 in tax year 2016 or 2015.The New Technological Enterprise Incentives Regime – Amendment 73 to the Investment LawAmendment 73 to the Investment Law (“Amendment 73”), which came into effect as of January 1, 2017, stipulates that regulations are to bepromulgated which will implement the "Nexus Principles", based on OECD guidelines recently published as part of the Base Erosion and ProfitShifting (BEPS) project.The new incentives regime will apply to "Preferred Technological Enterprises" that meet certain conditions, including all of the following: 1.A company's average R&D expenses in the three years prior to the current tax year must be greater than or equal to 7% of its totalrevenue or exceed NIS 75 million (approximately $19 million) per year; 2.A company must also satisfy one of the following conditions: •at least 20% of the workforce (or at least 200 employees) are employed in R&D; •a venture capital investment of an amount approximately equivalent to at least $2 million was previously made in the company;or •growth in sales or workforce by an average of 25% over the three years preceding the tax yearA "Special Preferred Technological Enterprise" is an enterprise that meets conditions 1 and 2 above, and in addition is a part of a group ofcompanies that have total annual consolidated revenues above NIS 10 billion (approximately $2.5 billion).Preferred Technological Enterprises will be subject to a corporate tax rate of 7.5% for operations in Development Zone A or 12% for operationsoutside of Development Zone A with respect to the portion of their income derived from IP developed in Israel, while Special PreferredTechnological Enterprises will be subject to 6% with respect to income related to such IP. The withholding tax on dividends from theseenterprises will be 4% for dividends paid to a foreign parent company holding at least 90% of the shares of the distributing company. For otherdividend distributions, the withholding tax rate shall be 20% (or a lower rate under a tax treaty, if applicable).The Company will evaluate the effect of such regime on its activities once the regulations are published e.Measurement of taxable income under the Income Tax (Inflationary Adjustments) Law, 1985 of Israel:With respect to the Israeli entity, commencing in taxable year 2003, the Company elected to measure its taxable income and file its tax returnsin U.S. dollars in keeping with Israeli Income Tax Regulations, 1986 (Principles Regarding the Management of Books of Account of ForeignInvested Companies and Certain Partnerships and the Determination of Their Taxable Income). Such an election was binding to the Companyfor three years. Accordingly, commencing taxable year 2003, results for tax purposes are measured in U.S. Dollar terms. After the initial three-year term, the Company must make the election on an annual basis. Through taxable year 2016, the Company has consistently elected, for taxpurposes, to measure its earnings in U.S. dollars.F-34TARO PHARMACEUTICAL INDUSTRIES LTD.Notes to consolidated financial statementsU.S. dollars in thousands (except share and per share data) f.Income from continuing and discontinued operations before income taxes is comprised of the following: Year ended March 31, 2017 2016 2015 Domestic (Israel) $123,707 $290,946 $250,979 Foreign (North America, the Cayman Islands, Ireland and the U.K.) 436,739 345,638 329,914 Income from continuing and discontinued operations before taxes $560,446 $636,584 $580,893 g.Taxes on income are comprised of the following: Year ended March 31, 2017 2016 2015 Current taxes $25,396 $66,785 $166,466 Prior years' (benefits) taxes (2,444) 2,540 (20)Deferred income taxes (benefits) 80,828 25,988 (70,387) $103,780 $95,313 $96,059 Domestic (Israel) $26,175 $34,254 $25,881 Foreign (North America, the Cayman Islands, Ireland and the U.K.) 77,605 61,059 70,178 $103,780 $95,313 $96,059 Included within current and deferred income tax expense are benefits relating to research and development tax credits at Taro Canada of $955,$884 and $909 for the years ended March 31, 2017, 2016 and 2015, respectively. Taro Canada uses the “flow-through” method and thereforerecords the benefits in earnings in the period the tax credits are utilized.As a result of the Zalicus acquisition and subsequent amalgamation of Zalicus with the Company, the Company recognized approximately$36,000 of tax loss carryforwards and investment tax credits in the