SWK Holdings Corp (SWKH) 2021 Q2 法說會逐字稿

Good morning, and welcome to SWK Holdings Corporation's second-quarter 2021 financial results. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Maureen McEnroe, EVP of IR at Tiberend Strategic Advisors. Please go ahead.

Thank you. Good morning, everyone, and thank you for joining SWK Holdings's second-quarter 2021 financial and corporate results call. Yesterday evening, SWK Holdings issued a press release detailing the financial results for the three months ended June 30, 2021. The press release can be found in the Investor Relations section of swkhold.com under News Releases.

Before beginning today's call, I'd like to make the following statement regarding forward-looking statements. Today, we will be making certain forward-looking statements about future expectations, plans, events, and circumstances, including statements about our strategy, future operations, and the 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's 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 second-quarter 2021 corporate and financial results.

Winston, go ahead.

Thank you, Maureen, and everyone, for joining our second-quarter conference call. When we closed the book on our second quarter on June 30, 2021, SWK Holdings had ended the first half of 2021 on solid footing. The developments during the second quarter and recent months, as well as the robust returns generated by our finance receivables segment and continued strong trends, led to a realized yield of 22.9% for the quarter ended June 30, 2021.

The engine behind these returns remains our unique investment strategy and focus on small- and mid-sized life science companies with differentiated, patent-protected commercial state products. This business model remains highly effective for SWK, given the continued innovation in healthcare aimed at addressing unmet medical needs, and a need for capital to fund the development of these innovations and bringing resulting technologies to market. Added to that, life science companies continue to make a strong recovery from the COVID-19 pandemic's widespread effects.

We remain well positioned to benefit from a niche in the healthcare-focused specialty finance sector. We find growth opportunities for small- and mid-sized commercial-stage life science companies through the creation of unique financing structures. These deals include structures debt, traditional royalty monetization, synthetic royalty transactions and asset purchases, and typically range in size from $5 million to $20 million, a market segment often ignored by other structured finance companies.

Illustrating this business strategy was the financing we made thus far in 2021. In March, we closed a $9 million loan with Sincerus Pharmaceuticals, a 503B compounding pharmacy focused on dermatology customers.

More recently, in April, we completed a $5 million synthetic royalty purchase with Ideal Implant, a medical device company focused on the aesthetic space, followed in July by a $9.5 million financing with Trio Healthcare to support the company's UK and international launch of its innovative stoma bag, Genii. These transactions are very much keeping with our investment strategy, and we continue to seek, source, and assess numerous loan and royalty opportunities.

As of now, we have $32 million of cash and revolver availability to support our partner companies and capitalize on potential investment opportunities. And unlike other business development companies, BDCs, and some investment funds, SWK's balance sheet is not heavily leveraged.

Second quarter was also a period of solid progress at our subsidiary, Enteris BioPharma, highlighted by the expansion of its manufacturing facility and the launch of its new CDMO business segment. These enhanced capabilities will allow Enteris's CEO, Dr. Rajiv Khosla, and his team to seek deeper development and manufacturing relationships with partners by providing customer solutions from bench to market, including the containment and processing of high-potency API.

When we first considered acquiring Enteris, we viewed the expanded company's manufacturing capabilities an important component of our technology licensing strategy, and believe the expanded capability of the facility will facilitate the business going forward. Exemplifying this opportunity is the ongoing success of Enteris's relationship with Cara Therapeutics and the company's development of Oral KORSUVA.

In June, Enteris earned an additional $10 million milestone from Cara, marking the third milestone payment in the last 12 months. Oral KORSUVA is now subject to four separate clinical programs, including an anticipated Phase 3 trial for the treatment of pruritus in patients with stage III and IV chronic kidney disease. We anticipate additional payments for the next several quarters, subject to achievement of development milestones.

