Elite Pharmaceuticals Inc (ELTP)

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Elite Pharmaceuticals' (ELTP) CEO Nasrat Hakim on Q2 2017 Results - Earnings Call Transcript

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Elite Pharmaceuticals, Inc. (OTCQB:ELTP) Q2 2017 Earnings Conference Call November 10, 2016 1:30 PM ET

Nasrat Hakim - President & Chief Executive Officer

Carter Ward - Chief Financial Officer

Nasrat Hakim

Thank you, Paul. Good afternoon, ladies and gentlemen. My name is Nasrat Hakim. I am Elite’s President and CEO. This is our earnings call. Our Chief Financial Officer, Mr. Carter Ward, will give us a financial analysis of our 10-Q, after which I’ll come back with final comments.

Mr. Ward, you have the floor.

Carter Ward

Thank you, Nasrat and thanks to everyone calling in today. Yesterday, we filed our 10-Q for the quarter and the six months ended September 30, 2016. We’re in a March 31 fiscal year, so that makes September 30 the second quarter of our 2017 fiscal year. The 10-Q is available on the investors section on our website, which is elitepharma.com; or wherever else you may get your SEC filings. If you haven’t seen our Q yet, please get a copy from our site or one of those other sites.

Our financials, they can be summarized as follows: sound operations, in line with expectations, strong financial position and also a few items, which don't have much impact currently on our financials, but will be significant on future financials. Those items I am talking about are the ANDA filing, which we made during the quarter. That is the generic version of Percocet and the development agreement entered into with SunGen Pharma during the quarter.

We have always said how important product pipelines are to all pharmaceutical companies. It is certainly true about our company, and then you have one pretty big product being filed; that is the Percocet, Generic Percocet, and a partnering, which will result in several more products, which will have a significant effect on future financials.

As I have said in the past, our financials don't just show how we did in the past quarter or what our current position is today, there is also information which gives an insight into where we are going, and those last two items; those are some of the where we are going aspects in the quarterly report. Nasrat will have more to say on these topics, but from a financial viewpoint, we are well placed to support our product development plans. We are on budget, we are on schedule, and we are continuing on the path that we have laid out.

Now to the financials. This time let us start with the balance sheet. Cash at September 30 was $12.6 million, that’s up more $1 million from the beginning of the fiscal year, and it is right about where we were at June 30. Working capital was $14.5 million. It is almost $1 million increase during the quarter and it is a $2.5 million improvement from working capital at the beginning of the fiscal year, March 31. This is a good metric demonstrating our strong financial position, which is continuing to strengthen. Also please note that the rise in inventory from $3.3 million at the beginning of the year to $5.6 million at September 30. Got a few questions on that; some of that inventory is for product development activities, which are numerous, but a large part is also for future production and shipments.

Now rise in inventory. That is one of those data points, which you hear the government releasing to the department of commerce, and when the inventories go up and the economy as a whole, most people see that as an indicator of increased revenues in the future and vice versa; inventories goes down it is kind of a negative indicator. Well, these rules, which apply to the economy as a whole on a macro level, they also apply to us at a corporate level. So the key point here is that changes in inventory, this is really one of those where we are going aspects of our financial statement. It is true on a macro level for the whole country and it is also true to Elite on our company level.

One last thing on the balance sheet, and this is also something we have got a few questions on, and that would be our mezzanine equity, or the Series I preferred stock. As of September 30, it is now zero, and this is as a result of the conversion of the entire series I shares outstanding, and those shares were held by Mr. Nasrat Hakim. The series I had no effect on operations, had no effect on our operating financials, has no effect on our cash flow. At the same time the conversion of the series I also had no effect on any of this. But one thing the conversion did do, it enabled us to bring our overall equity into a positive balance.

Our balance sheet is no longer showing negative equity. We are also not showing any mezzanine equity. So essentially the mezzanine was transferred – was moved down to the equity section of our balance sheet, as a result of the conversion. It is a technical entry for sure, but it is an accounting technicality, which has a positive effect on our balance sheet and that is always a good thing.

So now on to the P&L statement, gross revenues were $2.7 million for the quarter, and they are $5.9 million for the six months. Quarterly revenues, when you compare it to 2015 they are down 7%, but the year to date numbers, six-month numbers, they are up 17% as compared to 2015 results.

