Elite Pharmaceuticals Inc (ELTP)

[no2koolaid]

Je3232,

Elite is decidedly not toast. Rather, I believe we should raise a glass and toast them for what they have accomplished under Nasrat's stewardship. There is so much that investors appear to have lost sight of that is about Elite the business. A focus on past decisions that might be questioned fails to grasp the bigger picture - that the purpose of a business is to generate sufficient revenues with its value chain capabilities balanced with its debt burden; because no company is without some form of debt, but what matters is how much and of what kind.

Using that premise, I will not ask but tell the board that what any business must consider is what they can produce with their debt - it also includes how to effectively monetize assets and that, I expect, is the basis for selling certain products over time. But, let's not get sidetracked and, thus, focus on the question - has Elite produced revenues most efficiently?

Without getting caught up with mindless ratios - at least in this post - a little perspective on how to utilize capital efficiently.

In my Fortune 50, we had an expected IRR hurdle (Internal Rate of Return) for capital spent of 15%. So, that meant if a proposal cost $10 Million, once all the costs were removed, the company expected to get a return to the bottom line of $1.5M; which could come in a variety of ways - not merely more revenues, it could be a reduction in various forms of operating costs. With me so far? Okay, imagine that I said I had an opportunity to generate a return of 2.5X for the capital spent. Once I could provide evidence of the numbers, executives would write the check. I know, because I once pitched - with the able assistance of fellow experts - spending of $60 Million and they never flinched.

To keep this simple - while answering the question that is important - Elite is a business that is getting better and will be significantly profitable. In fact, consider that, given the projected revenues of the NEXT 5 Qs, that includes the one upcoming, Elite will likely generate revenues that will exceed its current market cap. (Read that carefully and let it conjure up how manipulated the share price really is for a company that is CFP.)

Let me close with this point.

A company should absolutely spend its capital obtained through debt - in the case of Elite selling shares to LPC to provide that capital - if it could get a 2.5X return.

So, here is the simple math...

When Nasrat became CEO in 2013 Elite's annual revenues were $3.4 Million and its Authorized Shares were about 690 M. https://s3.amazonaws.com/sec.irpass.cc/2258/0001144204-13-009129.pdf

At the end of FY 2020, the company had A/S of 1.445 B and revenues of $18 Million.

If we consider the A/S dilution as debt...A/S has increased 2.1X.

Revenues have increased 5.3X.

The numbers speak volumes and are clear...Elite has used its dilution as debt to avoid onerous loans that come with covenants that are and have created conditions leading to BK. This means Elite has avoided being toasted by debt. And, in fact, has generated the return of 2.5X to debt I mentioned. Just so we are clear...that is revenues of 5.3X divided by dilution (debt) of 2.1X = 2.52X. And, let's be clear, I used A/S but the dilution ONLY occurs when the shares are sold and become O/S - outstanding shares.

As a teaching moment, with all the other noise aside, the aforementioned is the single most compelling argument that Elite, as a business, is succeeding.

On that, one more point...as any business in any industry well knows, the developmental pipeline is essential to future growth. As an executive who came out of big pharma, Nasrat fundamentally understands that and is and has always sought to position the business for success. Clearly, moving away from pain meds to CNS drugs and keeping it generic involved a set of critical decisions that not all investors understand. To that, Elite is working on future meds, but there is no need for an unending number in the pipeline under development. Based on my reading of the tea leaves, Elite needs one more big generic to enable the company to be positioned for what is Nasrat's exit, as well as that of informed and knowledgeable shareholders.