Elite Pharmaceuticals, Inc. (ELTP) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to the Elite Pharmaceuticals Conference Call. [Operator Instructions] Before management begins speaking, the company has the following statement. Elite would like to remind their listeners that remarks made during this call may contain forward-looking statements that involve risks and uncertainties and are subject to changes at any time, including, but not limited to statements about Elite's expectations regarding future operating results. Forward-looking statements are made pursuant to the safe harbor provisions of the Federal Securities laws and represent management's current expectations. Actual results may differ materially. Elite disclaims any obligation to update or revise its forward-looking statements, except as required by law. More complete information regarding forward-looking statements, risks and uncertainties can be found in the reports Elite filed with the SEC, which are available on Elite's website at elitepharma.com under the Investor Relations section. Elite encourages you to review these documents carefully. With that covered, it is now my pleasure to turn the floor over to your host, Mr. Nasrat Hakim, President and Chief Executive Officer of Elite Pharmaceuticals. Sir, the floor is yours.

Thank you, Kate, and good morning, ladies and gentlemen, and thank you for joining us today. My name is Nasrat Hakim. I am Elite's Chairman and CEO. This is our earnings call. And our new CFO, Marc Bregman will give us a summary of the company's financials, after which, I'll come back with the corporate update and answer some of the questions that you submitted to Dianne. Marc, you have the floor.

Thank you, Nasrat, and thanks, everyone, for calling in today. Yesterday, we filed our 10-Q for the quarter ended June 30, 2021. We're on a March fiscal year, so the June quarter is our first quarter of fiscal 2022. A copy of the 10-K is available in our Investors section of our website at elitepharma.com. Today, I'll give an overview of the financials and some commentary as well. As always, we received questions and comments from shareholders and Elite followers, and we will do our best to address those questions today. Starting with the income statement; we posted sales of $7.1 million this fiscal quarter, down 6% compared to the same time last year. Manufacturing revenue was down due to timing of shipments as Lannett was building inventory last year, although this was slightly offset by better sales of our other products and stronger licensing fees. Again, our largest product remains the generic version of Adderall, for which we have a strong partner in Lannett. Despite lower sales, however, we posted an operating profit of $1 million, which is $100,000 higher than last year. This is due to a stronger margin of 14% compared to 11% last year. We posted net income of $2.4 million for the quarter. This included a positive fair value adjustment on our derivatives and the sale of past tax benefits. Net income after adjusting for these one-time or non-cash benefits on both the years was $919,000 for the quarter, $130,000 higher than last year. Now turning over to our balance sheet; our working capital continues to grow to $8.5 million, up $2.1 million from year-end. This is directly due to cash flow from operations combined with low debt. So to reiterate, although sales were lower, simply due to timing, a strong margin resulted in income growth versus last year. As I mentioned last call, we continue to have revenue growth in our organic base, but it is the generic Adderall that continues to stand out as our main growth driver. Elite is strong and growing. With that, I'd like to turn over to Nasrat to give an overview of the company.