I have gotten a few questions on why we are down for the quarter, but up for the full six months, the answer is really that this is just an ordinary timing difference in our shipments. We had some shipments that went in June, they went in October, and consequently they didn't make it into our revenues for the September quarter. We are a fluid and constantly moving operation. A few days here or there around the cut off date, it affects revenue numbers, but the overall trend is positive.

Our generic products, especially Naltrexone, Phentermine, Methadone and Isradipine are performing well. Shipments are steady and constant, and whether a shipment is put on a truck just before or just after the cut off date may have some effect on the numbers reported on a specific Q, but it doesn't change what is most important and that is revenue is being earned regardless of the period in which the accounting principles require it be reported.

Also notice when you look at our revenues, we are consistently at an annual run rate above $10 million. This is further evidence of our financial showing that our generic business is providing the solid foundation. We say all the time it is one of the key components of our overall strategic plan.

Now moving down the P&L, on the expense side, you notice the big number is always R&D expense. R&D expense was $1.3 million for the quarter, and $2.8 million for the six months ended September 30. Now this is down from $4.2 million and $6.6 million for the quarter and for the six months of 2015. This difference is really due to the nature of the R&D activities. It is certainly not due to the amount of the R&D activities. At this time last year, our R&D was focused on SequestOx, a branded NDA product. This year we are working on developing various generic products, both with SunGen and a few on our own.

We filed an ANDA for generic Percocet this quarter and we are working on others. So the takeaway here is that the decrease in R&D expenses is indicative of the types of products being developed now as compared to last year, and not the level of R&D activities. This year there is several generics we are working on and last year it was the branded product. There is also a timing component, which means that future quarters will show high R&D spend. It is all depending upon the timing of the trials and the study. There is going to be some R&D costs in the future related to this obviously.

Lastly on the P&L, we reported quarterly operating loss of $1.2 million and a six month operating loss of $2.4 million. Now these should both be viewed in conjunction with our R&D expenses, which exceeded the overall loss during both the quarter and the six months. Now I mentioned this before, as a P&L metric, which is a good indicator of the performance and the contribution of our generic business.

The generic business is a net positive on our P&L. It covers our own costs. It covers its overheads, and it also provides contribution to the cost of product development. This hasn't always been the case as you know, but it is consistently the case now. Once again a key plank in our long-term strategy is for a solid generic business providing the foundation for product development. If you take a look at our P&L and you will see that that plank is in place.

Now onto the cash flow statement, in which we reported an operating cash burn of $3.1 million for the six months ended September 30. Now that $3.1 million burn includes $2.3 million in cash used to increase the inventory and $2.8 million in R&D expenses. Both of these are uses of cash and they serve to increase our burn. So, when you add those two together you have $5.1 million in cash burn that was related to the inventory buildup and R&D activities and we were left with an overall operating cash burn of $3.1 million. So that means the cash burn was $2 million less than what we spent on inventory and R&D. That is the nice metric. It really shows the significant contribution that we are getting from the generic business.

We never like to see a cash burn, but keep in mind we build up the inventory. That inventory will result in higher revenues in the near term, and the R&D spend – I mean that is our lifeblood. It is the future of the company and it will provide higher revenues in the mid-term to longer-term. So both of these are what you expect to see in a growing company, and thanks to the overall financial strength of this company, financing of these amounts are well within our ability.

Overall, our financials show a strong financial position. They show solid operations, cash flow is well managed. It is under control, and from a finance perspective we are well placed to support the R&D activities and the strategic plans that are in place and are being executed successfully.

Now our President and CEO, Mr. Nasrat Hakim, would like to give an update.

Nasrat Hakim

Thank you, Carter. And thank you to those who submitted questions in advance. We received good questions actually. Many of you had the same or similar questions. So we grouped them into six categories; SequestOx, [Indiscernible], future filings, SunGen, revenues and stock conversion. Carter just addressed the stock conversion. So I will address the other five. I will try to address as many of these points as I can as part of my update.

I will start with the highlights, or by highlighting our progress for the last three years and our strategy for this quarter and the next three years. We are now exceeding $10 million in revenue. We are exceeding 50% per year growth in the last three years. We developed and filed SequestOx. We developed and filed oxy/APAP. We developed and will file several products in 2017.

