Note: This article covers a micro-cap stock. Please be aware of the risks associated with these stocks.
In my previous article published on May 28th titled Actavis: Abuse-Deterrent Opioid Connections, I noted connections and relationships to watch for between Actavis (ACT) and several companies. As it turns out, several of these companies have played a role in the re-emergence of the relatively unknown Elite Pharmaceuticals (OTCQB:ELTP). This article will examine these recent events and evaluate the opportunity this presents to investors. In my opinion, this is an incredible comeback story that will not go unnoticed much longer.
About seven years ago, Elite Pharmaceuticals traded on the AMEX, was popular among investment firms, and had a bright future with controlled release and abuse resistant opioid technologies. However, mistakes by management, coupled with the down turn in the economy left the company short of being able to attain their goals and on the verge of bankruptcy. An interesting read is this 2006 interview in the Wall street Journal with the former CEO Bernard Berk. Elite was an innovator but ran out of time and money when the market crashed shortly thereafter. The technology was there but the financial sustainability was not. A stock that used to trade for dollars now trades for eight cents.
But that is starting to change.
What has happened since May 28th?
- In June they announced sales of their existing drugs resulted in a record quarter.
- In August they announced senior management from Actavis has taken over key roles at Elite.
- In addition in August they announced numerous FDA approved drugs have been added to Elite's growing pipeline.
- In their most recent earnings conference call Elite announced they were on the verge of getting their abuse deterrent products into the final stages needed to garner FDA approval.
- During the Rodman and Renshaw Conference, CEO Nasrat Hakim noted that they have been approached by several companies regarding Elite's technology including meetings with a CEO the day before and the Chairman of a major pharmaceutical company two weeks prior.
- Elite previously cited in their filings "doubt as to our ability to meet our business objectives and to continue as a going concern." Their most recent 10q removes that language.
This is now a company with a 10 million dollar financing deal in place, nineteen FDA approved drugs to be manufactured, approximately eighteen more in the pipeline in various stages with numerous partners, and are about to enter studies to submit for a 505b2 NDA, twice daily abuse-deterrent Oxycontin/Oxycodone product. Additional abuse-deterrent products are also scaled up or in development such as a once daily Oxycontin/Oxycodone and a Morphine product. New senior leadership with extensive experience to take these products from the development phase to the approved phase was announced several weeks ago. And this is where we will begin to look at these relationships I note above and what I believe is the New Elite Pharmaceuticals.
The biggest and most recent catalyst was the hiring of Nasrat Hakim, former Global Vice President at Actavis and Alpharma. This has set the stage for Elite to take the next step in their comeback. In addition to extensive leadership and experience, Nasrat Hakim also brought with him 12 approved ANDAs (Abbreviated New Drug Applications), one pending approval, effectively merging his private company Mikah Pharmaceuticals with Elite. Elite also hired Doug Plassche as executive Vice President of Operations, also from Actavis.
For competitive reasons Elite is not releasing the names of the products they are receiving from Mikah until a material event, but a quick check of the FDA orange book and simple deductive reasoning greatly substantiates speculation that these are a few of the products identified in the FTC approved divestiture agreement between Actavis and Watson. Elite's press release notes that two of these products are in markets with only one other competitor obviously indicating this to likely be the case.
However, all of these approved generic drugs, some with little competition and additional products in Elite's pipeline (Close to 40 in total now) are not why Nasrat took over. Here is what he said in a recent conference call when asked about why Elite's stock price is so low:
The technology itself is sound; we haven't changed it much for years. But it's how we managed it in the 2000s and 95 and 2002 was the issue. In order for Elite to survive eventually they started making products. So now we are measured on our earnings. We are an R&D company; if Elite did not have the manufacturing capability and they were only an R&D facility with this great technology, the stock would be 10 times higher than it is today, that's my personal opinion.