Thank you, Marc. Our last conference call was only 8 weeks ago. During that call, I outlined Elite's calls for the next 2, 2.5 years. In today's update, I'll make a few comments about Elite's financials. Then I'll update you on safety, manufacturing facility and commercial products, our R&D pipeline, and then we'll go to Q&A. As Marc stated, our revenues for this quarter were $7.1 million. If you recall, last quarter, we were in the $4 million range; last quarter, ending in March of 2021. That wasn't because sales declined, that was because we had not sold what they had in inventory and did not replace it all. Why do I think that? Because the profit split we got from the quarter before where the sales were in the $6 million, $7 million range were about the same. So that really determines how much the sales are. Depleting the inventory is a standard practice in the pharmaceutical industry. Sometimes they build it and you see a fact that might talk about. And sometimes, they depleted when they reach equilibrium and they have money. Depletion is standard practice in the pharmaceutical industry and a fast rate is money for the company, too. But it does have its downside as well. The bottom line from all of this is the following: the sales and profits from Amphetamine IR and ER are solid and getting better. As you know, revenues from the last 3 years went up from $7.5 million to $18 million to $25 million. 2 years ago, $18 million in revenues was the best year ever for Elite. Last year, when we earned $25 million in revenues, that was -- that became our best year ever. I believe that the current year is shaping up to be our best year ever yet in revenues and profit split. You would think that higher revenues and profits would lead to higher stock price. I understand a lot of things about this business, but I do not understand the rationale for Elite stock movement. It seems to be inversely proportional to our performance. The better we do, the worst the stat debts. The stock was higher when we were broke and had to sell shares to survive, than it is now when we are profitable, self-sufficient and self-sustaining. As I updated you before, if you look at the generic sector as a whole, you'll find that the first price of the majority, not all, the majority of the companies have been depressed over the past 5 years. I look and compared 5 stocks this morning. Teva, Perrigo, Amneal, Lannett, Dr. Reddy's. 4 of the 5 stocks, Teva, Perrigo, Lannett and Amneal declined between 60% and 85% in value over the past 5 years while only one, Dr. Reddy's, increased by 30% over the past 5 years. And just to be accurate, Dr. Reddy's increased over the past 1.5 years or so because they changed their business model, and they were following the same pattern as everybody else, but they recovered and to their credit they're ahead. The most interesting part is their P/E ratios. 3 of the 5 had a negative P/E ratio. Their earnings per share are negative, they're losing money. They're Perrigo, Lannett and Teva. Dr. Reddy's and Amneal had a positive P/E ratio. Dr. Reddy's P/E ratio is 45, Amneal's is 87. Elite, like most companies in the industry, have declined from $0.17 to $0.045 or $0.05 over the past 5 years. Our P/E ratio is 6. If we are treated like Dr. Reddy's or Amneal, not like the other 3 that are losing money, just like Dr. Reddy's and Amneal, our stock price would be $0.33 or $0.65 today, just based on substituting their P/E ratio for ours. This is not the only metric to assess a company's value. There are other metrics that are used for company valuation. And we fared very well under those metrics as well. An example will be we have very low debt. The tide will turn. In due time, the stock should go up. In the meantime, we need to stay focused and stay the course and procure our business, starting with our employees and employee safety. Regarding safety, we are operating in a once in a lifetime pandemic. COVID-19 is a pandemic that is affecting all of us. It is affecting Elite, our suppliers, service providers and sales and marketing partners, not only in our business, it's affecting every business. We are following local and federal guidelines on the CDC recommendation. Most of our employees are vaccinated. We are still asking everyone to social distance as much as possible. We are holding meetings via Microsoft Team and conference calls for employees that must be in the same manufacturing suite, we've increased the airflow and circulation. And in addition to hyperfiltration, with installed UV lamps to ensure that viruses and bacteria reach an air conditioning or a heating ventilation system, they will get killed before they enter someone else's office. All non-essential employees have been given the option to work from home. At Elite, we have invested in our employees and it's paid off. We protected them, and they are protecting our business. Elite's business has not been materially affected by COVID yet because we do have multiple sources for many of our materials. We have been able to manage this problem well, and I hope that we continue. This pandemic is going to be around for generations, and it is most likely to morph from an epidemic to endemic. An endemic is when a disease continues to flourish up in certain parts. It's going to be very hard to get rid of this virus. And therefore, we need to manage our business accordingly, and that is why I update you on safety every single time we talk. I have my eye on the ball because even with APIs that we make in the U.S. and Elite buy from a U.S. source, it still scares me because some of the components that could go into that API could be coming from