Elite Pharmaceuticals: Swinging For The Fences

| About: Elite Pharmaceuticals, (ELTP)

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In my previous article, titled Elite Pharmaceuticals: Call It A Comeback Story, I explained how Elite Pharmaceuticals (OTCQB:ELTP) had turned the corner and was on the verge of achieving the goals that had investors excited prior to the market crash. This is a follow up to that article and will review recent and highly significant events. As the company continues to execute on their business plan, it is becoming more and more likely that Elite is going to once again be a major player in a huge market.

Before the market crash, they were on the AMEX and were at the forefront of this segment. Now this company is fundamentally stronger and able to finally bring these products to trial and ultimately to market. The technology has always been sound and new leadership has been meeting and exceeding their aggressive goals. This is a unique long term opportunity to take on minimal risk and potentially hit a home run.

Here are the latest events to be covered in this article:

Elite Announces trials started for ELI-201 and next products scheduled

Elite has finally begun the trials that have been anticipated for several years. A twice daily Oxycodone (Oxycontin) product identified as ELI-201 has entered a short pilot bio-equivalence study on December 5th. Oxycontin represents a $2.7 billion dollar market within an eight billion dollar opioid market. This is likely the biggest news in company history.

However, armed with a truly modular technology, Elite is attacking this market on many fronts. Elite announced a second unnamed product which enters larger pivotal BE studies January 10th. Then there will be a pivotal BE study in the beginning of March for ELI-201. In the most recent conference call, the company also noted that a third once daily Oxycodone product will be trialed in that same time-frame. There is no once daily product on the market.

Overall, we now know that Elite is working on at least four abuse deterrent opioid products. Oxycontin, once daily Oxycodone, a morphine product and a third currently unnamed Oxycodone product. This first trial should conclude on approximately 12/22. Elite has been through similar studies and saw excellent results.

Elite has hired Camargo, a leading expert in the field at pursuing drug approvals via the 505(NYSE:B)(2) route. This will expedite the process and ensure that the company is able to deliver the type of data the FDA will require in order to garner an approval. This is an abbreviated NDA process which will limit the number of years (3-5) Elite will be able to garner exclusivity but they will use their ever growing patent and IP rights to limit competition.

Another consideration is will the FDA give this product abuse-deterrent labeling? As we know, they will not approve any Oxycontin product unless it shows a significant level of abuse deterrence. A study published September in the Journal of Psycho-pharmacology 2013 27: 808 J Psychopharmacol notes that a hypothetical ER Naltrexone and Oxycodone product exhibits the least amount of attractiveness, value, likelihood to abuse, overall desirability, and street value.

"By contrast, ORF and the hypothetical oxycodone/naltrexone product were ranked the least attractive, least valuable and least desirable opioid products, as well as the opioid products least likely to be tampered with."

If you take a look at slide 7 on this presentation from the Abuse Deterrent Formulation Meeting held in Bethesda Maryland, it shows the results of this study and how this type of product ranks in these critical areas. Presenters were some of the most educated in the field ranging from the FDA to Scientists and university researchers to senior leadership at numerous related companies.

The reason this is so important is that there are basically three key areas for Elite to overcome in order to reward their shareholders with massive returns on their investment.

  1. Will the product relieve pain and perform similarly, i.e. is it "bio-equivalent" to the branded product?
  2. Will Naltrexone be sequestered?
  3. Will it be considered to be abuse-deterrent to drug users compared to regular Oxycontin or even new Oxycontin which may have set the bar for approval?

Just based on the science of the product, answer three seems to be clear and this study re-enforces what management obviously believes as does Pfizer for that matter as they pursue their one bead product. The first two questions will be settled soon but since Elite is already a very capable drug manufacturer being led by incredibly experienced industry veterans who are personally invested, and trials are being managed by Camargo a leading expert in the field, the odds are very good.

Elite is about to be awarded a critical third patent in the Abuse Deterrent Field - 13/863764

On December 12th, per the USPTO database this was noted as "Notice of Allowance" which indicates the decision to award a patent. Elite is known to have tech that is very modular by applying a two bead concept incorporating an agonist (opioid) bead with an identical antagonist (naltrexone) bead.

What if I told you that this patent was for a one bead system, layering the agonist over the antagonist on the same bead using Elite's patented formulation?

If you read through the patent claims, it becomes apparent that this is a different tech then the other patents and it is for a single bead option similar to Pfizers ALO-01 and ALO-02.