When you start measuring an R&D facility with a superior technology that could bring in oxy twice a day with naltrexone to the market in a short period of time, that could bring oxy once a day, that could go into other avenues such as Embeda working on morphine sulfate and other opioids. If we look at that and look at the market that it could generate the stock will be in a different place. Unfortunately we are sitting here listening to our earnings of a million and two and even when we bring Mikah's products and we bring in millions of dollars more, if you guys are happy with that I will consider myself a failure.
I did not come here to have an R&D start a manufacturing company that's producing $20 million, $30 million a year. I was working for a company that's making billions of dollars per year. My annual budget was the price of Elite times 10. I am here for our R&D superior technology and this is the primary focus of my heart and soul and that's my commitment to the stockholders.
Have you heard many CEOs say that increasing revenues five to ten times should be considered a failure? Nasrat is correct and when you begin to look at the market place and see how other companies are doing in this space, you begin to see that Elite is very well positioned. Elite is currently being judged on its current revenues and not on all the products and revenues to soon come from these approved, unnamed products and certainly not from their R&D and products in development.
Further strengthening Elite's position; several key companies in this field have had great difficulty proving their products would be abuse deterrent or viable. Endo pharmaceuticals (ENDP), failed to prove to the FDA that their Oxymorphone product was a significant deterrent to abuse. More recently, Acura Pharmaceuticals (ACUR) failed to show in trials that their version of the pain killer Percocet exhibited a significant decrease in "likeability" by abusers crushing the product. Pfizer's Embeda was recalled. Pain Therapeutics (PTIE) and Durects (DRRX) Remoxy faces a long uphill battle.
Drug addicts are creative and determined enough to get around these features. Even Purdue's recently approved and considered to be abuse-deterrent product can likely be defeated via instructions found on the internet using an microwave and conventional oven. With a street value of up to $60 or more per pill, there is a significant interest in defeating these measures and in an information and social media age, it does not take long for these techniques to be shared within the drug user community.
Could this happen to Elite? The amazing answer is probably not. Elite's product is not based on trying to create a physical barrier to abuse. Elite's technology is based on a pharmacological approach to eliminating the euphoric effects drug abusers seek. The ingredients and efficacy of this approach are already accepted and understood. This approach is the same concept used by Pfizer (PFE), has been approved by the FDA in Pfizer's Embeda product, and noted in the FDAs guidelines in creating these type of products. It is also interesting to note that Nasrat Hakim was with Alpharma during the development of Embeda.
The key difference is being able to manufacture a stable product that does not release a significant amount of Naltrexone. Pfizer's Embeda was recalled due to stability issues and has yet to return to market.
Elite's patented technology has shown in Ph1 and Ph2 trials to not release Naltrexone and crush studies have been done which showed a significant reduction in Euphoria. This is to be expected as Naltrexone is well known to reverse the effects of Opioids. So if an abuser attempts to manipulate Elite's extended release opioid products, they will not get the euphoric high they seek and may even experience mild withdrawal symptoms.
What sets Elite's product apart is that this is a truly modular concept. Elite uses a patented two bead approach and formulation inside a capsule. One bead contains the agonist (opioid) and the other bead contains the antagonist (Naltrexone). These tiny beads use essentially the same materials and are indistinguishable from each other. So if you can create an opioid bead and you can create a Naltrexone bead that will not leak a significant amount of Naltrexone, you can adjust these two items to suit any opioid.
Pfizer is also working on an Oxycontin product using the same concept as Embeda. These products attempt to wrap the opioid around a core of Naltrexone which is a more complicated manufacturing process.
Where other companies need to develop and test each formulation based on altering the physical characteristics of the pill, Elite essentially needs to adjust the opioid type and dosage of each bead which is far less complicated to develop. Could Elite effectively create an entire line of extended release opioid products in a relatively short amount of time? The amazing answer is they absolutely could and Elite's Chairman Jerry Treppel has noted that this is his vision. Here is what Nasrat Hakim noted in the recent conference call when asked why he is so confident in Elite's technology.
