| ELITE PHARMACEUTICALS INC /DE/ Item 1A Risk Factors |
| 11 ITEM 1A RISK FACTORS In addition to the other information contained in this report, the following risk factors should be considered carefully in evaluating an investment in the Company and in analyzing the Companyapstas forward-looking statements |
| WE HAVE A RELATIVELY LIMITED OPERATING HISTORY, WHICH MAKES IT DIFFICULT TO EVALUATE OUR FUTURE PROSPECTS Although we have been in operation since 1990, we have a relatively insignificant operating history and limited financial data upon which you may evaluate our business and prospects |
| As a result, our potential for future profitability must be considered in light of the risks, uncertainties, expenses and difficulties frequently encountered by companies that are attempting to move into new markets and continuing to innovate with new and unproven technologies |
| Some of these risks relate to our potential inability to: o develop new products; o obtain regulatory approval of our products; o manage our growth, control expenditures and align costs with revenues; o attract, retain and motivate qualified personnel; and o respond to competitive developments |
| If we do not effectively address the risks we face, our business model may become unworkable and we may not achieve or sustain profitability or successfully develop any products |
| WE HAVE NOT BEEN PROFITABLE AND EXPECT FUTURE LOSSES To date, we have not been profitable, and since our inception in 1990, we have not generated any significant revenues |
| We may never be profitable or, if we become profitable, we may be unable to sustain profitability |
| We have sustained losses in each year since our incorporation in 1990 |
| We incurred net losses of dlra6cmam883cmam914, dlra5cmam906cmam890, dlra6cmam514cmam217, dlra4cmam061cmam422, and dlra1cmam774cmam527 for the years ended March 11 31, 2006, 2005, 2004, 2003 and 2002, respectively |
| We expect to realize significant losses for the current year of operation and to continue to incur losses until we are able to generate sufficient revenues to support our operations and offset operating costs |
| OUR RESEARCH ACTIVITIES ARE CHARACTERIZED BY INHERENT RISK AND WE MAY NOT BE ABLE TO SUCCESSFULLY DEVELOP PRODUCTS FOR COMMERCIAL USE THAT ARE IN OUR PIPELINE Our research activities are characterized by the inherent risk that the research will not yield results that will receive FDA approval or otherwise be suitable for commercial exploitation |
| As of March 31, 2006, we have entered into agreements with respect to the marketing upon development of four drugs |
| Each agreement provides that we are to commercially develop or co-develop the product with the partner and upon securing by a partner or partners having FDA approval or other regulatory approval, if required, we are to manufacture the product and sell it to a partner or marketing partner for distribution |
| The commercial development of one of the four drugs has been completed |
| No assurance can be given that sales, if any, by any marketing partner will result in profit for Elite from the product |
| We have also entered into two additional co-development agreements |
| These products are currently in development |
| No assurance can be given that we will be successful in developing these products, and, if successful, that an agreement can be reached with a marketing partner for the sale of the products or that any sales of the products will result in profit for Elite |
| We are also developing three additional products on our own |
| Two are in pilot Phase I studies and one is in the pilot bioequivalence stage |
| Additional studies including either pivotal bioequivalence or efficacy studies will be required for these products before commercialization |
| In order for any of these products to be commercialized, the FDA requires successful completion of pivotal biostudies to file an ANDA and successful completion of pivotal clinical trials before filing a NDA The FDA next requires successful completion of comparative studies for drug listed products |
| ANDAs are filed with respect to generic versions of existing FDA approved products while NDAs are filed with respect to new products |
| WE COULD EXPERIENCE DIFFICULTY IN DEVELOPING AND INTEGRATING STRATEGIC ALLIANCES, CO-DEVELOPMENT OPPORTUNITIES AND OTHER RELATIONSHIPS With respect to products that are being developed and are available for partnering, we intend to pursue product-specific licensing, marketing agreements, co-development opportunities and other partnering arrangements in connection with the products |
| We have entered into partnership arrangements as to six products but no assurance can be given that we will be able to locate partners for our other products or that any arrangement is or will be suitable |
| In addition, assuming we identify suitable partners, the process of effectively entering into these arrangements involves risks such that our managementapstas attention may be diverted from other business concerns and that we may have difficulty integrating the new arrangements into our existing business |
| OUR LIMITED EXPERIENCE IN CONDUCTING CLINICAL TRIALS AND SUBMITTING NDAS AND THE UNCERTAINTIES INHERENT IN CLINICAL TRIALS COULD RESULT IN DELAYS IN PRODUCT DEVELOPMENT AND COMMERCIALIZATION Prior to seeking FDA approval for the commercial sale of any drug we develop, which does not qualify for the FDAapstas abbreviated application procedures, we or our partner must demonstrate through 12 clinical trials that these products are safe and effective for use |