As I note in my very first article on this subject, Actavis: Abuse-Deterrent Opioid Connections, there are significant connections between Actavis (ACT), Alpharma, Watson and this one bead concept used in the Morphine product Embeda. Watson was being sued by Pfizer (NYSE:PFE) over IP and the Embeda product, and Actavis was the manufacturer of Embeda. Pfizer/Alpharma/King was sued by Purdue before that and had to reach a settlement over IP as well. And who was part of executive leadership at both Actavis and Alpharma (where Embeda was developed)? Mr Nasrat Hakim....Elite's new President and CEO. Embeda is approved and expected back on the market in 2014.

A patented one bead system could unlock the IP and legal requirement on companies looking for technology in this field and possibly compete directly with Pfizer and Purdue to make generics of these one bead products. Would Actavis want to develop their own Embeda or other similar products such as ALO-02? What would that be worth to a company wanting to market this type of product or need legal IP coverage to market their products? According to the divestiture agreement between Actavis and Watson, Actavis maintains the right to develop an Embeda product on their own. Embeda is also known as ALO-01.

Pfizer is also developing ALO-02, using this concept to compete in the same 2.7B billion dollar market for twice daily Oxycodone (Oxycontin). So how would IP covering this type of product be valued? Pfizer acquired King Pharma for $3.2 Billion dollars to acquire various IP including the one bead technology that they are applying in their approved Embeda and ALO-02 products. These one bead abuse deterrent products have been key in this field, but what is probably most important to Elite Pharmaceutical investors is the continued validation and education regarding the agonist/antagonist approach.

However, by showing that they have the same type concept in their arsenal as Purdue and Pfizer, this patent obviously adds significant value to the company. Considering the magnitude of the opioid market at over Eight Billion dollars, and Pfizers pursuit of this technology and product line, owning a one bead type technology may very likely be worth more than Elite's current market cap all by itself. Companies work for years to develop and sell this type of technology. Elite not only has their own product line but also a real footprint in their competitors IP backyard who happen to be some of the largest drug companies in the world.

Financial Results 2nd Quarter 2014

Elite is both a manufacturing company and an R&D company. What is so significant is that the company is generating cash flow above their operating expenses to fund their massive R&D efforts. This was done on only eight products, some just launched and relatively new to the market. As noted previously, Elite has 12 more approved products pending transfer and launch, others pending approval, and in development. Some of these new products have only one or two competitors.

Some highlights from the report:

  1. Revenues up ~60% from quarter prior
  2. Revenues up ~83% from year prior quarter
  3. Revenues up ~55% year to year
  4. Inventories up almost 100% to $1.7m
  5. 686k Loss from Operations includes rapid increase in R&D (4x y2y) up to $855k - Elite is generating cash flow to fund R&D
  6. Almost all preferred shares converted resulting in ~500m shares outstanding representing a market cap of approximately $55 million dollars.
  7. Utilization of LPC financing for ~40m shares, ~$800k on hand as of the report date

Highlights from the Conference Call

Often the quarterly conference call is the only opportunity for the company to speak directly to shareholders and give forward looking guidance. This call was no exception. I felt it important to include some of the highlights from this CC considering the rapid growth, momentum and anticipation of upcoming events.

  1. Agreements being discussed with a major pharmaceutical company(s) but they may wait for trial results to find a deal more to Elite's liking. Not going to take a bad deal just to make a deal and prepared to market the products on their own if they cannot get fair value.

  2. Revenues up significantly as noted above and really just getting started due to the newness of some products and the large number of products pending transfer and launch. Not including the abuse deterrent opportunities.

  3. Pivotal trial for Abuse-deterrent once a day Oxycodone to take place in March. Previous market estimates put a once daily Oxycodone at $800m.

  4. Ongoing discussions regarding once daily non-ADT Oxycodone with a partner in Europe. Previous estimate of $400m.

  5. An additional unnamed product using Oxycodone also to be announced. This is the 4th ADT Opioid product in development.

  6. Poison Pill filing was to ensure companies can't just buyout the company instead of partnering.

  7. Cash flow payback of the notes to Mikah is expected to be three years. - $10m in cash flow to Elite projected

  8. Epic Pharma will sell small percentages of their holdings from time to time to get liquidity to pay for the milestone payments, costs of manufacturing and transfer of Elite's products and enhance their own R&D line and conduct trials.

  9. Isradipine is the first Epic partnered generic, expected to launch within six months and has one competitor in Actavis.