I will give only two simple little examples and I'll try my best to simplify it as much as I can. When I joined the company or before I even joined the company, I've had the opportunity to have a close relationship with Elite. So I looked at some of the data and presentations that they have. Elite developed a once-a-day anti abuse, actually once-a-day oxy and made the (inaudible), put them on stability for three years and the data after three years was rock solid Using the same technology that we could actually go to the market with.
Furthermore they took that same once-a-day tablet and ran clinical trials on 19 people and they ran it against a competitor and our results were better at least according to my analysis and I am knowledgeable in this area, were better than the competitors and we presented all of that data to an expert that we had here yesterday to help us with the filing.
So when I see that it has been proven first in manufacturing on a large scale and second on stability over time of up to three years and third on a human trial, it is self-evident that the technology works.
Okay; second the issue came that the twice-a-day may have a better market for that. So that technology was also developed, they placed on stability. We had six months stability on the latest slots with the API and that data is also rock solid.
Our (inaudible) polymers are the same story, and the beauty of this technology is it has two separate beads, and each one of them functions independently, but when inter-mixed cannot be separated and both of them separately have been proven to work in the human trials of 19 people on stability and in manufacturing.
This is why I am wondering why hasn't this been done in the past and that's why I said earlier that, I don't think historically when the data was generated in the early 2000, the R&D folks that were working on this took the necessary business risk and both went to the market instead scientist sometimes like to play around more and add more examinations and look at more bio studies and examine more data and we ended up where we are at.
I truly believe in this technology and that is why I merged my company in it and became a part of it.
So it is obvious that management believes in this technology and the company has put themselves in position to reap the benefits from all of the products in the pipeline. One thing both Nasrat and Jerry certainly have in common is a belief in the future of Elite Pharmaceuticals, demonstrated by taking salary almost entirely in stock. Jerry Treppel also provided the company a one million dollar unsecured line of credit. As it turns out, Nasrat Hakim was already one of Elite's largest stock holders owning 11 million shares prior to his arrival.
But how should investors begin to place a value on the company? I also have to ask myself, what would this company cost to buy? What price would they demand if a major pharma came in to buy them for their abuse-deterrent technology? I actually think this is a likely scenario as large pharmas have much to lose as the FDA begins to favor generics that have abuse deterrent features in what is a seven billion dollar market. Here is a simple bullet list of Elite's assets and potential revenue drivers.
- Eight launched products, 8th due now to launch
- Thirteen ANDAs, (Eleven Approved, two pending approval)
- Three Abuse Deterrent Opioids (Twice-daily and Once daily Oxycodone, Morphine) ~$3 Billion dollar market
- Once-a-day Oxycodone (Partner interested in Europe)
- 505B2 product MIK001 in development with Mikah
- Ownership of approximately 10% of Novel Laboratories
- Expected to trial an allergy product similar to 24 hour Lodrane product - Financial partner willing
- Partnered - Hi-tech (HITK) generic - 100 million branded product
- Undisclosed NDA-product approved overseas -Hong Kong Partner with multiple overseas FDA approved facilities.
- Eight generic products partnered with Epic Pharmaceuticals.
- Nine Patents and four more pending
A quick note regarding Elite's 10% stake in Novel Labs. This asset includes Novel's marketing arm Gavis and Novel has many products on the market, recently received approval for the "plan B" pill otherwise known as the "morning after" pill. They are also in development of numerous first to file products. For additional information, you can read more about them in Elite's 10k, Novel's website and this article. They have recently acquired a controlling interest in Indian Pharma company Wintac
Elite is not a cash rich company. Their revenues are getting very close to paying their bills outside of R&D expenses and they should be completely cash flow positive by the end of their 2014 fiscal year. Based on recent filings, Elite's operations has a run rate of about $700k per quarter outside of those R&D activities which of course are heavily focused on the massive abuse deterrent opioid products. With about $230k in cash and $600k still available from the current Chairman's line of credit, Elite can basically run their manufacturing business for break even on the products recently launched and just beginning to gain market share. Q4 of their last fiscal year saw a company record $1.5m in revenue, and this past Q was at $721k which was lower due to issues since resolved and discussed on the CC. As these products continue to grow and the many others are launched, these revenues are going to rapidly increase.