year ended March 31, 2016.Included within current and deferred income tax expense are benefits relating to state tax credits at Taro U.S.A. of $79 for the year endedMarch 31, 2016. h.Reconciliation of the statutory tax rate of the parent company in Israel to the effective consolidated tax rate: Year ended March 31, 2017 2016 2015 Statutory tax rate (in Israel) 25.0% 26.5% 26.5% (Decrease) increase in effective tax rate due to: Tax benefits from reduced tax rates under benefit programs (5.2%) (6.0%) (7.0%)Utilization of net operating losses 0.0% (5.0%) 0.0%Different tax rates applicable to non-Israeli subsidiaries (1.5%) (2.5%) (4.0%)Uncertain tax positions, net 0.7% 1.5% 1.0%Taxes from prior years (0.5%) 0.5% 0.0%Effective consolidated tax rate 18.5% 15.0% 16.5% F-35TARO PHARMACEUTICAL INDUSTRIES LTD.Notes to consolidated financial statementsU.S. dollars in thousands (except share and per share data) i.Current taxes are calculated at the following rates: Year ended March 31, 2017 2016 2015 On Israeli operations (not including “Approved Enterprise”) 25.0% 26.5% 26.5%On U.S. operations * 35.2% 35.2% 35.5%On Canadian operations * 25.0% 25.0% 25.0%On U.K. operations * 20.0% 20.0% 21.0%On Ireland operations * 12.5% 12.5% 12.5% *The U.S., Canadian, U.K., and Irish subsidiaries are taxed on the basis of the tax laws prevailing in their countries of residence. TheCanadian subsidiary qualifies for research and development tax credits and manufacturing and processing credits, thereby reducing itseffective tax rate. j.Deferred income taxes:Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financialreporting purposes and the amounts used for income tax purposes and carryforward losses. March 31, 2017 2016 Deferred tax assets: Net operating loss carryforward $18,143 $11,322 Deferred revenue 22,137 39,153 Property, plant, and equipment 789 908 Accrued expenses 86,760 141,524 Bad debt allowance 112 36 Amortization and impairment 4,435 5,218 Other, net 21,419 29,885 Total deferred tax assets 153,795 228,046 Valuation allowance for deferred tax assets (11,407) (11,817)Net deferred tax assets 142,388 216,229 Deferred tax liabilities: Property, plant, and equipment (2,086) (2,203)Other, net (316) (312)Total deferred tax liabilities (2,402) (2,515)Net deferred tax assets $139,986 $213,714 Domestic $11,152 $18,338 Foreign 128,834 195,376 $139,986 $213,714 The deferred income taxes are presented on the consolidated balance sheets as follows: March 31, 2017 2016 Among current assets (“other receivables and prepaid expenses”) $132,064 $212,222 Among other assets ("long-term deferred income tax assets") 10,324 4,007 Among short-term liabilities (288) (283)Among long-term liabilities (2,114) (2,232) $139,986 $213,714 F-36TARO PHARMACEUTICAL INDUSTRIES LTD.Notes to consolidated financial statementsU.S. dollars in thousands (except share and per share data) The Company plans to change its method of deducting certain customer rebates and allowances in the U.S. for the March 31, 2017 annual taxfiling. As a result of this planned change, the Company converted $49,374 of its deferred tax asset to tax receivable, which is reflected in theMarch 31, 2017 balances. k.Carryforward tax losses: 1.The Company:As of March 31, 2017, the Company has no carryforward net operating losses. Please refer to Note 15.c. and Note 17.o. forinformation relating to Israel carryforward tax losses. 2.Canadian subsidiary:As of March 31, 2017, this subsidiary has carryforward losses of $18,608. 3.U.K. subsidiary:As of March 31, 2017, this subsidiary has carryforward tax losses of $11,124 which may be carried forward and offset againsttaxable income for an indefinite period in the future. As discussed in Note 2.u, there is a full valuation allowance providedagainst these losses. 4.Irish subsidiary:As of March 31, 2017, this subsidiary has carryforward losses of $67,237. Taro Ireland commenced trade in 2006 and thereforehas satisfied any expiration deadlines. As discussed in Note 2.u, a full valuation allowance is provided against these losses. 5.U.S. subsidiary:As of March 31, 2017, this subsidiary has no carryforward tax losses. 