| We have limited experience in conducting and supervising clinical trials |
| Our studies and filings may not result in FDA approval to market our new drug products and, if the FDA grants approval, we cannot predict the timing of any approval |
| IF OUR CLINICAL TRIALS ARE NOT SUCCESSFUL OR TAKE LONGER TO COMPLETE THAN WE EXPECT, WE MAY NOT BE ABLE TO DEVELOP AND COMMERCIALIZE OUR PRODUCTS In order to obtain regulatory approvals for the commercial sale of our potential products, we will be required to complete clinical trials in humans to demonstrate the safety and efficacy of the products |
| We may not be able to obtain authority from the FDA or other regulatory agencies to commence or complete these clinical trials |
| The results from preclinical testing of a product that is under development may not be predictive of results that will be obtained in human clinical trials |
| In addition, the results of early human clinical trials may not be predictive of results that will be obtained in larger scale advanced stage clinical trials |
| Furthermore, we or the FDA may suspend clinical trials at any time if the subjects participating in such trials are being exposed to unacceptable health risks, or for other reasons |
| The rate of completion of clinical trials is dependent in part upon the rate of enrollment of subjects |
| A favorable clinical trial result is a function of many factors including the size of the subject population, the proximity of subjects to clinical sites, the eligibility criteria for the study and the existence of competitive clinical trials |
| Delays in planned subject enrollment may result in increased costs and program delays |
| We may not be able to successfully complete any clinical trial of a potential product within any specified time period |
| Moreover, clinical trials may not show any potential product to be safe or efficacious |
| Thus, the FDA and other regulatory authorities may not approve any of our potential products for any indication |
| Our business, financial condition, or results of operations could be materially adversely affected if: o we are unable to complete a clinical trial of one of our potential products; o the results of any clinical trial are unfavorable; or o the time or cost of completing the trial exceeds our expectations |
| WE ARE DEPENDENT ON A SMALL NUMBER OF SUPPLIERS FOR OUR RAW MATERIALS, AND ANY DELAY OR UNAVAILABILITY OF RAW MATERIALS CAN MATERIALLY ADVERSELY AFFECT OUR ABILITY TO PRODUCE PRODUCTS The FDA requires identification of raw material suppliers in applications for approval of drug products |
| If raw materials were unavailable from a specified supplier, FDA approval of a new supplier could delay the manufacture of the drug involved |
| In addition, some materials used in our products are currently available from only one supplier or a limited number of suppliers |
| Further, a significant portion of our raw materials may be available only from foreign sources |
| Foreign sources can be subject to the special risks of doing business abroad, including: o greater possibility for disruption due to transportation or communication problems; o the relative instability of some foreign governments and economies; 13 o interim price volatility based on labor unrest, materials or equipment shortages, export duties, restrictions on the transfer of funds, or fluctuations in currency exchange rates; and o uncertainty regarding recourse to a dependable legal system for the enforcement of contracts and other rights |
| In addition, recent changes in patent laws in certain foreign jurisdictions (primarily in Europe) may make it increasingly difficult to obtain raw materials for research and development prior to expiration of applicable United States or foreign patents |
| Any inability to obtain raw materials on a timely basis, or any significant price increases that cannot be passed on to customers, could have a material adverse effect on us |
| The delay or unavailability of raw materials can materially adversely affect our ability to produce products |
| This can materially adversely affect our business and operations |
| IF THE COMPANY IS UNABLE TO OBTAIN ADDITIONAL FINANCING NEEDED FOR THE EXPENDITURES FOR THE DEVELOPMENT AND COMMERCIALIZATION OF THE COMPANY &apos S DRUG PRODUCTS, IT WOULD IMPAIR THE COMPANY &apos S ABILITY TO CONTINUE TO MEET ITS BUSINESS OBJECTIVES On March 15, 2006, the Company completed a private placement, for aggregate gross proceeds of dlra10cmam000cmam000, of 10cmam000 shares of its Series B Preferred Stock convertible into 4cmam444cmam444 shares of Common Stock and five year warrants to purchase an aggregate of 2cmam222cmam222 shares of Common Stock |
| 50prca of such warrants have an exercise price of dlra2dtta75 and 50prca have an exercise price of dlra3dtta25 |
| Additionally, the placement agent received five year warrants to purchase 355cmam555 shares of Common Stock with an exercise price of dlra2dtta25 |
| As of March 31, 2006, the Company had aggregate cash and cash equivalents of approximately dlra9cmam000cmam000, which the Company anticipates is adequate to finance its operations through the next 12 to 18 months |
