Elite Pharmaceuticals, Inc. (PNK:ELTP) Q4 2024 Earnings Call Transcript

Elite Pharmaceuticals, Inc. (PNK:ELTP) Q4 2024 Earnings Call Transcript July 2, 2024

Operator: Good morning, ladies and gentlemen, and welcome to the Elite Pharmaceuticals Conference Call. At this time, all lines have been placed on a listen-only mode. Before management begins speaking, the conference has the following statement. Elite would like to remind the listeners that remarks made during this call may contain forward-looking statements that involve risks and uncertainties that are subject to change at any time, including but not limited to, statements about Elite’s expectations regarding forward 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 files with the SEC, which is 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.

Nasrat Hakim: Thank you, Matthew, and good morning, ladies and gentlemen. Thank you for joining us today. My name is Nasrat Hakim. I am Elite’s Chairman and CEO. This is our earnings call. Our CFO, Carter Ward, will give us a summary of the company’s financials, after which I’ll give you an update and answer some of the questions you have submitted to Dianne. Carter, you have the floor.

Carter Ward: Thank you, Nasrat. Thanks, everybody, for calling in today. Yesterday, we filed our 10-K. That’s the annual report. It’s for our fiscal year ending March 31, 2024 and go over some of the important parts of the financial statements, provide you some context and answer some of the questions. I received a bunch of questions, finance-related questions, I’ll do my best to answer all of those as well as I go through the financials. First of all, before I even started, I got a — first time I ever got this question, somebody noticed that we are qualified as a non-accelerated filer, and they wanted to know if we were going to be an accelerated filer for this year. And the answer is no, we will not. We don’t — there’s certain criteria, revenue criteria, specifically, we won’t meet that for this year.

So starting with the P&L. Total revenues for the year were $56.6 million and that’s compared to last year’s $34.2 million, a $22.4 million increase or 65%. The operating income was $10.8 million compared to last year was $3.7 million, that is a $7.1 million increase or 192% increase in operating income. Got a bunch of questions on why such a big increase, and it’s pretty obvious, the increase is due to the commercial launch of the Elite label product line or, I should say, the successful commercial launch of the Elite label product line. I want to talk a little bit about that and how that has changed our business model in this year alone. Before in the prior years in the past, we had a very different business model. Most of the business we had was from licensing our product to third parties.

Q&A Session

And they would take our product, but they would market and distribute under their own labels. The margin dollars were much lower when you do that. But we also had not the same capital — working capital requirements, investment requirements that we would when we launched our own label. So we had much lower margin dollars, although percentage-wise, it was probably just a little higher margin percentage because we didn’t have that upfront investment. This year, though, we took most of these previous license products, and we brought them in-house. So we had enough products to do that. We had a critical mass. It made sense financially, commercially, and we transformed this business model, this company, and we established our Elite product line.

That required a large investment in working capital and infrastructure, which we were able to provide. And we had the critical mass that made it commercially viable. So then we had significantly higher revenues, as you see from our financials, significantly higher margins — margin dollars, profit dollars, as you see. But if you look at it percentage-wise, I did get a question on that. So if you look at it percentage-wise, it’s slightly lower as a percentage, even though the dollars are much bigger. And the reason for that is the upfront investment, the working capital and the infrastructure, the overheads that are required to support the in-house marketing and distribution operations that we’ve begun. But the dollars are much, much bigger.

So that’s what we’re looking for. So if you look at after one year, this is our first year of the Elite product line. We’ve become established in niche markets where as a trusted supplier, we’re expanding our product line and we have — it’s just been a very successful strategy to bring it in-house, and it was well executed and the P&L demonstrates this success. One thing that I want to talk about, when you look at the P&L, P&L shows you our results for the year just ended. It’s backward-looking. It says, “Well, how did you do this last year?” I get a lot of questions on more future-related, more forward-looking questions. And there’s a part of the financial statement that gives you an insight into a forward-looking view. And that is we have a footnote 18, it’s a subsequent event footnote.

It’s something material events that occurred after March 31. And there’s a couple of items in there that you should note, we have the approval of methotrexate, which happened about a month or so ago. So that’s a product that we had filed before. We developed it. We filed it and we filed an ANDA. It got approved. Now it’s approved and that can be commercially launched as well as just less than two weeks ago, we acquired three approved ANDAs which are also commercially, there are two ANDAs in April for commercial launch. Nasrat will, I’m sure, talk a lot about those in his presentation. But from me, from the finance perspective, a generic company is always looking for new products. And you look at our financial statements, you look at the subsequent events footnote and there you go, right there.

