SWK Holdings Corp (SWKH) 2021 Q3 法說會逐字稿

Good day and welcome to the SWK Holdings, Inc. third-quarter 2021 financial results conference call. (Operator Instructions) Please note this event is being recorded. I would now like to turn the conference over to Jason Rando from Tiberend Strategic Advisors. Please go ahead.

Good morning, everyone, and thank you for joining SWK Holdings' third-quarter 2021 financial and corporate results call. After the close of the market on November 12, SWK Holdings issued a press release detailing its financial results for the three months ended September 31. The press release can be found in the Investor Relations section of swkhold.com under news releases.

Before beginning today's call, I would like to make the following statement regarding forward-looking statements. Today, we'll be making certain forward-looking statements about future expectations, plans, events, and circumstances, including statements about our strategy, future operations, and development of our consumer and drug product candidates, plans for future potential product candidates and studies and our expectations regarding our capital allocation and cash resources.

These statements are based on our current expectations and you should not place undue reliance on these statements. Actual results may differ materially due to our risks and uncertainties, including those detailed in the Risk Factors section of SWK Holdings' 10-K filed with the SEC, and other filings we make with the SEC from time to time. SWK Holdings disclaims any obligation to update information contained in these forward-looking statements, whether as a result of new information, future events or otherwise.

Joining me on today's call is Winston Black, Chairman and CEO of SWK Holdings, who will provide an update on SWK's third-quarter 2021 corporate and financial results. Winston, go ahead.

Thank you, Jason, and everyone for joining our third-quarter conference call. SWK Holdings' business strategy is focused on providing non-dilutive financing opportunities to small and midsize life science companies with differentiated commercial stage products. This has been our mission from inception to today, (inaudible) solid returns for our company and shareholders during that time.

It is an uncomplicated business and one that, when executed with discipline and care, works well because the small to midsized companies fueling innovation in the life sciences industry and barely require access to capital to bring the resulting therapies, products, and technologies to market.

We have been successful at finding those opportunities where our financing products provide the right capital infusion at the right time, empowering companies to unlock the value of their technologies and, in turn, enable SWK to realize a positive return on our investment.

Since 2012, the SWK team has successfully deployed approximately $600 million of capital into 42 investments, with 23 realizations that generated an IRR of 20%.

Earlier this year, in partnership with our largest shareholder, SWK formed a strategic review committee to identify, review, and explore strategic alternatives for SWK with a view to maximizing stockholder value. As we announced earlier this month, the committee and its financial and legal advisors completed its review and determined that our specialty finance business, as just described, is a very good business ideally suited to drive the company's future growth and shareholder value going forward.

[The Board's] decision was informed by our own internal valuation of the company's assets as well as by an independent third party valuation that support our belief that SWK's core specialty finance assets have value in excess of our GAAP carrying value.

[Illustrating] this analysis is the third-quarter performance of a specialty financed portfolio. It produced an 18.8 realized yield with strong underlying credit trends, despite the overhang of the review process. As you can appreciate, the review's outcome and the team's ability to deliver these results is very gratifying, and for our shareholders, a clear sign that what we are doing works.

With the [review preview] now completed SWK is squarely focused on our specialty finance business segment. Though we temporarily paused new deal originations during the strategic review process, we have continued to closely monitor the life science investment environment and expect new deal originations to return to our historic levels over the next few quarters and foresee multiple opportunities to deploy capital.

We'll be pursuing opportunities from a position of financial strength with our current liquidity profile of over -- excuse me, of roughly $80 million of cash and revolver availability. Further adding to our liquidity muscle, SWK's Board of Directors has committed to prudently increase leverage as we scale the business to help improve capital allocation and improve returns for stockholders. We now anticipate restoring normalized deployment levels during 2022.

The third quarter in recent weeks also marked the continued progress at our subsidiary, Enteris Biopharma, highlighted by advances in the clinical program for one of its internal 505(b)(2) products and the signing of more Peptelligence feasibility studies. The Peptelligence and pro-forma technologies developed by Enteris enable the oral delivery of peptides and BCS Class II, III, IV small molecules, respectively.

These drugs are typically administered via injection due to poor bioavailability or permeability. The ability to develop safe and effective oral formulations is a game changer that could enhance the commercial markets for myriad drug candidates, reshaping therapeutic categories and treatment paradigms, and provide improved (inaudible) for patients.

Last month Enteris announced successful completion of a Phase 1 clinical trial of optimized Peptelligence candidate, oral leuprolide, demonstrating delivery of drug levels comparable or greater to subcutaneous or depot injection. Enteris is advancing the program, the next round of clinical development. We will provide additional details when warranted as the program advances.

Meanwhile Enteris CEO, Rajiv Khosla, and his team continue to execute a dual arm growth strategy to maximize the value of the company's Peptelligence and ProPerma technologies as a manufacturing and CMO business. So far this year Enteris has signed six Peptelligence feasibility studies, in which Enteris partners with a peptide therapeutics developer to engineer their drug for oral delivery.

