Replies to post #323497 on Elite Pharmaceuticals Inc (ELTP)

[no2koolaid]

Life has intruded and I have not posted in some time. But you asked for my observations and I have some…

To begin with, the p/s defies Elite’s business success. When I hear the market is disinterested, I laugh. There is no MARKET…there is the OTC and what comes with it is a short-term view. However, business is about the longer-term strategic vision. On that…

I have heard that the p/s will not increase no matter how many FDA filings Elite makes. The only thing that matters is whether they are approved. Then, with approvals, I heard the only way the p/s will increase will be with launching the drugs. But then with the launches, I heard Elite needed to prove it could generate meaningful revenues. But, when that happened with Q1 2020, I heard that it could not be a one-time event, it had to happen again. Now that has happened again and the increase over Q1 2020 was notably higher, what is the reason preventing the p/s from increasing? Wait, don’t tell me…

It is that Elite is diluting the share count. Well, the reality is that the approval of the authorized share count is not dilution. Stock dilution occurs when a company's action increases the number of outstanding shares…dilution is not the increase of authorized shares! https://www.investopedia.com/ask/answers/06/dilutivestock.asp

Further, Elite uses the shares to fund the company rather than take on expensive debt that would always place the company in a position of jeopardy. Using the shares as financial currency means Elite incurs no additional debt and debt must be paid first upon being acquired and, thus, would lessen shareholder return. In truth, excessive debt can often chase away interested acquirers and Elite will have none of that.

If we examine the manner in which Elite has sold shares to LPC to fund development and operations, it is obvious it has not been excessively done. To that, in about six years Elite has doubled the authorized shares used to fund the business but still has more than 150 million shares available on their currently approved share count. If you do the math, at that current burn rate, Elite would not fully use the currently authorized share and the newly requested authorization for more than six years. And, of course, with the potential of becoming CFP that burn rate will decrease substantially. Which brings me to my next point…

We have long heard how often Nasrat has been wrong or lied. On that point, here are his words from the 2019 Q4 conference call…

“If you look at our earnings from last quarter, the quarter ending March 2019, we earned roughly about $1.3 million during that quarter. Our earnings for the quarter ending in June 2019, this current quarter I expect will be at least double that. The quarter ending in September 2019 will be just as good as this current quarter, that is twice as much as the quarter before and the quarter ending in December 2019 should be three times larger than the March quarter.”

Well he was absolutely wrong or did he lie? Not sure. But he said he expected to double revenues by Q2 2020 and not triple until Q3 2020. Well, they more than tripled in Q2! So, where does that leave us for Q3 2020?

Okay, that was fun. Now let’s look at the reality facing Elite. Their revenues are increasing largely based on manufacturing fees and less from revenues born of commercialization. Think about that. As the CFO indicated (and who did a really nice job on the CC), the revenues from commercialization lag and will only be more fully realized in the Q3 2020 numbers. What that means is that, with revenues increasing for both manufacturing and commercialization, based solely on the currently approved and commercialized drugs, Elite should have annualized revenues a year from now that exceed $20 Million. Let me repeat that with emphasis…BASED SOLELY ON CURRENTLY APPROVED DRUGS, ELITE WILL BECOME CASH FLOW POSITIVE WITH TOTAL ANNUALIZED REVENUES IN EXCESS OF $20 MILLION!

That means before the end of fiscal 2020, Elite will become CFP WITHOUT the approval of the pending SunGen5 partnered ANDA with the mid-December GDUFA date nor the SunGen2 partnered antibiotic that has a GDUFA date later this month (nor the potential that is Loxapine). However, with those drugs approved, particularly the SunGen5 CNS ANDA, Elite’s annualized revenues will easily exceed $30 Million a year from now. Of course, there are no certainties when considering the machinations of the FDA. However, given the FDA history of approvals, that they have asked for nothing more than labeling suggests approval is expected. Yeah, we have been there before on this ANDA; but after completing all necessary tests, that the only thing the FDA wants relates to labeling would indicate approval seems teed up. But there is more good news with that…

If we consider that new ANDAs generally take about three years to reach peak revenues, we should see Elite’s annual revenues more than double over the next two years and continue to increase into 2023. As has long been said, the p/s will follow the fundamentals down the road to success, either willingly or kicking and screaming.

A final thought: Based on a strategic decision that totally realigned its product focus (and which cost additional shares to fund), Elite has become a well-diversified generics company. As a generics firm, the focus is on price not differentiation. SOX was an NDA and, thus, differentiated. It was a strategic anomaly and, I believe, a mistaken decision for a generics firm to make. But I forgive them the mistake because they are not attempting to escalate their financial commitment to an opioid product line that has socio-legal-political issues. Moreover, ADFs, while a grand idea, are and remain a costly drug. ICER has put out a report that indicates ADF opioids are overpriced by 40% and it is a major reason they will not gain the traction with the now cautious prescribers who do not believe their patients are at risk of abuse or diversion. Because the cost of ADF opioids is high, abuse threat low, and many of these people are on fixed incomes and sensitive to pricing, healthcare professionals will not easily prescribe ADFs.

And, there is the fact that the CNS ANDAs will be more profitable and reach a larger market.

So it is that we investors owe Nasrat and Elite a vote of thanks, respect and trust. Management is moving Elite toward success that early investors could not have imagined and it is because at a key tipping point they made a strategic decision that now finds the company with increasing revenues and on the doorstep of financial success. I am now invested in a better company than when I first began.

That is my perspective.