We have four approved products right there. So that’s a little — to answer all those questions I get on forward-looking, that’s probably a place to look for in our financial statements. I received a question on why our operating income is $11 million, but the net income is $20 million. So that’s probably the next part. Moving down the P&L statement. You’ll see there’s three large items below the line in the other expense income and even the income tax line. All of these are noncash. All of these are more or less technical accounting, GAAP accounting that we have to address. So the first 2, there’s derivative and stock-based liabilities and these are items that fluctuate with our stock price. Stock price goes up, we record an expense, stock price goes down.

We record revenue. There’s never any cash. We never have to pay out cash nor for the expense side, nor do we have received cash for the revenue side. So I’m happy to see the price go up. I hope you all are, and I hope it continues. While I’m on an area, I did receive a question on the stock-based liabilities about what’s going to happen with them. And it’s really kind of a moot point now because all of the stock-based liabilities, they have been paid by March 31, 2024. They’re no longer there. We no longer have these liabilities. And so there’s really nothing to discuss going forward with regards to that. The derivatives, however, they’re still on the books. Those are the warrant derivatives, and they’re still there. That’s two of the three items.

The third item, if you look further down, it’s our income tax expense item, we actually have an income tax benefit of $19.6 million. So that adds to our income. This is related to the deferred tax asset, which is on our balance sheet. There’s a deferred tax asset of $22 million on our balance sheet. And this is really our net operating losses that have been accruing over the last 20-plus years, the NOLs, as we call them. They’ve always been there every year. Except due to accounting rules, Elite wasn’t profitable back then. So we were required to place a reserve on them because Elite wasn’t profitable and we weren’t able to assume a sufficient level of profits going forward to allow us to remove that reserve in the past. But now those doubts are gone.

The reserve was released. We were able to demonstrate sufficiently — sufficient expectation of future profits, meaning that these NOLs will be available to us. They’re really tax credits that we apply against our future tax liabilities. So to do that, the result is a onetime noncash increase in income, and in this case, it’s $19.6 million. So that’s adding to our income kind of like a negative income tax. It’s below the line and it’s a onetime increase. It’s not exactly noncash because as we go in the future, these NOLs do have value to us. They are tax credits. So you can look at it as the next $22 million in taxes that we owe to the IRS will be paid by utilizing these tax credits. So it’s quite a valuable item to us going forward. So you put all those three items together, you end up with net income that’s larger than operating income.

We focus here on the operating income. That’s the real growth. That’s the real business. That’s what generates cash and that’s what we really work on. The other is something that I myself have to work on. These are technical gap accounting in nature. And I just take care to make sure that they’re properly accounted for and properly disclosed. So moving on to the cash flow statement. We had an operating cash burn of $3.3 million, and you compare that to a positive cash flow for the prior year of $3.3 million. So we’re from a $3 million positive to $3.3 million negative. Again, this is a textbook example of a company that has gone through a rapid growth stage. There’s — whenever a company encounters that as we have, there is an increased need for working capital, and that’s a strain on cash flow.

So we have increased inventory and receivables during this year of around $20 million. So that’s using our cash to support the growing sales, growing sales means more inventory, it means more receivables, it means a strain on cash flows. And you’ll see that demonstrated in our cash flow statement. But it takes around 12 months when you’re going through this rapid growth for the receivables and the inventory to start, what I call, rotate into positive cash flows. You’ll note, if you go back to our 10-Q in December, for nine months, we had a cash burn and operating cash burn in December of $5.3 million for nine months, and here it is 12 months and we have gone $2 million towards the positive. So that we went from $5.3 million cash burn to $3.3 million cash burn.

So this shows you the rotation has occurred, and we’re heading in the positive direction. Before I move on, I did get one question on accounts receivable, on the payment terms, and we have pretty standard payment terms generally net 30 to net 60 days, just like everybody else in the industry, nothing unusual there. On to the balance sheet. The thing I always look at is working capital. It’s current assets minus current liabilities. We had working capital that has essentially doubled. We went from $14 million to $28 million during this year. Easy explanation, profits drive working capital and our financials, they clearly demonstrate that. Moving down another interesting item, I note, on our liabilities, our current liabilities, and that’s the accounts payable and accrued expenses.

Those are our operating liabilities. They were up slightly. They were $8 million this year compared to $7.5 million last year. But you really have to look at — so we had a slight increase in these liabilities, but our inventory and receivables were up by $20 million. So such a large increase in receivables and liabilities, and it was funded through profits, not through payables and accruals. It just shows you that our balance sheet is strengthening, thanks to the great performance of our P&L. So rounding out the balance sheet. The strong balance sheet is if you look at our equity section and again, our equity, our net equity went from — doubled, went from $29 million to $58 million. Again, that’s what happens when you have a profitable business.