We launched Phendimetrazine, Isradipine and Hydroxyzine and strengthened our current generic profile. We created infrastructure for the [Indiscernible] and built a new facility. We strengthened our board of directors and our management team. I couldn't be happier with having our two new board members, Eugene Pfeifer and Davis Caskey. We have a solid board.

Our generic business is profitable without the burden of funding our pipeline. This is an important milestone in Elite’s growth. We are now exceeding $10 million, as you heard from Carter, in revenue every year, a very important growth over the last three years. Be as it may, this is but a milestone towards our ultimate goal. Our ultimate goal is to fund our existing pipeline to ensure a higher share of return and better growth in the future, and this is what we are doing.

I have divided Elite’s R&D strategy in a three-pronged strategy. I will call them three baskets. The first basket of products and the most important is our ART technology, starting with SequestOx and extending into our ER pipeline. As far as SequestOx is concerned, we ran multiple in vitro trials that simulated set conditions and created three options supported by data. Wrote a report and a proposal to the FDA that contains a path forward that in our opinion will make Elite’s product work and efficacious irrespective of food intake.

They FDA is studying our proposal, and they will give us feedback soon. They have given us a date to meet us in the third week of December. We believe that our proposal will address the FDA Tmax concern, and if they agree with our proposal and we will know that next month, Elite will complete additional work and a fed BE study and target resubmission in 2017. We will know more after we meet with the FDA.

Regarding the warning letter, we used a third party to ensure complete and adequate response. We responded fully to concerns in the letter. We tightened up the SOPs and had them evaluated by a third party, and we were very happy that Dr. Eugene Pfeifer was instrumental in helping us with the regulatory strategy and in writing the response.

Let me pause here for a few seconds to read some of the questions that you asked regarding these two areas, and ensure that I have addressed them. Regarding SequestOx the questions were when if ever do you guys expect FDA approval? Even in a modified form for SequestOx did Elite meet with FDA and regarding to the three solutions that Nasrat mentioned in the last call, what is the path forward? Do you pursue approval for SequestOx in Canada, Europe and China as FDA delays approval in the US? I think I pretty much answered the first three. As to the last one, we are not at this time pursuing SequestOx in other countries because you are required to run clinical trials in these countries, even though China was an option for us, and it remains as such. But right now, we are focusing on our financials and our products in the US, and if we encounter anymore difficulties with the FDA then we will consider that.

Regarding the warning letter, the questions are what Elite has done with FDA warning letter? I just responded to that. Do we have all new SOPs in place as requested by FDA? Yes, we do and as I said Dr. Eugene Pfeifer [Indiscernible] came in and [approved] what we submitted.

Next is our ART ER pipeline. As I have updated you before, Pfizer received approval for their oxy with naltrexone ER using the same technology or similar technology as we do with pharmacological approach. But they have not launched yet. We cannot compare our product and create a formulation [Indiscernible] without them launching. Then we will have access to this product. So as soon as the product is available, we will do what needs to be done to file an ANDA.

As I said before, our technology is a $1 billion platform. Therefore, validating our technology with an IR and ER is critical to attracting prospective partners and buyers. Ladies and gentlemen, our technology is still needed. There are still many opportunities for abuse deterrent ERs and IRs. Actually, there are no IRs out there that are abuse-deterrent yet. This basket is one of the main pillars. Our success for Elite – our success in this area will get us the fundamentals we need to be on NASDAQ.

The second basket of product is the partnership basket and SunGen is on top of the list. The questions that you sent me are, can you provide more color about SunGen? Not much information is available on the Internet about this company. Could you please give us more information on the partnership with SunGen Pharma and what that means for us. Three, since the deal with SunGen came to most of us common investors as a surprise, does this mean that Elite could be in talks in the near future with other partners for licensing or manufacturing?

Okay, regarding number three, I cannot tell you if we are in talks with anybody because sometimes we will be in intense talks, and nothing happens, and sometimes a simple little conversation leads to a deal, so we are always talking to people, but I have nothing to report there. However, as far as the first two questions you ask, let me tell you this, [color=red]SunGen is run by an experienced team of professionals. Dr. Isaac Liu has extensive Pharma experience and operation and management. At one time he is a Pfizer executive, who was in charge of Asia-pacific I believe at one time. He is the president of the company. Dr. Jim Huang is a good friend of mine, and he is the CEO. He has extensive pharma experience. He was with us at [Activas] and he also was the head of R&D for the generics for [Endo Pharmaceutical].[/color]

The company is well funded with private money. That is why you don't find too much information online about them. And frankly they don't care for worksites, Internet and fluff. I've made the chime I meII I met the chairman that finances the operation, a billionaire, who has six, seven other pharmaceutical companies worldwide. If you wish to look up SunGen or know a little more about them, a couple of months ago they had another business partnership with a company called Athenex, over seven products – a basket of seven products. You can Google that with SunGen, and you will get some hits on that. SunGen also does business as Peterson Pharmaceuticals.