Elite Pharmaceuticals Announces Manufacturing and License Agreement for Twelve Generic Products

As discussed in the CC, Elite had proposals from various companies but Epic provided the best overall opportunity to market and launch these products. The reason this is such a beneficial deal to Elite is that Epic is responsible for the costs associated with the process of transferring these products. This eliminated additional expense to Elite of up to two million dollars. Essentially, Elite will be able to collect significant profits from these products without much of the transfer or overhead expense related to transfer and manufacture. That means almost instant profit and generation of cash flow. This first product is Isradipine, has one competitor and the transfer has already been submitted to the FDA under CBE-30 guidelines.

Some highlights from this agreement

  • Elite received a milestone payment
  • Elite receives a milestone payment for each transfer submission to the FDA
  • Elite receives a milestone payment for each approved transfer
  • Elite receives a monthly license fee based on sales
  • Six Products are exclusive with Epic and six are not

Elite's Chairman of the Board converts loan principal to non interest convertible note

Elite's former CEO and current Chairman of the board Jerry Treppel has decided to forgo 10% interest on his loan instead opting for a convertible note potentially increasing his ownership by an additional six million shares. That is six hundred thousand dollars additionally in company stock. Here is what he said:

"Elite is now in the best financial, operational, and product development position in its history. Elite is only days away from the beginning of its first human clinical trial on its twice daily oxycodone/naltrexone product. I welcome the opportunity to substantially increase my equity position in the company."

So you also have the BOD paid in shares, and the CEO paid in shares, who also bought 11m shares before he even came to Elite. I think it is fair to say that they believe in the technology and the company. When you consider investing in a small company it is always important to see senior leadership with a significant amount "skin in the game".

In addition, on October 16th Elite's Nasrat Hakim also made a 1 million dollar unsecured loan to Elite. Here is what he notes in regards to this loan.

"this credit line matches the credit line already extended by our Chairman, Mr. Jerry Treppel, and when combined with the previously established Lincoln Park equity line, is another step in our endeavor to secure the critical mass financing which is required for the further development and eventual commercialization of products utilizing Elite's patented abuse resistant technology.

I firmly believe in the superiority of Elite's technology and am grateful to Elite's Board for allowing me to demonstrate my confidence by providing much needed funding to help Elite achieve its potential."

Elite Files form SEC Form 8-A12G

On November 15th, Elite filed form 8-A12G, better known as a "poison pill". It puts caveats in place which make it extremely difficult to attempt a hostile takeover of the company. Elite is incredibly undervalued. Try and find a profitable drug manufacturing company with twenty FDA approved drugs and another ten to twenty in development, pending approvals etc. What would a comparable market cap be for such a company?

Then take a look at companies in the ADT market like Acura (NASDAQ:ACUR) and (NASDAQ:PTIE) and compare their market caps. Then consider that Elite probably has as good or better chance at an approval as any of them.

Elite's ADT products are truly modular making it easier to transfer from one opioid to the next. This puts a potential value on the company into the billions of dollars due to the possibility of making a play for market share of any and all products in the entire eight billion dollar opioid market.

What would that be worth to a major pharmaceutical company with the financial backing to make it happen?

Now look at the market caps of these two types of companies and what do you come up with? $200 million? $300 million? Elite is currently at about ~$55 million. Here is what the CEO said regarding discussions with potential partners and the SEC 8-A12G filing:

"It is really more for security purposes. But I will tell you this, when I meet with people, I evaluate them as they are evaluating me and I look at several CEOs and when you wonder, should I spending amount of money on partnering with Elite or should I just go out with this cheap share and buy half the company and just own the whole thing, it makes you think to protect -- it's in your best interest to create a program like this to prevent that from potentially happening."

[Editor's note: The author has retracted the section that originally appeared here.]

The next few months will be huge for Elite

Over the next few months we should hear about the results of the trials and new products entering trials. Patent 13/863764 will be officially released to Elite, and possibly a partnership announcement from these ongoing discussions. There are multiple products pending approval and the first of the twelve products with Epic should launch and others transferred to launch.

Earnings are going to continue to rapidly increase as products are growing and new products are being added while Elite collects milestone fees from the Epic agreement. Worst case scenario for Elite investors is they own a piece of a rapidly growing and profitable drug company. Best case is the abuse deterrent products perform as expected and the company sees its value grow very sharply. Both of these scenarios make this company such an appealing opportunity.

On one hand you get to swing for the fences and have a good chance at hitting the homerun. And if for some reason it doesn't happen, you get a profitable, rapidly growing drug manufacturing and development company as consolation. I think it is looking more and more likely that we are going to get the homerun.

Disclosure: I am long OTCQB:ELTP. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.