So to sum things up, these are the strongest financials ever for Elite. I don’t think that’s without — if there’s any debate on that. We have record revenues, we have record profits. The balance sheet continues to strengthen. Our working capital is increasing continues to increase and the debt is low. Looking forward, the financial statements, we have four approved ANDAs that were added after March 31. We hope that they’ll contribute to future revenues, future performance, but they are leading a well-stocked pipeline pointing towards future continued growth. So all things considered, I’d say, was a good year, a very good year. Now our CEO, Mr. Nasrat Hakim, will provide his comments.

Nasrat Hakim: Thank you, Carter. That was a very nice comprehensive coverage of the financials. Let me say a couple of thoughts of our debt before I go into sales and distribution, research and development facility and infrastructure and then finally, the Q&A. As Carter stated, $56.6 million in revenues make this our best year ever. For the past five years, every year, our revenues have been better than the year before, and therefore, it’s been our best year ever until the next year. And ladies and gentlemen, next year will be our best year ever again until the year after. Last year’s revenues were $34 million. Our goal for the current fiscal year was $40 million. Then I think around November, I modified the number to north of $40 million.

And in February, we thought, okay, we’re going to hit $50 million, and we ended up with $56 million. Well, that’s embarrassing. But I’ve learned from my mistakes, Therefore, I am not going to say that this year, our revenues are going to be $60 million. And then in November, I’ll tell you we’re going to go north of $60 million and February, Ops we’re going to hit $70 million. I’m just going to skip all of that right now and go straight for skipping the 60s, I’m predicting that we’re going to hit a minimum of $70 million for the fiscal year ending March 2025. You are not sitting in the room, but Carter just hinted, and I think maybe Nasrat hinted too. However, that is the least I can expect on the current run rate. I have no doubt and no issues we’re going to achieve that.

What I think will happen is that some of you will start calling Dianne now and saying, well, he said $70 million, does that mean in November, he’s going to say we’re going to be north of $70 million, and then by February, he’s going to say we’re going to skip to $80 million? That is not what I’m saying. But if that happened, it would be embarrassing. Not long ago, our income was in the single digits, $7 million. Then we graduated to the teens, 20s, 30s, we skipped the 40s and now we’re in the 50s, and we’re going to give skip to 70s and go into 60, that’s all because of our sales and distribution and the excellent pipeline we have been working very hard on over the years. Elite has successfully transitioned from a CMO private label model to a national distributor with the Elite label.

The transition to direct sales with the Elite label has been a great success. The revenues and profit growth demonstrate that a testament to our great team, especially our operations and sales organization. The most important products that Elite has right now are the mixed amphetamine, most of the revenues and profits are coming from these products both the IR and ER. We have strong demand in the market for these two products. And we have rose to the occasion. Even though DEA quota has been a challenge, signing up contracts has been challenged, working with WAC prices and distributors have been challenged. The numbers today demonstrate the success of the team in that area. Speaking of DEA, that was just at the site a couple of weeks ago, conducted an inspection and the inspection was successful with no observations.

Isradipine and tremepramine, both have strong market share and also good margins. They do not contribute as much of amphetamine IR and ER, but they are very solid products that are great for the base of the company, and we have had Isradipine for many, many years. In addition, Elite will shortly be launching two new products. Generic methotrexate that we just got an approval by the FDA for not too long ago. And genetic APAP with codeine, that’s coding with acetaminophen that we have had for a while, but we believe now is the time for us to get back into the pain management business. This will be a great test market for that. In addition, our foundation contains two partners: Prasco and Peggy precision dose. Prasco has a nonexclusive license for the Amphetamine ER and sells it under their Bural pharmaceutical label and precision dose, who is our longest partner.

We’ve had them for about 13 years now. They sell naltrexone and phentermine. Elite maintained a strong cash position during our transition to sales. We have supported working capital needs as well as an R&D pipeline while maintaining our cash levels. Regarding the research and development pipeline, Elite has three ANDAs filed under FDA review. A generic dopamine agonist ANDA for the treatment of Parkinson’s disease and ANDA for the treatment of pain management, we have already disclosed its OxyContins, a generic, a central nervous system stimulus ANDA used for attention deficit disorder. Two out of these three are needle movers and approval of one of them would have a huge impact on our revenues for next year. That’s when we’ll talk about skipping the 70s.