In May, SWK's Board of Directors announced the formation of a Strategic Review Committee to identify, review, and explore strategic alternatives for the company with a view to maximizing stockholder value. While the Strategic Review Committee continues to work diligently on this initiative, at this time, it has not made any decision to enter any transaction, and there can be no assurance that the exploration of strategic alternatives will result in any transaction being announced or agreed upon.

Now, turning to our finances. As of June 30, 2021, SWK's portfolio of royalties and structured credit backed by royalties totaled approximately $213 million across 25 partners, which compares favorably to $182 million -- excuse me, $182.3 million from the same period last year, representing a 16.8% increase year over year.

In the second quarter of 2021 and recent weeks, as we previously discussed, SWK closed a $5 million synthetic royalty transaction with Ideal Implant, with $3 million funded at close.

On June 30, 2021, the weighted average projected effective yield of the finance receivables portfolio was 13.9%, including non-accrual positions versus 13.2% as of the end of the second quarter in the previous year. Also, after the close of the quarter on June 30, SWK closed a $9.5 million financing with Trio Healthcare, of which $5.1 million was advanced at close.

At the end of the quarter, SWK reported a book value per share of $20.18, which included $0.06 per share negative impact from the amortization of Enteris intangibles and $0.07 per share positive impact from mark-to-market changes on warrant and equity securities, compared to $18.06 as of June 30, 2020. This is approximately a 12% year-over-year increase.

Tangible financing book value per share, which includes the deferred tax asset, intangible assets, goodwill and contingent consideration payable, totaled $17.23 per share, which increased 14.5% from the same period last year of $15.05. Management views tangible financing book value per share as a relevant metric to value the company's core specialty finance business.

For the second quarter of 2021, SWK reported total revenue of $22.3 million, compared to $7.9 million for the second quarter of 2020. The $14.4 million net increase in revenue was primarily due to a $4.1 million increase in interest and fees earned on our finance receivables, and $10.3 million increase in revenues at Enteris, primarily related to Enteris's licensing agreement with Cara, which included $6.1 million that was paid to the former Enteris owner.

Income before taxes for the second quarter of 2021 totaled $17.5 million, compared to $125,000 loss for the same period of the previous year. The year over year approximately $18 million increase is primarily driven by the $14.4 million increase in revenue, plus a $2.6 million decrease in amortization of intangible assets and a $1.9 million decrease in the change in the fair value of the contingent consideration related to Enteris's acquisition. This is partially offset by a $1.3 million increase in general and administrative and pharmaceutical manufacturing expense.

The GAAP net income for the second quarter ended June 30, 2021, totaled $14 million or $1.09 per diluted share, compared to $876,000 or $0.07 per diluted share for the second quarter of 2020.

For the second quarter of 2021, adjusted net income was $17.2 million compared to $4 million for the second quarter of 2020. For the second quarter, non-GAAP net income generated by the specialty finance business totaled $10.6 million, as compared to $7.7 million for the prior year period.

As evidenced by these results, our specialty finance business continues to perform well, and we're working hard to identify new transactions that leverage our areas of expertise and the growing need among small- to mid-life science companies for access to capital to fund future growth. And by doing so, we'll benefit to the borrower and positive returns for SWK shareholders.

Industry dynamics should, we believe, remain favorable to our business strategy. SWK remains well positioned to harness our expertise to opportunistically deploy capital for compelling, value-adding investment opportunities.

As for Enteris, as we discussed, Rajiv and his team continue to execute a dual-arm growth strategy to maximize the potential of its new manufacturing and CDMO business, and the company's Peptelligence and ProPerma technologies. In that regard, Enteris continues to work hard towards partnership agreements.

In conclusion, the 2021 fiscal year has so far continued what has been a period of substantial development for SWK. All of this is made possible by the diligent efforts of our SWK Holdings team. I, once again, 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 Holdings.

With that, I will now open the call to your questions.

(Operator Instructions) Kyle Bauser, Colliers Securities.

Hey, Winston, good morning. Thanks for all of the updates today and congrats on a great quarter here.

Thank you.

