SWK Holdings Corp (SWKH) 2020 Q2 法說會逐字稿

Good morning. Welcome to SWK Holdings' second-quarter 2020 financial results conference call. (Operator Instructions) Please note that this event is being recorded. I would 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' second-quarter 2020 financial and corporate results call. This morning, SWK Holdings issued a press release detailing its financial results for the three months ended June 30, 2020. 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 statements 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 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' 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. Winston will provide an update on SWK's second-quarter 2020 corporate and financial results. Winston, go ahead.

Thank you, Jason, and everyone, for joining our second-quarter conference call. Second quarter 2020 continued what has been a significant progress year for SWK, highlighted by improved quarter-over-quarter performance that was driven by strong returns from our specialty finance business. We believe this is reflective of the growth potential of our SWK's business model, and our ability to capitalize on attractive financing opportunities within the small to mid-sized commercial stage life sciences sector.

Looking ahead, we believe the current industry and general economic dynamics, inclusive of the strong underlying demand for health care products and services, despite the current COVID-19 conditions, should remain favorable throughout the remainder of 2020.

We anticipate these conditions and the credit quality of our portfolio will not only enable us to continue to produce strong results from our current specialty finance portfolio, but also to provide new differentiated opportunities for us to deploy capital in a compelling, risk-adjusted, efficient manner to support innovative companies help them achieve their growth opportunities.

When SWK initiated our growth -- our strategic growth plan in 2019, we viewed the expansion of our investor base as central to the plan's success. The recent addition of SWK to the Russell Indexes marks an important step towards achieving this goal.

Russell indices are a widely used benchmark for active managed investment strategies that should enable SWK to broaden its visibility within the investment community, and increase liquidity of our stock as we continue to explore additional avenues to attract new investors and create shareholder value. This achievement demonstrates both the determination of SWK's team and the high potential we offer [to investors].

Before I discuss our second-quarter results and achievements, I'd like to provide a brief update on the COVID-19 situation [and current] position in our subsidiary, Enteris BioPharma. As you have seen previously, SWK's business has been minimally impacted by the COVID-19 outbreak. We remain in regular contact with the [original] management team of our portfolio companies, and are pleased to report that our portfolio as a whole sees the whole firm against the challenges impacting the broader US economy and the healthcare industry, which [particularly] is illustrated by no new non-accrual positions year-to-date.

We also believe this is due to SWK's focus on investing in differentiated companies with strong intellectual property, [directing] commercial products that (inaudible) within the health care system. Also benefiting SWK, we remain reasonably well capitalized with approximately $32 million of cash and revolver availability (inaudible) share purchases for our partner companies, and execute on potential investment opportunities. Unlike BDCs and some similar investment funds, SWK's balance sheet is not highly leveraged.

Regarding our subsidiary, Enteris BioPharma, it was approximately a year ago that SWK completed the acquisition. And we remain as excited about the opportunities in front of Enteris as we were when we closed the acquisition. And (inaudible) 12 months since closing, SWK has worked closely with Enteris to strengthen its operations, advance the expansion of its manufacturing capabilities, and enhance its management team.

A critical step in this process occurred during the second quarter with the appointment of Dr. Rajiv Khosla as the company's new Chief Executive Officer. Dr. Khosla has already made a substantial imprint on Enteris' business. [He has taken] several measures that should enable the company to capture more value creating opportunities and maximize the potential of our Peptelligence platform.

We clearly believe at our core thesis that Enteris' Peptelligence technology and commercial platform has yet to realize their full economic potential remains valid. For example, Cara Therapeutics, which utilizes the Peptelligence platform and our license for its oral KORSUVA program, announced in its second-quarter 2020 update that it expects to initiate the safety portion of its Phase 3 program of oral KORSUVA as treatment for pruritus in patients with moderate to severe chronic kidney disease in the fourth quarter of 2020.

This would occur in advance of the end of Phase 2 meeting with the FDA, which is now forecast for the first quarter of 2021. Additionally, Cara now expects to report top-line results in the first half of 2021 for up to two Phase 2 clinical trials of Oral KORSUVA in atopic dermatitis and pruritus in patients with hepatic impairment due to primary biliary cholangitis.

In closing, while the coronavirus outbreak continues to have an influence of all aspects of life and business for the foreseeable future, we believe that SWK's structure and focus will allow us to withstand these challenges and potentially will position us for growth in the near-term and certainly once the situation subsides.

As of June 30, 2020, SWK's yielding portfolio of royalties and structured credit backed by royalties totaled approximately $178.7 million across [23] partners. That compares favorably to $178.3 million at the end of the first quarter 2020, and $173.3 million as of the year end 2019.

During the second quarter 2020, the company deployed $0.6 million to existing borrower Harrow Health, and we deployed an additional $2 million to another existing borrower, Eton Pharmaceuticals, post quarter. At the end of the second quarter 2020, the weighted average projected effective yield of the finance receivables portfolio was 13.2%, inclusive of non-accrual positions versus 13.9% as of the end of the second quarter in the previous year.

