Elite Pharmaceuticals Inc (OTCMKTS:ELTP) Remains Massively Undervalued

One of our most undervalued opportunities in small-cap biotech right now is­ Elite Pharmaceuticals Inc (OTCMKTS:ELTP). The company is down more than 40% this month alone, and a massive 65% from July highs, and while we understand where these declines have come from, we disagree with them from a fundamentally representative point of view.For those not familiar with the company, it is probably best known for developing an abuse deterrent opioid called SequestOx, which it is currently trying to get approved in the US by way of a pending new drug application. The FDA turned down the application in July, issuing a complete response letter citing some concerns rooted in the potential for overdose. This is where the vast majority of the value loss over the past few months has derived from, and once again, we understand this assessment. However, and again, we don't feel it is representative of the magnitude of the issues surrounding the development phase drug and – far more importantly – the company's ongoing bread and butter generic operations.Those who have followed the company for a number of years will already be aware that Elite's goal from the outset was to develop a profitable generic operation, and use this operation to offset the development costs associated with bringing new drugs to market in the US. The company put out its first quarter fiscal year 2017 earnings in August, and the numbers highlighted the fact that it has executed on this long-term strategy to great effect. The earnings report came out just a few weeks after the CRL issue, and we think this might have overshadowed the impact of the numbers.In turn, we think there is an opportunity to get in on this overshadowing, ahead of a market revaluation.We'd like to focus on a few key points in the latest quarterly report to illustrate our point.We will kick things off with the obvious – revenues. In the report, revenues is broken down into manufacturing fees and licensing fees. Manufacturing fees accounts for the vast majority of the revenues reported, and it represents the sales generated from its generic operations. For the three months ended June 2016, Elite recorded just shy of $2.6 million manufacturing fees revenues. This was up from $1.7 million during the same period a year earlier.More interestingly, and perhaps more importantly depending on which way you are looking at it, operating expenses for the period (total) came in at $2.4 million. This includes $1.6 million in research and development costs. Why is this important? Because total operating expenses came in lower than the revenues generated from the generics operation for the quarter.Of course, this doesn't take into consideration cost of revenue, but even with that factored in, generic operations revenues are covering all costs other than a portion of research and development, for which it is footing the bill. There are not many biotechs with the market capitalization Elite currently holds that have revenues that outstrip research and development costs.And that's not the best thing. The company is focusing on dramatically increasing its generics operations revenues across the coming 12 months. It just submitted an ANDA for a generic formulation of Percocet – a market worth $700 million, which if the company can penetrate by just 2%, it can double its current product revenues. Further, management expects to submit at least one further generic to the FDA for approval every quarter between now and the end of 2017. That means we have a near-term catalyst for the fourth quarter submission, and then one further catalyst slated for each quarter over the next 12 months. Each one of these has the potential to inject multiples of the company's current product revenues into its financials.The point we're trying to make here is that Elite is valued at its current price based on market response to the SequestOx CRL, rather than its underlying generics operation. When markets realize this, and we expect they might have done last quarter if the CRL didn’t draw attention away from the quarterly report, we're probably going to see an upside revaluation. An entry at current levels offers an exposure to that revaluation.Subscribe to our newsletter below and we will bring you more of this under the hood type analysis to give you the edge in the biotech space!Disclosure: We have no position in ELTP and have not been compensated for this article.