FDA review continues for these three ANDAs, and Elite will issue a press release upon approval. Elite has just recently reacquired three ANDAs. Methadone, Oxy APAP or oxy with acetaminophen, which is generic for Percocet and hydrocodone with acetaminophen, which is the generic for Norco. Elite will transfer and prepare these products for the market. We believe the time and market needs exist now and Elite has the capacity to handle these products. All of these products require manufacturing infrastructure that matches the productivity that we are counting on for the future. Our success in moving to direct sales dictated that we expand into an additional 34,000 square foot facility. That is literally if you’ve ever been to Elite across the street, it’s next door.

We have two buildings, 135 and 165, and the new building is closer to manufacturing than our old buildings. We closed the deal on the building in January. The permits were obtained and the construction is done. IT, servers, cameras, ADP security are already, the Vault is built. The Department of Health inspection was just conducted and done. After that, we need the CDS and then the DEA will come in and approve the facility, and I expect that portion of it will take probably six to eight weeks. We installed a state-of-the-art packaging line that has a minimum of 3x the current capacity of the packaging line we have. Just to emphasize, as soon as the FDA approves the new facility, we’re not going to forego the old packaging line, we’re going to move it into the facility and that will also increase the capacity further.

So we are running the entire company with that current packaging line. We will still have it and move it to the new facility, but in the process, we have purchased a state-of-the-art packaging line that has 3x the capacity of the old one. Now we have to — it’s already installed. We have to qualify it and that’s happening right now. After that, we need to make three lots on it. Put it on stability for three months and file with the FDA a prior approval supplement to trigger an inspection. So the FDA will come in and approve it. And that is when the facility will be fully operational for commercial use. Today, the facility is fully ready, but you have to go through certain steps to get DEA approval and the FDA approval for you to be able to utilize it for commercial use, and that is exactly what we’re doing right now.

At the end of the day, our capacity has increased substantially whether it is from packaging or encapsulation or any aspects of making the finished product, we have duplicate equipment of almost everything, and we can easily double our capacity. In the case of packaging, quadruple our capacity. In summary, Elite has shown strong growth this year and is executing its strategy of commercial, sales and distribution and research and development growth. Elite has supported working capital growth and pipeline development costs while maintaining and given our focus on new products. Let’s go to Q&A.

A – Nasrat Hakim: I wanted to take the time and answer this question because I thought it’s a very intelligent question. And it is an early on question for our business. So this is an excellent question. It is a futuristic in that a lot of the machines that we have, they have not incorporated AI into them. They have a component of AI, but it is not as sophisticated as could be in the future. But for everybody who heard the question, I want you to think about this. Any time you think of optimizing your company, you think about it from beginning to end and incorporating AI into the formulation development and optimizing the formulation is something that is being utilized right now. We do it on a smaller scale, we use design of experiments.

But when you incorporate AI, it will cut down the time. So instead of running 60 experiments, you’ll run 10 or 15, okay? So it saves a lot of money in that. It is incorporated into clinical trials, okay? As a matter of fact, even Dr. Smith, our Chief Legal Counsel, who had a PhD in biochemistry and also Juris Doctorate. At one time, he was patterning — him and his friends who are patterning a certain genetic sequences that look like could potentially have a pharmaceutical effect. They don’t know if they have it or not, but they look like they have receptors that will fit into the body and cure diseases, so they went ahead them patent them to figure out later on what to do. And all of that, you do by using AI in order for it to tell you, hey, this specific receptor will require this specific configuration.

So if you start to find this configuration in the body and patent them, they become yours and later on, you can utilize them for different diseases. Same thing in manufacturing and quality, optimizing the equipment is a straightforward thing with AI. And finally, sales and marketing. So from beginning to end, from starting the formulation until you get to the market, utilizing AI is very important. We do that, as I said, all of our machines have a component of AI to them, but it’s not really what they could be nowadays, and we look forward to improving them in the future once such things become available. There were a lot of questions that were not as good, and there are the standard normal questions about why they have so many stocks and why does it make give us everything.

But I will read one of them because I would like to make a point regarding the stocks. Why does Elite need so many shares outstanding? If the company’s objective is to benefit its shareholders, then does it really make sense to have a lot of stuff. All of this is rather meaningless statements that really do not deal with the core issues. The core issue is that Elite has a problem way back when we had the Series D and then Elite, throughout its history, was going bankrupt and Epic Pharma came into help and they had the strategic alliance — strategic alliance agreement triggered the Series D to issue even more shares in order to satisfy their flaws. Epic, which almost about 50% of Elite for $3.5 million also brought any investors to buy more shares to keep the company going.