The goal of this process is to advance the development of the oral peptide to where Enteris and a prospective company enter a license agreement with the newly developed oral product. Example of this strategy in action is Cara Therapeutics and its Oral KORSUVA product, which is developed using Enteris' Peptelligence technology across multiple patient populations.

Oral KORSUVA is now [subject] to four separate clinical programs. And Cara expects to initiate Phase 3 programs for the treatment of moderate to severe pruritus in both atopic dermatitis and non-dialysis dependent chronic kidney disease patients during the first quarter of 2022. During the past 12 months, Enteris has received three milestone payments related to Oral KORSUVA program. More milestones are anticipated in the quarters to come.

Turning to our finances, as at September 30, 2021, SWK's portfolio of royalties and structured credit backed by royalties totaled approximately $206.2 million across 26 partners, which compares favorably to $187.1 million for the year-ago period.

During the quarter, SWK did not deploy any capital with existing companies. On June 30 of this year, SWK did close a $9.5 million financing with Trio Healthcare Ltd., with $5.1 million funded at closing.

During the quarter ended September 30, 2021, the company collected $7.1 million of principal payments, and more recently, we collected $31.6 million in facility repayment proceeds from Misonix's $518 million acquisition by Bioventus. We also received $1.9 million in cash and 71,361 shares of Bioventus common stock. The gain on the transaction will be recognized in the fourth quarter.

As of November 8, 2021, SWK had $6.4 million of unfunded commitments. SWK reported book value per share of $20.36 as of September 30, 2021, which includes a $0.05 per share negative impact from the amortization of Enteris intangibles and an $0.08 per share negative impact from legal and financial consulting expenses associated with our strategic review. This compares favorably to $18.44 as of September 30, 2020.

Tangible financial book value per share, which excludes the deferred tax asset, intangible assets, goodwill, and contingent consideration payable, totaled $17.50 a share, a 12.7% increase over $15.52 per share for the same period last year. Management views tangible financing book value per share as a relevant metric to value the company's core specialty finance business.

For the third quarter of 2021, SWK reported total revenue of $9.6 million compared to $10.6 million for the third quarter of 2020. The decrease in revenue is primarily due to a $2.6 million decrease in revenues on our Pharmaceutical Development segment due to a milestone payment from Cara in the third quarter of 2020. This is partially offset by a $1.5 million increase in interest and fees earned on our finance receivables.

GAAP net income for the third quarter ended September 30, 2021, totaled $2.2 million or $0.17 per diluted share compared to $4.3 million or $0.34 per diluted share for the third quarter 2020. For the third quarter of 2021, non-GAAP adjusted net income was $4.3 million compared to $6.7 million -- for the third quarter of 2020.

Lastly, for the third quarter of 2021, non-GAAP net income generated by specialty finance business totaled $7.7 million as compared to $6.6 million for the prior year period.

SWK remains well positioned to harness our expertise to opportunistically deploy capital for compelling value-adding investment opportunities. The prudent addition of leverage will, we believe, optimize SWK's capital structure. Further, going forward, SWK will evaluate other measures to improve shareholder returns, including a dividend policy. As for Enteris, Rajiv and his team continue to work on partnership agreements in advancing its 505(b)(2) pipeline.

In conclusion, the 2021 fiscal year has so far continued what has been a period of consistent performance for SWK. All this is made possible by the diligent efforts of the SWK Holdings team. And once again, I'd like to thank our employees for their dedication and loyalty, and our stakeholders for their continued support, as we evolve our model and grow SWK. With that, I will now open the call to your questions.

(Operator Instructions) Kyle Bauser, Colliers Securities.

Great. Good morning. Thanks, Winston, for all the updates. Maybe -- you mentioned the review committee also independently valuing the specialty finance business, which jived with your own internal analysis of it having a larger carrying value. But just kind of curious what the committee -- what their thoughts were on the biopharma business, and what sort of valuation they calculated for Enteris, and kind of any thoughts on how that fits in? Thank you.

Sure. I appreciate the question, Kyle. So yeah, the committee and it's advisors definitely evaluated Enteris alongside the specialty finance business. I think the one thing I'd point out is, as we think about just our book value, for example, Enteris is currently $1.10 a share, only 5% of the book value.

So while we see a tremendous opportunity with Enteris, I think as we've communicated kind of the value in the business and where our capital is [majorly] deployed now, I think we wanted to be conservative, as we always have been, with respect to the value of our assets and the potential within them.

So we continue to see a lot of upside there, but given it's a 5% position, we also didn't want to be overly promotional about that business. So I think just having perspective about it is how we thought about that. And of course, it could deliver a tremendous amount of value. But we also -- and I think you'd appreciate, like I said earlier, we do definitely want to be conservative about how we communicate value. And as the business performs, we'll be able to demonstrate that and talk more about it.

Got it. No, it makes sense. And so it sounds like you've gotten the green light to lever up as necessary. And I think you said you had either $60 million or $80 million in cash currently available. What sort of debt levels do you think would make sense for the business? Or would -- maybe asked another way -- kind of puts you in line with some of your peers? Just kind of curious how you're looking at adding onto that?

Sure. So I guess first to clarify, we do roughly have $60 million of cash and with our revolver that takes us about $80 million of just general liquidity -- so to answer that first question.