| Thereafter, the Company will require additional financing to insure that the Company will be able to meet the expenditures to develop and commercialize its products for which requirement the Company has no current arrangements |
| Other possible sources of the required financing are the cash exercise of the Long Term Warrants issued in the October 2004 private placement, the Replacement Warrants issued in the December 2005 private placement and other warrants and options that are currently outstanding |
| No representation can be made that the Company will be able to obtain additional financing or if obtained it will be on favorable terms, or at all |
| No assurance can be given that any offering if undertaken will be successfully concluded or that if concluded the proceeds will be material |
| The Companyapstas inability to obtain additional financing when needed would impair its ability to continue its business |
| On the other hand, if the Company incurred debt, the Company would be subject to risks associated with indebtedness, including the risk that interest rates might fluctuate and cash flow would be insufficient to pay principal and interest on such indebtedness |
| IF WE ARE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS AND AVOID CLAIMS THAT WE INFRINGED ON THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS, OUR ABILITY TO CONDUCT BUSINESS MAY BE IMPAIRED Our success, competitive position and amount of revenues, principally royalty income, if any, will depend in part on our ability to obtain patent protection in various jurisdictions related to our technologies, processes and products |
| We intend to file patent applications seeking such protection, but 14 we cannot be certain that these applications will result in the issuance of patents |
| If patents are issued, third parties may sue us to challenge such patent protection, and although we know of no reason why they should prevail, it is possible that they could |
| It is likewise possible that our patents may not prevent third parties from developing similar or competing products |
| In addition, although we are not aware of any threatened or pending actions by third parties asserting that we have infringed on their patents, and are not aware of any actions we have taken that would lead to such a claim, it is possible that we might be sued for infringement |
| The cost involved in bringing suits against others for infringement of our patents, or in defending any suits brought against us, can be substantial |
| We may not possess sufficient funds to prosecute or defend such suits |
| If our products were found to infringe upon patents issued to others, we would be prohibited from manufacturing or selling such products and we could be required to pay substantial damages |
| In addition, we may be required to obtain licenses to patents or other proprietary rights of third parties in connection with the development and use of our products and technologies as they relate to other persons &apos technologies |
| The failure to obtain the necessary licenses or other rights could preclude the sale, manufacture or distribution of our products |
| We also rely upon trade secrets and proprietary know-how |
| We seek to protect this know-how in part by confidentiality agreements |
| We consistently require our employees and potential business partners to execute confidentiality agreements prior to doing business with us |
| However, it is possible that an employee would disclose confidential information in violation of his or her agreement, or that our trade secrets would otherwise become known or be independently developed in such a manner that we will have no practical recourse |
| We are not engaged in any litigation, nor contemplating any, with regard to a claim that someone has infringed one of our patents, revealed any of our trade secrets, or otherwise misused our confidential information |
| THE PHARMACEUTICAL INDUSTRY IS SUBJECT TO EXTENSIVE FDA REGULATION AND FOREIGN REGULATION, WHICH PRESENTS NUMEROUS RISKS TO US The manufacturing and marketing of pharmaceutical products in the United States and abroad are subject to stringent governmental regulation |
| The sale of any of our products for use in humans in the United States will require the approval of the FDA Similar approvals by comparable agencies are required in most foreign countries |
| The FDA has established mandatory procedures and safety standards that apply to the clinical testing, manufacture and marketing of pharmaceutical products |
| Obtaining FDA approval for a new therapeutic product may take several years and involve substantial expenditures |
| The eight products currently under development have not yet been approved for sale or use in humans in the United States or elsewhere |
| If we or our licensees fail to obtain or maintain requisite governmental approvals or fail to obtain or maintain approvals of the scope requested, it will delay or preclude us or our licensees or marketing partners from marketing our products |
| It could also limit the commercial use of our products |
| 15 THE PHARMACEUTICAL INDUSTRY IS HIGHLY COMPETITIVE AND SUBJECT TO RAPID AND SIGNIFICANT TECHNOLOGICAL CHANGE, WHICH COULD IMPAIR OUR ABILITY TO IMPLEMENT OUR BUSINESS MODEL The pharmaceutical industry is highly competitive, and we may be unable to compete effectively |