Maybe just starting on the Enteris side of things. Following the build-out of operations to support manufacturing of clinical trials and early commercialization of new assets, has this provided some momentum for new partnerships and collaborations now that you're kind of up and running?

Sure. I definitely believe it has. As we noted in the press release, Enteris has recently signed, I think, three new feasibility studies which I think is a direct result of all the momentum that they have there.

And yeah, I think as we think about the development pipeline, Rajiv started last year in May and right in the midst of COVID, which was a difficult time to go onboard and begin to turn around that program. But here we are roughly a year past that, and now we're starting to see the feasibility agreement starting to ramp and the facilities open. So yeah, I think we're starting to see that momentum come together a little bit.

Great. Appreciate that. And you mentioned it in your prepared remarks, I mean you've got over $30 million of availability in cash in the revolver but a relatively low leverage ratio compared to your peers, a question I ask every quarter, but how are we thinking about the leverage ratio now and going forward? Any appetite to take out some more debt?

Sure. Great question. And yeah, I think the answer is definitely yes. We do have much more capacity to support larger credit facilities. Yeah, I think we're being patient as the Strategic Review Committee goes through its process, and I want to make sure that what they recommend and what the Board determines to do in terms of next steps to create value for our shareholders, I'm sure that that credit facility question or the appropriate capital structure will come into play there.

And so I think we'll have more updates on what that all looks like as they do their work, but I definitely agree. We have much more capacity to deploy leverage and grow the book, and we'll see how it all comes together.

Got it. Makes sense. And just staying on the specialty finance side of the business, you've obviously remained very active in investments post-Q2, as well. How has the environment been? I mean, maybe compared to six months ago, are there as many opportunities? Are there less? Are there more? Is it more competitive? Just wondering what the landscape is like right now.

Sure. Great question, Kyle. The landscape definitely ebbs and flows. I think as we came out of COVID and the economy just kind of rolling back in the fourth quarter, there was definitely a lot more activity, it felt like, just generally speaking. But we, of course, had lots of opportunities and were able to deploy capital. And in the first quarter, I think we saw very similar trends and that continued into the second quarter.

And from a competition perspective, our segment of the market continues to be pretty unique in that sometimes, we'll see things that are fairly competitive, and then other times, we'll be the only folks having a look at an opportunity that, in some respects, had to scratch our heads in terms of how come others aren't really paying attention. But I think we're pleased with the volume of pipeline activities that we have going on and expect to close additional things as we get toward year-end.

Great. Great. And then just one more regarding the partnership with Cara, we saw another nice milestone. Remind me, I know you don't disclose the actual milestones, but how many are left? And I think you said, in the press release, they could come over the next several quarters. And then lastly, are there other milestones we should be keeping an eye on with separate partnerships? Thank you.

Sure. Yeah, I wish I could give you perfect clarity into the remaining Cara milestones. But as you know, the majority of that is -- and the economics of those are redacted in the filed agreement. They're -- I think, actually, in that agreement, the titles of all the milestones are also redacted. So I think all I can say is there's definitely a handful of milestones that remain outstanding.

And as you think about what those milestones would likely be, I think the ones that we have are similar to what other ones you'd see in the industry in terms of advancement of clinical programs and an FDA approval and sales milestones, those sort of things. Our agreement is generally not structured all that differently than what other ones you see in biopharma. So I think that's probably all I can say about that.

But in terms of new licenses, of course, that is the whole point of the business development program at Enteris. And when you think about the progression from meeting a potential partner through to actually getting a license, I think, as your future partners, you get to know the technology, the first logical step is really the feasibility studies. And that's really the team working with their potential partner to determine the right formulation using the technology and then taking it forward, which, of course, depends on your partners' development timelines and so forth.

So yeah, the process does take a while. But that said, we're a year into the rebuilding of that licensing program, and we're now getting our first sets of feasibility programs. So I think we can say that there's progress that's ongoing, and we'll want to see how those develop, and assuming those feasibility studies are successful, then how they progress towards national license. But it's good momentum, starting to see that now.