6.Hungarian subsidiary:As of March 31, 2017, this subsidiary has no carryforward losses. This subsidiary was dissolved as of February 2017. l.The Company’s Board of Directors has determined that its U.S. subsidiary will not pay any dividend as long as such payment will result in anytax expense for the Company. m.At March 31, 2017, deferred income taxes were not provided for on a cumulative total of $1,263,485 of the undistributed earnings of TaroCanada, which are not taxable provided earnings remain undistributed. Taro Canada intends to invest these earnings indefinitely in itsoperations. n.Foreign withholding taxes have been accrued as necessary by the Company and its subsidiaries. o.Tax assessments:The Company completed its tax assessments with the Israeli tax authorities for years through 2009. In March 2016, the Israel tax authoritiesissued a tax assessment for the period January 1, 2010 through March 31, 2014, in the amount of $40,782 (before interest, linkage andpenalties) and determined that an unutilized capital loss in an amount of $74,551 that has been claimed by the Company has been denied. TheCompany may be subject to examination by the Israeli tax authorities for years ending March 31, 2015 and onward. The Company believesthat its tax provision is adequate to satisfy any assessments resulting from examinations related to these years.In February 2017, the Company filed an appeal pursuant to Section 153 of the Income Tax Ordinance (New Version), 1961 in the Haifa DistrictCourt challenging the Israel Tax Authority’s tax assessment for the period January 1, 2010 through March 31, 2014. The Company hasconsulted with its tax advisors and believes it has a good position on the appeal. The Company completed its tax assessments with the U.S. tax authorities for the years through March 31, 2014. The Company is currentlyunder examination by the U.S. tax authorities for the year ending March 31, 2015. The Company may be subject to examination by the U.S.tax authorities for the years ending March 31, 2016 and onward. TheF-37TARO PHARMACEUTICAL INDUSTRIES LTD.Notes to consolidated financial statementsU.S. dollars in thousands (except share and per share data) Company believes that its tax provision is adequate to satisfy any assessments resulting from examination related to these years.The Company completed its tax assessments with the Canadian tax authorities for the years through 2011. The Company’s tax provision wasmaterially adequate to satisfy these assessments. Taro Canada remains subject to examination by the Canadian tax authorities for years after2012 according to the statute of limitations. The Company believes that its tax provision is adequate to satisfy any assessments resulting fromexaminations related to these years. p.Uncertain tax positions:The Company adopted FASB ASC Section 740-10-25, “Income Taxes-Overall-Recognition,” effective January 1, 2007, which prescribes amodel for how a company should recognize, measure, present and disclose in its financial statements uncertain tax positions that it has taken orexpects to take on a tax return (see Note 2.m and Note 2.u). Year ended March 31, 2017 2016 2015 Unrecognized tax exposure at beginning of year $22,093 $8,966 $6,858 Increases as a result of positions taken in prior period 750 6 129 (Decreases) increases as a result of positions taken in prior period (4,794) 4,393 (462)Increases as a result of positions taken in current period 5,408 8,728 2,501 Decreases due to settlements with tax authorities — — (60)Unrecognized tax exposure at end of year $23,457 $22,093 $8,966 The total amount of interest and penalties recognized on the consolidated statement of operations for the years ended March 31, 2017, 2016and 2015, were $1,379, $759, and ($230), respectively. The total amount of interest and penalties recognized on the consolidated balancesheets at March 31, 2017 and 2016, were $2,674 and $1,293, respectively.The total amount of unrecognized tax benefits, which would impact the effective tax rate if recognized, was $23,457 and $22,093 at March 31,2017 and 2016, respectively. F-38TARO PHARMACEUTICAL INDUSTRIES LTD.Notes to consolidated financial statementsU.S. dollars in thousands (except share and per share data) NOTE 18: — SELECTED STATEMENTS OF INCOME DATA Year ended March 31, 2017 2016 2015 Sales by location of customers : United States $785,319 $865,224 $777,191 Canada 57,621 56,605 55,452 Israel 29,200 22,963 22,157 Other 7,247 5,959 8,144 $879,387 $950,751 $862,944 Selling, marketing, general and administrative expenses: Selling and marketing $40,813 $43,574 $44,617 Advertising 10,468 15,504 8,370 General and administrative * 34,375 33,287 34,657 Settlements and loss contingencies — 973 (4,200) $85,656 $93,338 $83,444 * Including provision for doubtful accounts $218 $(5) $16 Financial (income) expenses: Interest and exchange differences on long-term liabilities $131 $473 $928 Income in respect of deposits (14,599) (13,077) (10,605)Foreign currency transaction gains (20,168) (7,068) (41,634) $(34,636) $(19,672) $(51,311) NOTE 19: — SEGMENT INFORMATION a.Geographic Area Information:The Group operates in one industry segment, which produces, researches, develops and markets pharmaceutical products. Managementorganizes the Company’s operations based on geographic segments, which are presented below in accordance with FASB ASC Paragraph 280-10-50-1, “Segment Reporting – Overall – Disclosure – Operating Segments.” Israel Canada* U.S.A. Other Consolidated Year ended March 31, 2017 and as of March 31, 2017 Sales to unaffiliated customers ** $29,200 $57,621 $785,319 $7,247 $879,387 Long-lived assets *** $101,111 $55,154 $36,940 $— $193,205 Year ended March 31, 2016 and as of March 31, 2016 Sales to unaffiliated customers ** $22,963 $56,605 $865,224 $5,959 $950,751 Long-lived assets *** $92,284 $49,936 $32,771 $— $174,991 Year ended March 31, 2015 and as of March 31, 2015 Sales to unaffiliated customers ** $22,157 $55,452 $777,191 $8,144 $862,944 Long-lived assets *** $88,804 $46,876 $36,755 $1,020 $173,455 *Includes operations in both Canada and Cayman Islands.**Based on customer’s location.***Includes property, plant and equipment, net; goodwill and intangible assets, net. b.For the year ended March 31, 2017, the Company had net sales to three different U.S. customers of 19.3%, 14.2%, and 10.3% of consolidatednet sales. For the year ended March 31, 2016, the Company had net sales to three differentF-39TARO PHARMACEUTICAL INDUSTRIES LTD.Notes to consolidated financial statementsU.S. dollars in thousands (except share and per share data) customers of 20.0%, 14.1%, and 14.0% of consolidated net sales. For the year ended March 31, 2015, the Company had net sales to threedifferent customers of 18.0%, 14.1% and 10.3% of consolidated net sales. c.Sales by therapeutic category, as a percentage of total net sales for the years ended March 31, 2017, 2016 and 2015, were as follows: Year ended March 31, Category 2017 2016 2015 Dermatological and topical 64% 66% 66%Neuropsychiatric 18% 20% 16%Anti-inflammatory 8% 3% 5%Cardiovascular 6% 8% 8%Other 4% 3% 5%Total 100% 100% 100% NOTE 20: — DISCONTINUED OPERATIONS a.During 2010, the Company’s Management decided to sell its Irish facility. The results of operations of the Irish facility have been classified asdiscontinued operations in the Consolidated Statements of Operations. b.The following is the detail of discontinued operations: Year ended March 31, 2017 2016 2015 Sales, net $— $— $— Cost of sales (172) (178) (276)Gross loss (172) (178) (276)Operating expenses: Research and development — (18) (2)Selling, marketing, general and administrative (142) (141) (167)Operating loss (314) (337) (445)Financial (expenses) income, net (67) 65 (347)Other income, net 29 36 2 Loss before income taxes (352) (236) (790)Tax benefit (expense) — — 3 Net loss from discontinued operations $(352) $(236) $(787) NOTE 21: — RELATED PARTY TRANSACTIONSIn addition to Sun controlling 81.9% of the voting power in the Company as of March 31, 2017, the Company has substantial relationshipswith Sun. Certain of Taro Board members are also members of various Sun entities board of directors, including Taro’s Chairman, DilipShanghvi who is also Managing Director of Sun Pharma’s board of directors. In addition, certain of Taro’s officers and executives are alsoexecutives of Sun. Arrangements with SunSince 2013, Taro has entered into various commercial transactions, including product distribution and logistics, manufacturing and serviceagreements with Sun in the ordinary course of our business. The Company does not currently deem any of these transactions material orunusual and believes that the terms of these transactions are comparable to those offered by or that could be obtained from unrelated thirdparties. Additionally, pursuant to Israeli requirements, each of the material transactions was presented to the Audit Committee, whichdetermined that each such transaction was not considered extraordinary, as defined in the Israeli Companies Law and therefore did not requireshareholder approval. The Audit Committee further determined the approval requirements for