While Elite may not have a lot of cash, they also have little debt, about $4 million total. It is a remarkably low number for a company with this much potential, technological experience and assets. Previous shareholders paid for it all.
Elite has a $10 million dollar financing deal in place with Lincoln Park Capital Fund, LLC which is based on the current PPS. As of the last 10q, only $394k was used. As Elite's value grows, the financing rate follows the PPS, limiting the dilutive effect to shareholders. However as noted by Nasrat Hakim at the Rodman and Renshaw conference, they have been meeting with a number of interested parties including a CEO and a Chairman from major pharmaceutical companies. They are looking to partner for both marketing and trials in a profit split type of arrangement. Elite has the resources to move forward with current financing, but having a major partner now will obviously accelerate their growth. Many investors are waiting for Elite to simply sell their growing investment in Novel Labs as well.
So what is the downside? After all this is a penny stock. There are really only two items that I note as having any consequence. One is the share count and structure which includes authorized share count of up to 690m shares. However if all these shares came to bear, you would still looking at only a 56m market cap. Elite's latest filing shows approximately 400 million common shares and fully diluted of about 580 million shares. Based on the current stock price, this represents a market cap of only 32 million dollars which in my opinion makes it remarkably undervalued.
The other item is Elite's notice of default on their bond from the trustee of NJEDA starting in 2009. Elite has put a proposal out there to resolve this issue for a number of years but it is still an overhang that does not seem to concern anyone as interest payments have been made for a number of years now. Here is what it says in the recent filings.
In addition, the Company has received Notice of Default from the Trustee of the NJEDA Bonds as a result of the utilization of the debt service reserve being used to pay semi-annual interest payments due on September 1st and March 1st of each year. The debt service reserve was first used to make such semi-annual interest payments on March 1, 2009 and has been utilized for all semi-annual interest payments due since then, with the Restricted Cash Interest Payments constituting such payments.
The Company has replenished all amounts withdrawn from the debt service reserve for the payment of semi-annual interest payments, as required, and in accordance with the applicable terms and conditions of such replenishments.
There are approximately forty products in Elite's pipeline now, the large majority not launched and those that have launched are relatively new to the market. Revenues are continually increasing and can really only trend much higher as these products are introduced. Then consider Elite's approximate 10% ownership stake in Novel. Now add in the R&D and abuse-deterrent products that brought recognized industry executives to take over top leadership positions, take salary in stock, and merge their company into Elite and you would have a difficult time finding a comparable company with a market cap less than 200 million dollars.
Elite's new CEO believes that if Elite was being evaluated simply on their R&D alone, the stock would be many times higher than it is today. Unfortunately the company's difficult past, the stigma and manipulation and games associated with OTC stocks, and being evaluated based on current revenues have kept the price down but certainly not the company itself. Elite will soon be making many announcements related to these trials and products. Many are due for approval, launch, partnerships for marketing and trials for 2.7 Billion dollar Oxycodone as noted in the Rodman and Renshaw Presentation. Of course the most anticipated event will be the trial results which based on the technology, previous trials and the science behind them, should pass with flying colors. It is the best opportunity I have seen to jump on an R&D play with a high chance for success and expect many times return on your investment.
The CEO is looking to turn this into a billion dollar company and is putting his reputation, time and money on the line. And even if he is a failure, you would still see a profitable drug company with 30 plus approved drugs, numerous ANDA and NDA partnerships, and a growing asset in their stake in Novel Labs. Elite is not only close to achieving the lofty goals that had investors excited years ago, they may greatly surpass them.
I don't believe this opportunity is going to go undiscovered for much longer and at a 33m market cap, the upside is absolutely incredible and there is not much downside at current levels.