Elite Pharmaceuticals Inc (OTCMKTS:ELTP) Financials Reinforce Our Upside Bias

Elite Pharmaceuticals Inc (OTCMKTS:ELTP) just put out its second quarter fiscal year 2017 financials, and the company is up close to 6% on the release. A conference call accompanied the numbers, and we sat in on the call to bring our readers some insight unto what's going on under the hood, and to get an idea of whether there's room for further upside heading into the close of 2016 and beyond.Here's what we learned.For those not familiar with Elite, we'll kick things off with quick introduction. The company is a development stage biotech entity with a couple of core, but separate, focuses. The first is it’s a branded 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 second arm of its operations focuses on bringing generic versions of already established drugs to market. This latter point, while not having the blockbuster potential as the former, is the key valuation factor for us when it comes to Elite; something we'll elaborate on in a little more detail shortly.Elite has struggled to maintain its valuation over the last few quarters, since the agency turned down its NDA for the above mentioned SequestOx. As far as any update on this goes, at least as far as any insight to be gained into the progress of the application, there isn’t too much to go on. All we know is that the company is set to meet with the agency during the third week of December, at which the two entities will discuss a proposal to move forward.But that's not the important thing for us. Yes, SequestOx would be a great addition to the company's commercial portfolio, but as mentioned above, it's the generics that really make the difference here.When you have a biotech company valued at a little over $110 million, said company generally has a pretty robust pipeline with perhaps one or two late stage assets. It has little to no revenues, perhaps a couple of research grants, and its market capitalization is rooted in markets' speculation as to the value of the late stage assets.Elite generated $2.03 million from its generics operations last quarter. For the six months ended September 30, this figure was $4.58 million. That's circa $10 million in annual revenues. Excluding R&D costs (which is something we addressed in our previous look at Elite here), this generics operation is a profitable business.That's a big deal, and it's only going to get bigger. Elite filed a generic application with the FDA this quarter, and intends to file one per quarter throughout 2017. Each of these has the potential to double or triple current revenues with a tiny (we're talking low single digit percentage points) market penetration.The important thing here is the impact of this operation on shareholders. It removes the risk of serious dilution, as the company can (pretty much) fund its own development program. Operating expenses (including R&D) for the three months to September 30 came in at a little over $2 million. On hand at the end of that period totaled $12.6 million. Even without the generics revenues footing the bill, and taking the $1.8 million cost of revenue into account, the company is capitalized through 2018. Additionally, at September 30, all mezzanine equity series (something that has been one a bit of a black mark on the balance sheet) all converted, and are now zero. As management stated, this had no effect on operations, but allowed the company to adjust its balance sheet so that it is no longer showing negative equity. It's an accounting trick, but it tidies things up, and we like that.The takeaway here is that as an investment prospect, Elite is one of the top allocations at this end of the biotech space right now. It's generating revenues that offset a large portion of its development costs, and it's got cash on hand to see it through the foreseeable future. It's got a near term catalyst in the third week of December relating to what could be a blockbuster, and there's large upside potential if the FDA accepts the proposal on that, but even without an acceptance, there's still plenty of potential for long term return.We will be updating our subscribers as soon as we know more. For the latest updates on ELTP, sign up below!Disclosure: We have no position in ELTP and have not been compensated for this article.