the different types of transactions.F-40TARO PHARMACEUTICAL INDUSTRIES LTD.Notes to consolidated financial statementsU.S. dollars in thousands (except share and per share data) In April 2016, Sun and Taro affiliates entered into a services arrangement (the “Services Agreement”) that is intended to allow the companies toshare the services of certain employees of the respective companies involved in certain North American management and operations functionsin North America and Israel in the following areas: Human Resources, Information Technology, Legal (including intellectual propertymatters), Management, Procurement and certain aspects of Commercial and Customer Service, Finance (including Accounts Receivable andAccounts Payable processing and Tax compliance), Regulatory Affairs, Supply Chain and Operations (Management Services only) (each a“Service Area” and collectively, “Service Areas”).The companies are required to maintain records (the “Service Reports”) of the costs associated with the provision of the services under theServices Agreement, and allocate such costs to the applicable Services Areas, based upon the established allocation methodologies for eachService Area. The Services Agreement requires our Audit Committee to review the Service Reports on a semi-annual basis and, the ServicesAgreement as a whole, on an annual basis to determine its efficacy and whether it is in the Company’s best interests.Each of the employees providing services under the Services Agreement is required to sign a written acknowledgment of his/her receipt of andagreement to be bound by (a) the confidentiality and non-disclosure agreement between Sun and Taro, and (b) guidelines for consideration inthe performance of such services, including the identification of potential conflicts of interest.In April 2017, the Board of Directors approved for Taro to negotiate an agreement with Sun whereby Taro's U.S. branded products team willpromote a combined portfolio of Taro and Sun corticosteroid products. Under this agreement, Sun will sell its products to customers and willpay Taro a percentage of the net sales for Taro's promotional services. NOTE 22: — SUBSEQUENT EVENTS Subsequent to March 31, 2017, the Company received approvals from the FDA for four additional ANDAs: Tazarotene Cream, 0.1%, FelbamateTablets, 400 mg and 600 mg, Felbamate Oral Suspension USP, 600 mg/5 mL, and Betamethasone Valerate Foam, 0.12%.On April 25, 2017, Crescita Therapeutics Inc. (“Crescita”), announced it had entered into a development and commercialization licenseagreement with Taro, under which, Crescita has granted Taro an exclusive license to the rights to sell and distribute Pliaglis® in the U.S.market and for a second-generation enhanced version with patent pending.During the period of June 1, 2017 through June 16, 2017, the Company repurchased 45,814 shares at an average price of $106.44 under itsNovember 2016 authorization. There is $187,249 remaining for this authorization. As a result of the repurchases, Sun’s ownership increased to73.0% and its voting ownership increased to 82.0% as of June 16, 2017. End of consolidated financial statements F-41 SCHEDULE II: — VALUATION AND QUALIFYING ACCOUNTSSchedules have been omitted as the required information is provided elsewhere in these financial statements. S-1 Exhibit 12.1CERTIFICATIONI, Abhay Gandhi, certify that: 1.I have reviewed this annual report on Form 20-F of Taro Pharmaceutical Industries Ltd.; 2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to makethe statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period coveredby this report; 3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all materialrespects the financial condition, results of operations and cash flows of the company as of, and for, the periods presented in this report; 4.The company’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (asdefined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules13a-15(f) and 15d-15(f) for the company and have: a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under oursupervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is made known tous by others within those entities, particularly during the period in which this report is being prepared. b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed underour supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financialstatements for external purposes in accordance with