| In addition, it is undergoing rapid and significant technological change, and we expect competition to intensify as technical advances in each field are made and become more widely known |
| An increasing number of pharmaceutical companies have been or are becoming interested in the development and commercialization of products incorporating advanced or novel drug delivery systems |
| We expect that competition in the field of drug delivery will increase in the future as other specialized research and development companies begin to concentrate on this aspect of the business |
| Some of the major pharmaceutical companies have invested and are continuing to invest significant resources in the development of their own drug delivery systems and technologies and some have invested funds in such specialized drug delivery companies |
| Many of our competitors have longer operating histories and greater financial, research and development, marketing and other resources than we do |
| Such companies may develop new formulations and products, or may improve existing ones, more efficiently than we can |
| Our success, if any, will depend in part on our ability to keep pace with the changing technology in the fields in which we operate |
| IF KEY PERSONNEL WERE TO LEAVE ELITE OR IF WE ARE UNSUCCESSFUL IN ATTRACTING QUALIFIED PERSONNEL, OUR ABILITY TO DEVELOP PRODUCTS COULD BE MATERIALLY HARMED Our success depends in large part on our ability to attract and retain highly qualified scientific, technical and business personnel experienced in the development, manufacture and marketing of controlled release drug delivery systems and products |
| Our business and financial results could be materially harmed by the inability to attract or retain qualified personnel |
| IF WE WERE SUED ON A PRODUCT LIABILITY CLAIM, AN AWARD COULD EXCEED OUR INSURANCE COVERAGE AND COST US SIGNIFICANTLY The design, development and manufacture of our products involve an inherent risk of product liability claims |
| We have procured product liability insurance having a maximum limit of dlra5cmam000cmam000; however, a successful claim against us in excess of the policy limits could be very expensive to us, damaging our financial position |
| The amount of our insurance coverage, which has been limited due to our limited financial resources, may be materially below the coverage maintained by many of the other companies engaged in similar activities |
| To the best of our knowledge, no product liability claim has been made against us as of March 31, 2006 |
| OUR STOCK PRICE HAS BEEN VOLATILE AND MAY FLUCTUATE IN THE FUTURE There has been significant volatility in the market prices for publicly traded shares of pharmaceutical companies, including ours |
| For the twelve months ended March 31, 2006, the closing sale price on the American Stock Exchange of our Common Stock fluctuated from a high of dlra4dtta42 per share to a low of dlra1dtta68 per share |
| The per share price of our Common Stock may not remain at or exceed current levels |
| The market price for our Common Stock, and for the stock of pharmaceutical companies generally, has been highly volatile |
| The market price of our Common Stock may be affected by: o Results of our clinical trials; o Approval or disapproval of abbreviated new drug applications or new drug applications; o Announcements of innovations, new products or new patents by us or by our competitors; 16 o Governmental regulation; o Patent or proprietary rights developments; o Proxy contests or litigation; o News regarding the efficacy of, safety of or demand for drugs or drug technologies; o Economic and market conditions, generally and related to the pharmaceutical industry; o Healthcare legislation; o Changes in third-party reimbursement policies for drugs; and o Fluctuations in our operating results |
| As of this date sales of substantial amounts of the Common Stock in the public market are eligible for sale by these holders pursuant to exemption or registration under the Securities Act |
| Perceptions that substantial sales may take place in the future may lower the Common Stockapstas market price |
| THE FAILURE TO MAINTAIN THE AMERICAN STOCK EXCHANGE LISTING OF THE COMMON STOCK WOULD HAVE A MATERIAL ADVERSE EFFECT ON THE MARKET FOR THE COMMON STOCK AND ITS MARKET PRICE On January 4, 2006, the Company received a letter from the American Stock Exchange ( "e AMEX "e ) notifying it that, based on the Companyapstas unaudited financial statements as of September 30, 2005, the Company is not in compliance with the continued listing standards set forth in the AMEX Company Guide in that under one listing standard its shareholders &apos equity is less than dlra4cmam000cmam000 and it had losses from continuing operations and/or net losses in three of its four most recent fiscal years and under another listing standard its shareholders &apos equity is less than dlra6cmam000cmam000 and it had losses from continuing operations and/or net losses in its five most recent fiscal years |
| The Company, at the request of AMEX, submitted a plan on February 3, 2006 advising AMEX of action, it has taken, and will take, to bring it in compliance with the continued listing standards within a maximum of 18 months from January 4, 2006 |
| On March 15, 2006, the Company completed a private placement of its Series B Preferred Stock and warrants to purchase Common Stock |