That's great. Well, thanks for all the updates. I'll jump back in queue.

No, thanks, Kyle. Appreciate it.

Michael Diana, Maxim Group.

Okay, thank you. Hi, Winston.

Hey, how are you?

Good. First on the finance side, you mentioned you have $6.4 million of unfunded commitments. Are those to existing borrowers or new ones?

Yes. So those are two of the deals that we recently closed, the Ideal Implant and the Trio loan facility. So those are existing deals. Those are new and we'll fund them to the extent that our partners want those drawings, and then, of course, if they meet the performance milestones that are typically associated with those.

Okay, great. Thanks. On the Enteris side, your CDMO business, do you have any pipeline there yet?

So the pipeline is building, and I think similar to the Peptelligence licensing pipeline, that's a process that will take a little bit of time to move through, as you think about any potential RFPs that they may be working on. It's hard to do a whole lot of work or for -- a potential customer to do a whole lot of work at the facility until it's really up and running, so they can really see the capabilities and they can adequately market those capabilities.

So with the facility now being turned on, I think that those conversations are beginning to build. And there's a fair bit of interest in it. I think the company has had a couple of reverse inquiries actually from potential partners who are seeking capacity. So we'll see how that develops and also, of course, how that helps facilitate the licensing business as well.

Okay, thanks. And on your Strategic Review Committee, I understand it's ongoing. Do you have any expected or completion date? Or any idea when the process might, quote, end, even though it would probably go on forever, but just this iteration of it?

Sure. No, that's a very fair question. Yeah, I think it gets to state the obvious. Board should always be looking at maximizing value for shareholders, and ours definitely has been. Yeah, I think in (technical difficulty) May. And so, we're, I guess, approaching through the end of the third month of them doing their work.

So I don't have any timeline to announce, but I think that the committee and their advisers are definitely making progress and have come up with some interesting things for the business. So we'll see, ultimately, how that unfolds. And I wish I had a material update to provide and a timeline to provide. But I think, suffice to say that everyone is working hard and very interested in making sure that the shareholders are rewarded for their trust in us.

Okay, great. Thank you very much.

Thank you.

Nat Stewart, N.A.S. Capital.

Hi, Winston, thanks for taking my questions.

Sure. Hey, Nat. How are you?

Good. Congratulations on a lot of tremendous progress this quarter and for the first half of the year.

Yes, appreciate it.

My first question is related -- sure. My first question is very closely related to Kyle's last question, but I figured I'd ask again in case there are some more details, because I'm trying to understand better the process of the feasibility studies.

Obviously, these licensing agreements, if you're able to hit some new ones that are good, they can be tremendously valuable. So I'd like to better understand what the process is there. And like I said, you already touched on this, but also the timeline. And also if, in the meantime, with those feasibility studies, if there's much in the way of revenue opportunities there?

Sure. So the timeline, generally, is, you have your business development discussion and that will progress to wanting to sign a CDA between the parties, which the CDA to protect our technology. And then, of course, our pharma partner would want a CDA to protect their know-how and their molecules that they're looking to develop an oral formulation of.

And that process could be quick in terms of from first meeting to the actual CDA, or perhaps there's a couple of meetings. And if you think about a group like a large pharma, that process may take weeks, months, quarters, which I don't think would be surprising. And then you think about a smaller biotech that may move more quickly and more aggressively, that could be just a couple of weeks. So you have that first time frame.

And then once you get to the point where the parties are working with one another, the feasibility studies will generally be preclinical type, and one of the models that we typically use is like a [dog] study, for example. And so from a revenue opportunity, they're $100,000 to a couple of hundred thousand, depending on the scope of work and the number of iterations that the other team has to do, and of course, what all the pharma partner is looking to achieve.

And then, as that process goes on, that can lead to additional clinical work, that can lead to a license right away, or the foreign partner may want to actually see some clinical results before taking a license. And there's puts and takes all on the way when you're doing that, meaning that the further you are in clinical development, the better economic terms will be on a license, which is not dissimilar from what you see in the industry generally. And of course, earlier it is in development, and of course, the less valuable the potential economics are.