generally accepted accounting principles; c)Evaluated the effectiveness of the company’s disclosure controls and procedures and presented in this report our conclusions aboutthe effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on suchevaluation; and d)Disclosed in this report any change in the company’s internal control over financial reporting that occurred during the periodcovered by the annual report that has materially affected, or is reasonably likely to materially affect, the company’s internal controlover financial reporting; and 5.The company’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financialreporting, to the company’s auditors and the audit committee of the company’s board of directors (or persons performing the equivalentfunctions): a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which arereasonably likely to adversely affect the company’s ability to record, process, summarize and report financial information; and b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the company’sinternal control over financial reporting. Date: June 21, 2017 /s/ Abhay GandhiName:Abhay GandhiTitle:Interim Chief Executive Officer and Director Exhibit 12.2CERTIFICATIONI, Mariano Balaguer, certify that: 1.I have reviewed this annual report on Form 20-F of Taro Pharmaceutical Industries Ltd.; 2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to makethe statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period coveredby this report; 3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all materialrespects the financial condition, results of operations and cash flows of the company as of, and for, the periods presented in this report; 4.The company’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (asdefined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules13a-15(f) and 15d-15(f) for the company and have: a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under oursupervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is made known tous by others within those entities, particularly during the period in which this report is being prepared. b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed underour supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financialstatements for external purposes in accordance with generally accepted accounting principles; c)Evaluated the effectiveness of the company’s disclosure controls and procedures and presented in this report our conclusions aboutthe effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on suchevaluation; and d)Disclosed in this report any change in the company’s internal control over financial reporting that occurred during the periodcovered by the annual report that has materially affected, or is reasonably likely to materially affect, the company’s internal controlover financial reporting; and 5.The company’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financialreporting, to the company’s auditors and the audit committee of the company’s board of directors (or persons performing the equivalentfunctions): a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which arereasonably likely to adversely affect the company’s ability to record, process, summarize and report financial information; and b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the company’sinternal control over financial reporting. Date: June 21, 2017 /s/ Mariano BalaguerName:Mariano BalaguerTitle:Vice President, Chief Financial Officer and Chief AccountingOfficer Exhibit 13CERTIFICATION PURSUANT TO18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT 2002In connection with the Annual Report of Taro Pharmaceutical Industries Ltd. (the “Company”) on Form 20-F for the period ended March 31, 2017 as filedwith the Securities and Exchange Commission on the date hereof (the “Report”), we, Abhay Gandhi, Interim Chief Executive Officer and Director of theCompany, and Mariano Balaguer, Vice President, Chief Financial Officer and Chief Accounting Officer of the Company, certify, pursuant to 18 U.S.C. §1350,as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that: 1)The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of theCompany. Date: June 21, 2017 By:/s/ Abhay Gandhi Abhay Gandhi Interim Chief Executive Officer and Director By:/s/ Mariano Balaguer Mariano Balaguer Group Vice President, Chief Financial Officer and ChiefAccounting Officer

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