Our deal is a large marketing opportunity totaling over $3 billion. The smallest of the four products is over $0.5 billion. It is a small number of generic players, and two of the formulations are difficult ER formulations. Our target is to file the first of these products in 12 months. The deal with SunGen is another major pillar in our foundation that could by itself get us the fundamentals that we need to be on NASDAQ.

Our third basket is our own ANDA. Elite can and will participate broadly and all generics that fit our model and technology. Whether it is narcotics or not, it is oxycodone, hydrocodone, oxymorphone, hydromorphone, morphine sulphate, even an opioid. We are filing a combination of abuse deterrent products that have abuse deterrent properties such as what we did with oxy APAP. We are going to file for additional ANDAs that are IRs or ERs as long as they are viable and profitable.

We work for the one of the most greatest businesses in the world, really, the pharmaceutical business. But at the end of the day it is still a business. If there is something that makes money, we are definitely going to throw our hat in the ring. We are on target for filing and ANDA this quarter, second ANDA. We already filed oxy APAP, where we are targeting one more ANDA this quarter and four for next year. The four will average one per quarter. Half of them will be owned, two ANDAs will be owned 100% by Elite and other two will be co-owned with a partner.

Regarding revenue, you sent us four questions. With SequestOx do you guys see Elite getting to $100 million in sales in the next 3 to 5 years? Absolutely, as I just described, these three baskets that we created, each and every one of them has enough oomph to get us there. A combination of the three, we will definitely be able to do that. With generics paying for most expenses at this time, and assuming we get some other ANDA and perhaps SequestOx within a couple of years, would Elite consider either paying with cash on hand or with bonds/debt to purchase stock backs.

The first, there is no way it is going to take us a couple of years to get SequestOx. We should be able to get it a heck of a lot sooner than that, and we will know more next month. But second, I'm not sure that the answer will be yes or no, and here because I don't have all the details. If we had $100 million for me to buyback 10% of our stocks that will increase your shareholder value by 10%. But if there was an opportunity to invest that $100 million and bring in 25% revenue for you guys then that is what we will do. So it is hypothetical. I really appreciate it, but we will deal with it once we get there.

Again with generics paying most expenses currently, are you looking to use cash on hand, banks, to maybe purchase other products or technologies to add to Elite’s bottom line? Yes, we have explored several options and when we find the right fit we will execute. But we are not going to just start and execute onto something that we do not study, and we know we can immediately start to capitalize on the investment.

Do you believe that if Elite continues to grow and we eventually meet our goal, fundamentally that we will not resort to a reverse split. I know we have spoken about this in other conference calls, but if Elite continues to add to fuel growth then maybe [700 to 800] is not too bad, especially if stock purchases are included.

I would love to get us to NASDAQ organically. If I can, I have no issue with supplementing that with another method such as stock split, but really the preferred method always is for us to try and get there organically.

I know where our stock price is, and I know where it should be. Approval time for new filings are getting better and faster on the [PDUFA]. That is positive news for companies like us who need new products fast. We also already have a sales and marketing group that handles a couple of our products. When growth and in-house sales come together, we will be in a position to perform better on NASDAQ. I also know that our ART technology and ART strategy and the partnering strategy, especially with SunGen and our high caliber ANDAs that we are working on right now will get us to achieve our goal and beyond.

Finally Elite is in the best financial shape in her history, has the best infrastructure ever and most importantly an excellent pipeline that is so charged up that it is becoming a little forgiving. It allow us to tolerate regulatory delays, and less-than-perfect performances, and it is still forgiving enough for us to be able to get the fundamentals necessary to get to dollar land and get into NASDAQ.

Thank you for joining us today and we will speak to you soon. Thank you, Paul.

Operator

Thank you ladies and gentlemen. This does conclude today’s conference call. You may disconnect you phones lines at this time and have a wonderful day. Thank you for your participation.