Regarding debt levels, there's, of course, two ways we'll look at it. The first is the maximum amount of debt that we could take on per the 2014 stockholder's agreement with Carlson, which basically lets us get up to one-to-one. And I think as we look to scale the amount of leverage we would look to be in the 25% to 50% type range, and then we'll look to grow from there depending on how it goes.

On one hand, leverage is great because it can help turbocharge returns. But as everyone here also knows, they can also turbocharge losses if you don't scale that right. So I think there's definitely a lot more room to lever our portfolio, but we also want to be kind of prudent and measured in our steps to do that.

Got it. And just lastly, I guess following up on that, if I may -- so assuming you did lever up, and take down more debt, and utilize the existing cash you have, are you seeing a lot of activity out there still? In other words, would you be able to put it to work relatively quickly? Just kind of trying to understand what the environment is like out there for deal flow, and if you'd be able to kind of deploy it all right away. Thank you.

Sure. Well, I guess first to address that -- we don't want to have this money burning a hole in our pocket, so to speak. We're always very diligent and measured in deploying our stockholders' capital. So we will -- nothing will be different from that perspective.

But just regarding the deal environment, I think it remains very active out there. We -- even though we haven't been putting much of capital to work over the past couple quarters, we certainly have been watching things and continue to develop our pipeline of opportunities. And I think we expect to get back to what we normally have done historically sometime next year.

There are some pockets of the market that are kind of more competitive, and there's others that they continue to be really attractive. And we'll look to execute where it is -- we're seeing the best risk-adjusted returns.

That's great. Thanks so much, Winston. I'll jump back in queue.

Thanks, Kyle.

(Operator Instructions) Michael Diana, Maxim Group.

Thank you. I was going to ask about the leverage too. I think that opportunity is very interesting. In relation to that, and really also, I guess, in relation to Enteris, you mentioned that you're evaluating the dividend. My guess is more leverage could be good for dividend. Keeping Enteris could mean you want to use any earnings to drive growth in Enteris? Do you have any comment on that?

Sure. I appreciate your astute observation there as we do have a lot of opportunity to deploy capital. Yeah, I think the first thing is to address the the dividend -- that's something that we've been considering for a while.

But as noted in our release on November 1 regarding the SRC process conclusion, that's something that requires Carlson's consent, and we don't quite have that yet. So, I very much would like to have a stated dividend policy and we're working to implement that. So stay tuned there. Unfortunately, I don't have -- I don't have anything to share today about that.

But you're exactly right regarding Enteris and just transactions out there, kind of regular way finance transactions that we look at. There are -- I think there are a lot of opportunities for us to deploy capital. And whether we're paying a dividend or not, I don't necessarily think we'll say whether we see opportunities to deploy capital with Enteris.

I think on one hand, we want to make sure our shareholders are participating in the success of the business, and between buybacks and dividends, those are too very, very typical things for us -- for companies to do with respect to that.

And on Enteris, I think one thing that we're thinking about, and we've talked a little bit about it, is how we (technical difficulty) go about financing our own asset development pipeline, because you can go nuts and spend a ton of money on that. And that certainly isn't very helpful to have a business that is trying to compound book value and generate cash flow.

So we're -- I think we've been taking a measured approach with respect to the development that we're doing because we do see a tremendous amount of value in that. But that said, we're trying to be measured with the amounts that we are dedicating to that. And so, I think we'll -- our goal is to have some more formal guidance on that as we get into the new year to help shareholders understand how -- kind of what our formal capital allocation policies are going to be.

Okay. And then -- thank you. And then you mentioned you now have 71,000 shares of Bioventus stock. Do you have a policy about what you do when you receive stock, like you sell it right away, or you keep it and look for an opportunistic exit? Or do you have any policy whatsoever on that?

Yeah, great question because it doesn't apply just to the Bioventus equity that we have. It also applies to any warrants that we have in public companies as well, right? So we do -- the first thing depends, do we have any material nonpublic information that we have to be kind of cleansed of?

And so once we determine that we're cleansed of that, yes, I think we're in position to actually sell an equity or exercise a warrant. And just like any investment that we have in our portfolio, we'll evaluate it and determine what we think it's worth and then determine the right time to exit based on kind of market prices and liquidity.

That said, we're also not looking to speculate in public equities. So we certainly are actively looking to get the last cent out of our calculated value for position. So we will -- I think we use that general framework to look to exit positions when it's appropriate.

Okay. And while you hold it you have to mark it? Is that right or wrong?

Yes, that's right. Just like the Misonix equity that we had, we mark it to market because we're public observable inputs. That's also how we mark our public warrants because there are public observable inputs. So we do mark those as well, on -- at each quarter end.

Yeah, okay, great. Thank you.

And ladies and gentlemen, this will conclude our question-and-answer session. At this time, I'd like to turn the conference back over to Mr. Black for any closing remarks.

Thank you. In closing, I appreciate everyone's time and attention and look forward to future updates as we continue to advance SWK Holdings. I'd also like to extend my sincerest wishes of good health to all.

The conference has now concluded, and we do thank you for attending today's presentation, and you may now disconnect your lines.