And so, in terms of going from the feasibility study to a national license, that can be couple of quarters, or it can be a couple of years. It just depends on the overall process. But all along the way, there is opportunities to earn economics on the formulation work, on the manufacturing to support your partner, and so forth.

So the whole goal is to build as big as a licensing funnel as we can and increase the number of shots on goal and keep building and building. So that as we get into periods over the next 12 months, next 24 months, we'll have a building of that pipeline that will eventually turn into licenses, and really build what we hope to be a very valuable portfolio of milestones and royalties out of that technology.

Okay. Yeah, that's great. That's very helpful. In terms of the strategic review -- and this is a little related to my findings, and certainly this will be more true as you sign more licensing agreements -- but Enteris probably has a lot more value, I think, than even when you bought it with the developments you've already had and the milestone payments.

Is the feasibility study including any options, there might be something like raising some money at the Enteris level or anything like that? Or is there anything you can reveal? I don't know if that would be a worthwhile thing to do or not, but is that the thing being considered or no?

Well, sure. Yeah, that's a great suggestion, Nat. And in terms of what all the Strategic Review Committee is considering, I think they're considering anything and everything, and that's definitely a conversation that's been had in the past. And again, I'd very much like to tell everyone exactly what all is being considered and so forth. But I think we can leave it that the SRC will definitely be apprised of your suggestion and we'll see exactly how it's determined to move that forward.

Okay. Great. Just one last minor thing, but I was looking at the warrant and equity portfolio, you have a few things that have had a pretty decent return there. I was just curious how you're managing those. Are you reviewing them quarter to quarter? Or you consider them long-term, buy-and-hold positions? Just -- it looks like some can end up being home runs potentially, or are these things you just assess quarter to quarter?

Sure. It's a little bit of both, Nat. And I think one of the challenges with monetizing those positions is that, in most cases, we remain lender to our partner that we actually have a warrant position in. And as a result of that, we're somewhat limited from a material non-public information perspective and being able to monetize those. And so I think, historically, you probably noticed that we typically -- being able to monetize those when there's a change of control of the partner company.

But when you think about a loan where we get refinanced and then our cleansing period, so to speak, completes, I think at that point we're able to determine whether we're going to monetize or wait. So it's something that we look at on a quarterly basis, but we're also limited in terms of what we can do with some of these positions until we're cleared from MNPI.

Okay, well, that's great. Keep up the good work. Really enjoying seeing all the progress.

Appreciate it, Nat. Thank you for the support.

[Scott Jensen], a private investor.

Hey, good morning, Winston, another great quarter. Thank you. So my question is a little bit of minutia but when I looked at the Narcan revenue for this quarter, and I looked at the underlying sales of Narcan, can you go over again how you get paid? Is it like a quarter off or delayed? Because the Narcan sales were fantastic, and we're (technical difficulty), so how does that work?

Yeah. Great question. I think it's good to clarify for everyone to make sure that everyone understands how these work. So we recognize revenue on our royalties in arrears. Since we don't have very good information on actual sales of a product upon which we get paid royalties, we really have to wait to see what we get to be able to recognize that revenue.

So in the case of Narcan, the payment that we would have received during the second quarter is derived off the sales from the first quarter. And that's pretty typical for all royalties, where, just generally speaking, royalty payments are due anywhere from 45 days to 60 days, or industry norms for those royalties to be paid post quarter.

So you're absolutely right, Emergent announced a blockbuster quarter, if you will, for it. And then -- so our royalty payment associated with that from the second quarter will be paid during the third quarter. And that's when we'll recognize that as revenue.

Great. Well, thanks for that, and I'll go back in queue.

(Operator Instructions) And at this time, I'm showing no further questions. So I'd like to turn the call back over to Winston Black for any closing remarks.

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

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.