Elite Pharmaceuticals Inc (ELTP)

[Pharma Sleuth]

Regarding valuation of Elite

I read the note below about large cap companies trading at 2-3x earnings. That is not correct. Here is a quick link to PE ratios of 50 companies in the sector. This was just the first one I found. You can find others.

http://www.indiainfoline.com/MarketStatistics/PE-Ratios/Pharmaceuticals-Sector

Its a large range here from about 5x to about 100x. There will be some under this as well. Elite's CEO Jerry Treppel served on the board of Akorn I believe and that Pharma company for example is about 20x I think but I hadn't looked in a while.

I always ask myself the following question. Could you buy the company for the current market cap? In Elite's case, they are at about 25m. You could not buy this company for 25m. probably not 200m.

Also think about companies that are just R&D pharma companies. They have no real revenue in some cases, so you are betting on the odds of the company successfully developing and launching that product and the revenues they could receive. They have no revenue so their PE ratios are solely based on future predictions.

Let's look at Elite

Say 4m in revenue now. Should be right at that mark give or take a little.

Lets also chose a large round number of shares, say 400m in the float. Its less then that but it makes the math easier and you err on the conservative side.

So Elite would be at a 28m market cap. And 7*400 equals 28. Your PE would be 10x based on current revenues.

So is 10 high or low for a company like Elite? Well if they were just a generic drug company, I would say that considering they have an asset like Novel (10-30m) and all of their products are relatively new, just beginning to barely start to penetrate the market, I would say it is about right and probably a little low because their growth is all in front of them. They haven't begun to peak. Most of the products are not even a year old.

You also have to think about margins and future profit too. Elite has low expenses and overhead, so that is very good. Also have eliminated costs by packaging and running a tight ship.

But remember even on the manufacturing side, Elite is not just a generic drug company, they are working NDAs with multiple partners.

Now what other products does Elite plan to launch soon? What is real and what is pipeline R&D future stuff and how does that figure in?

Well you have the another ANDA pending approval, Naltrexone due to launch, 100m drug with HITK, 8 products with Epic, MIK001, HK Pharma drug, etc...

So you know the company is experiencing rapid growth. This future potential drives that PE ratio up for me. As someone posted earlier or yesterday, 20m a year in revenues from the known products, expected to be approved is not an unreasonable possibility. (This does not include the abuse resistant opioids)

In two years Elite should be pushing 15-20 FDA approved drugs and some of these are NDAs (remember my note about above about R&D companies) which unlike generics limits competition. Pure generic companies will have lower PE ratios at times because of the increasing competition. So you have to ask yourself what will the future revenues and costs be? A company like Elite is not quite ready to give out projections either. So you base your judgement on the future and current revenue and current and future PE ratios.

Now note this has been all about Elite's generics, and NDAs partnered with some major players. These companies wouldn't go through the trouble of developing these products if there was not substantial revenues in it for them.

Then you have the abuse resistant opioid products. These are in development and stand a very good chance for approval for a number of reasons. If you invested you likely already believe this as I do.

When you start to factor these products in, you start to think about future revenues which are measured in 100s of millions of dollars and competition will be less for some of them but will grow over time. By that time I will have sold my shares anyway.

So if you use a very reasonable PE ratio of 10 (Which for an R&D company with this potential is low) Elite needs roughly 40m in revenue to hit 1$ PPS. Based on the 400m shares I note. I believe 40m can be a drop in the bucket actually.

Thus when I say I see a current market cap of about 125 million dollars, I am being extremely conservative because one FDA ART product may get them to a 400m market cap.

That is why when the CEO who is a wall street guy notes the disparate valuation of Elite compared to other companies, I agree with him 100%.

Also when comparing to companies like Acura and others, remember they will receive royalties and licensing fees while the drug companies make the big money.

Well Elite will probably license some of this out but they will also have their own line of opioid drug products for themselves.

Thus between Elites rapidly growing revenue and product base, future products, I have them having much higher potential than some of these companies.

And the current 25 million dollar cap is a joke but there is heavy manipulation with this one.

Hope this helps. Gotta go. check back later.