| The Company received dlra10cmam000cmam000 in gross proceeds from the private placement |
| On March 21, 2006, the Company submitted an update to the plan it had previously submitted on February 6, 2006 |
| Upon notice of the recent private placement and the acceptance of the updated plan, AMEX provided the Company with an extension until July 3, 2007 to regain compliance with the continued listing standards |
| AMEX will allow the Company to maintain its AMEX listing through the plan period, subject to periodic review of the Companyapstas progress by the AMEX staff |
| If the Company is not in compliance with the continued listing standards or does not make progress consistent with such plan during the plan period, AMEX may then initiate delisting proceedings |
| The failure to maintain listing of the Common Stock on AMEX will have an adverse effect on the market and the market price for the Common Stock |
| THE ISSUANCE OF ADDITIONAL SHARES OF OUR COMMON STOCK OR OUR PREFERRED STOCK COULD MAKE A CHANGE OF CONTROL MORE DIFFICULT TO ACHIEVE The issuance of additional shares of the Companyapstas Common Stock or the issuance of shares of an additional series of Preferred Stock could be used to make a change of control of the Company more difficult and expensive |
| Under certain circumstances, such shares could be used to create impediments to or frustrate persons seeking to cause a takeover or to gain control of the Company |
| Such shares could be sold to purchasers who might side with the Board in opposing a takeover bid that the Board determines not to be in the best interests of its stockholders |
| It might also have the effect of discouraging an attempt by another person or entity through the acquisition of a substantial number of shares of the Companyapstas Common Stock to acquire control of the Company with a view to consummating a merger, sale of all or 17 part of the Companyapstas assets, or a similar transaction, since the issuance of new shares could be used to dilute the stock ownership of such person or entity |
| IF PENNY STOCK REGULATIONS BECOME APPLICABLE TO OUR COMMON STOCK THEY WILL IMPOSE RESTRICTIONS ON THE MARKETABILITY OF OUR COMMON STOCK AND THE ABILITY OF OUR STOCKHOLDERS TO SELL SHARES OF OUR STOCK COULD BE IMPAIRED The SEC has adopted regulations that generally define a "e penny stock "e to be an equity security that has a market price of less than dlra5dtta00 per share or an exercise price of less than dlra5dtta00 per share subject to certain exceptions |
| Exceptions include equity securities issued by an issuer that has (i) net tangible assets of at least dlra2cmam000cmam000, if such issuer has been in continuous operation for more than three years, or (ii) net tangible assets of at least dlra5cmam000cmam000, if such issuer has been in continuous operation for less than three years, or (iii) average revenue of at least dlra6cmam000cmam000 for the preceding three years |
| Unless an exception is available, the regulations require that prior to any transaction involving a penny stock, a risk of disclosure schedule must be delivered to the buyer explaining the penny stock market and its risks |
| Although we currently fall under one of the exceptions, if at a later time we fail to meet one of the exceptions, our Common Stock will be considered a penny stock |
| As such the market liquidity for our Common Stock will be limited to the ability of broker-dealers to sell it in compliance with the above-mentioned disclosure requirements |
| You should be aware that, according to the SEC, the market for penny stocks has suffered in recent years from patterns of fraud and abuse |
| Such patterns include: o Control of the market for the security by one or a few broker-dealers; o "e Boiler room "e practices involving high-pressure sales tactics; o Manipulation of prices through prearranged matching of purchases and sales; o The release of misleading information; o Excessive and undisclosed bid-ask differentials and markups by selling broker-dealers; and o Dumping of securities by broker-dealers after prices have been manipulated to a desired level, which hurts the price of the stock and causes investors to suffer loss |
| We are aware of the abuses that have occurred in the penny stock market |
| Although we do not expect to be in a position to dictate the behavior of the market or of broker-dealers who participate in the market, we will strive within the confines of practical limitations to prevent such abuses with respect to our Common Stock |
| SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW MAY DETER A THIRD PARTY FROM ACQUIRING US Section 203 of the Delaware General Corporation Law prohibits a merger with a 15prca shareholder within three years of the date such shareholder acquired 15prca, unless the merger meets one of several exceptions |
| The exceptions include, for example, approval by the holders of two-thirds of the outstanding shares (not counting the 15prca shareholder), or approval by the Board prior to the 15prca shareholder acquiring its 15prca ownership |
| This provision makes it difficult for a potential acquirer to force a merger with or takeover of the Company, and could thus limit the price that certain investors might be willing to pay in the future for shares of our Common Stock |