India and China or a country that's infected with a severe case of the COVID-19, even Latin America. On the R&D front, of course, our objective is to grow our commercial pipeline, and we can only do that by investing in R&D and/or purchase new products. Protecting and improving our current commercial product line is key to continuing profitability. The protection part is a joint effort with our sales and marketing partner. We provide them a product with a reasonable transfer price so they can compete. That's our part of it. And they need to penetrate the market and compete with that price. Now expanding the product line is a function of R&D. I shared Elite's call with you 8 weeks ago. So let me recap. Our goal over the next 2.5 years is to continue profitability, continue to upgrade our manufacturing facility, stay cash flow positive, maintain adequate working capital and the rest of the money will be invested in R&D or new product purchases. I get advice from our stockholders telling me to go into the vaccine business because it's lucrative and that's what's happening lately. We cannot do that. In R&D, we have to select the right product that fits our portfolio and can be made at our facility. For example, we're not considered to make injectable streams arrangement. That requires a totally different technology of laminar air and bacterial control and a purified water of higher standard injectable standard. We do not have that. We will pass on that opportunity. I know somebody is offering us the product line and the facility. Opportunities that include controlled or non-controlled substances that are orally administrated either tablet or capsule that are instant release, delayed release or extended release, which sit within our portfolio. These are the things we keep looking for. Once we identified the product and begin reverse engineering, it takes years and a lot of time and money before we run a pivotal clinical trial. I'm telling you this because you'll understand that the first I'm promising we're going to take care -- for end of a year. We have been working for a long time on these products. Many formulations do not materialize into clinical trials of filing because of multiple things you encounter throughout the life of the development process. You may fail the first second and third time before you finally can run a clinical trial or get successful clinical trial and file. SunGen, which has great scientist, success rate was about 25% on the products they worked with us on. We do a lot of force behind the scenes that the public does not know about or hereof. Our goal is to pass and/or file for ANDAs before December 2022. You can do the math and determine how many ANDAs we must be working on our work on to get for viable ANDAs in 2022. Now let me be clear, the formulations that do not work the first, second time are not a last. They can be reworked. You learn from the errors, and you learn what not to do, and you can come back and try again. But that cost delays, time and money. Financial permitting, we intend to do this next year as well, conduct for more clinical trials and file more ANDAs. And hopefully, by then, we still fruit for labels where the first 4 we filed we will be in the process of getting approvals for. This plan is a critical part of getting to and sizing on NASDAQ. On the commercial front, we are profitable and our commercial products and sales and marketing partners are key to continuing profitability. We cannot do it alone. Amphetamine IR and ER continues to be the highest contributors to revenues and profit. Lannett is doing well at market penetration. This quarter's profit split was the highest we have had to date, and I expect that trend to continue. Isradipine and Phentermine are with our partner, Epic. These 2 products are interesting because they have limited competition. Each one has only one competitor in the market. Glenmark, our previous partner, was not able to give them the attention we believe they deserve. We expect Epic to be more effective in the marketing of Isradipine and Phentermine. Let me make a comment in here. It is about market penetration when we have 15, 20 players. But when you're the only one in the market or there's 2 it's about the price adjustment. And when X of us are selling this product, we were making millions. Glenmark was selling them a small little margin above cost. And that is not the way to handle it. That's why we reverted to Epic, hoping that they know how to sell these products. Tagi is doing well with naltrexone and the bariatrics. They are running second in sales of the bariatric compared to KBK, which had 85% of the market, we have about 16%. But we hope that Tagi will capture a larger share of the market as KVK solve their problems with the FDA and the federal government. KVK got in trouble with the FDA. Their owner and the Head of the Quality were invited because apparently, instead of using the suppliers that their and approved the FDA, they bought products from Mexico, which was not approved and a lot cheaper, and we're competing with that for hydroxyzine. So the FDA and the federal governments invited them and they are under investigation, and that could materialize the business for Elite. Loxapine, Prasco is our partner there. We've launched Loxapine capsules in June with Prasco under the label Burel Pharmaceutical. Loxapine continues to be on product surface list, and we hope that Prasco does well with that. Elite is executing one of the growth plans, obtaining product approvals and launching new products. Our sales and marketing partners are performing well. We look forward to another successful year.