So we had a lot of shares distributed to make sure the company survive. Then I joined the company and after I joined the company, I had the simple philosophy and that is, you know what, I don’t want to borrow money because when you borrow money from people and a clinical trial fails, they come looking for it and they take your company. So instead of doing that, we had the Lincoln Park deal and I sold shares in order for us to keep the company going, okay? It is all of these strategic moves that led us to having a lot of shares today. Could we have done things differently? Yes. Would it be more successful? I don’t think so. I think we would probably be bankrupt today if we didn’t have the number of shares we have that can be remedied with the reverse split, and we’re not going to do that at this time or at any time, most likely unless we go to NASDAQ, which becomes a requirement.

But all of these things that keep getting bought up and sent to Dianne don’t really add any value. And that’s why I don’t address them. I want to use this one specific example in order to drive the point stop sending these questions that are being ignored. Partnerships. Tagi and Precision Dosing, is the partnership with Tagi is still beneficial now that Elite is marketing product under the Elite label. Honestly, it is. Tagi is our oldest partner. We’ve been with them for over 13 years now. And what they do is they have a little niche in the bariatrics and they are doing a good job with that. The contract has a finite date another 1.5 years or so on it. And when the time comes, we’ll sit down with Tagi and see what they want to do and what we want to do.

But as of now, I have been happy with them. They have been a partner, as I said, for 13 years, and they have benefited and so have we from this partnership. A question about NCIBs technology. Are you considering using SequestOx technology to develop is not to approved [indiscernible] NDA or other drugs. Not at this time, our patents and know-how have a lot of value, and they add to the company’s valuation, okay? And having them will entice someone to buy the company and take on that task and they’ll have enough money in order to run all of these clinical trials to run NDA. Right now, ever since we created the three baskets, I have a lot of things in motion, but the one that’s being most profitable as our own products. And we’re going to stick with that for another year or two because I see the revenues, as I said, increasing every single year and every single year, is going to be our best year ever for at least the foreseeable future, that’s few years.

Last set of questions on Nostrum. Why did Nostrum ever — did not from ever launch the opioid they purchased from Elite? Good question to ask sued and they did not want to do that. They really persisted at the time because they had the money and it was a good deal. And they figure that when things when the tide changes, then they’ll go ahead and launch it. But financially, they’re not doing very well. And when we made them the offer of giving it back to us for the same exact price we gave it to them they jump at the opportunity. Why did Elite led buy back the product? Well, for multiple reasons. So I’ll tell you about first, while we sold the product. More than five years ago, five years ago, when we were making $7 million in revenues, we were operating at a loss.

We had no money. So selling these five products at $1.5 million total was a massive amount of money for us. The alternative was for me to sell stocks at $0.03 to raise the $1.5 million or sacrifice this ANDAs that we were not going to market anytime soon because of all of the lawsuits and all of the issues that are happening in the industry. It broke my heart to sell them, but you had to. I’ve given this example before, and I’ll do it again. When you are at Costco, you can go to the vending machine and buy a bottle of water for $0.25. When you are at a play and on New York and Broadway, they sell a bottle of water for $5. Well, if you were in the [indiscernible] desert dying of thirst, you will pay $1,000 for it. So the price of anything is really proportional to your need, we wanted these products.

We wanted to give them we couldn’t afford to so we sold them. Now that we finally are making money, and we noticed that the company that bottom is not doing as well, we approach them with the same exact offer. We said here is the contract. We reversed the name, the buyer to the seller and we’ll give you back the money and we want three out of the all 5, not all five and they said, yes. So to us, it turned out to be great because in essence, we got an interest-free loan for five years. And the stock price was $0.03. So if we sold the shares we would have had so like 40 million shares in order to be able to raise the money while now the stock price is $0.20. So we made 5x our money really an interest-free loan. All right. So why don’t Elite buy back hydromorphone from Nostrum.

That was one of the five. We bought three and there was that, and then Phendimetrazine — Phendimetrazine was the last one. Well, Phendimetrazine, we have a duplicate. Hydromorphone is a good product. It’s a very good product except our hydromorphone had only the six milligrams. We don’t have the four and two. And when we try to make the four and two, you have to change the formulation because you cannot use the same formulation for the six and reduce it. So it’s not dose proportional, okay? We have to come up with a new formulation that requires a lot of headache. And for the money and effort, it was awarded, we have bigger products to focus on, such as the needle movers that we have discussed before. Does Mr. Hakim plan to produce the products that we recently acquired.

Of course, that’s why we acquired them. And that’s why we are building up the new facility and expanding it to free up space in the old facility in order for us to make all of these products. That was the last question I have. So with that, we conclude this conference call, and we will talk to you in six weeks. Thank you, Matthew.

Operator: Thank you, everyone. This concludes today’s event. You may disconnect at this time, and have a wonderful day. Thank you for your participation.