SWK reported book value per share of $18.9 as of June 30, 2020, which includes an aggregate $0.40 per share noncash charge during the quarter, which was comprised of 26% -- sorry, $0.26 per share negative impact from the amortization of Enteris intangibles and $0.14 per share loss due to the increase in the fair value estimate of the Enteris acquisition-related contingent consideration liability.

These items were offset by an approximate $0.08 per share positive impact on the mark-to-market changes on warrant equity securities. This compares to our book value per share of $18.31 as of December 31, 2019, $17.31 as of June 30, 2019.

The tangible specialty financing book value per share, which includes the deferred tax asset, intangible assets, goodwill, and contingent consideration payable, totaled $16.08 at the end of the quarter. Management views the tangible financing book value per share as a relevant metric to value the company's core specialty finance business.

In the second quarter of 2020, SWK reported total revenue of $7.9 million compared to $5.7 million for the same quarter of 2019, which was driven by an increase of $1.8 million of royalty income, and a net $300,000 increase in fees and interest earned on our finance receivables portfolio. Revenue primarily consisted of interest and fees earned on the portfolio and royalty payments generated by portfolio companies, as well as pharmaceutical development revenue generated by Enteris.

Focusing on the second-quarter financial results, I want to highlight that the increase in the royalty payments in the second quarter was higher than we would typically expect as revenue stream royalty payments can be a bit irregular or lumpy, which can result in fluctuations from quarter-to-quarter.

Income before tax for the second quarter 2020 totaled $1.3 million compared to $4.3 million for the same period the previous year. The decline was driven by a $3.4 million expense for Enteris intangibles amortization, a $1.8 million loss due to increase in the fair value estimate of Enteris acquisition-related contingent consideration, a $1.7 million operating loss for Enteris. And these were partially offset by a $1 million gain as a result of the fair market value increase of our equity weighted positions.

A quick reminder about the Enteris acquisition accounting. You're amortizing the purchase price value ascribed to intangible assets, which resulted in a $[2.2] million charge in non-expense cash during the quarter. Additionally, the $1.8 million loss in the quarter related to the increase in the fair value of the contingent consideration caused by our increased expectation for the value of that consideration. Unfortunately, even though we have greater expectations for the value potential cash payments under existing license agreements, that doesn't allow for an offsetting increase in the assets.

GAAP net income for the second quarter ended June 30, 2020, totaled $0.9 million or $0.07 per diluted share compared to $4.3 million or $0.34 per diluted share for the same quarter of 2019. For the second quarter 2020 the non-GAAP adjusted net income was $4 million. And the specialty finance segment (inaudible) an increase in non-GAAP earnings to $5.7 million versus $4.3 million for the second quarter of 2019.

From a portfolio perspective, our income-producing assets, which includes our finance receivables and corporate debt securities, reached an all-time high in the quarter of $178.7 million as of June 30, 2020. This increase compared to $169.7 million as of June 30, 2019.

[As per our] study results, our specialty finance business continues to perform well and we're working hard to target new transactions that leverage our areas of expertise and the growing need among small to midsize life science companies to access capital. We're well capitalized to meet the continued demand and what we expect to be increasing as well for our financial products.

At Enteris our focus continues to be on supporting our license partners, (inaudible) the business development function generally which includes evaluating our own asset opportunities for future development and potential out-licensing, and expanding our manufacturing capabilities. All these activities are focused on crystallizing our overall future growth strategy.

To that end, we have added personnel to the Enteris team this year, including a new CEO and CMO. They're working to expand the company's manufacturing facilities, which continues according to plan.

Further, regarding our overall business development strategy, the hiring of Dr. Khosla as Enteris's new CEO marks a key development at a critical time for Enteris. He brings to his new role a wealth of experience as an industry executive and as a consultant advising biopharmaceutical companies (inaudible) properties, as well as the development experience and a deep knowledge of all of the (inaudible) technologies will all be critical to Enteris as the Company targets multiple growth opportunities to maximize the value of Peptelligence.

With Rajiv's arrival, Enteris's management team now possesses an executive team with substantial experience and ingenuity and we look forward to being an active and supportive partner as Enteris seeks to advance its external and internal growth programs, as well as development of new licensing and partnership opportunities that leverage the Peptelligence platform. We anticipate providing a more thorough update regarding Enteris in early 2021.

In inclusion, the second quarter (inaudible) has been a sustained period of growth for SWK, also made possible by the diligent efforts of our SWK holdings team. I'd once again like to thank our employees for their dedication and loyalty, and our stakeholders for your continued support as we evolve our model (inaudible) SWK. With that, I will now open the call to your questions.

(Operator Instructions) Kyle Bauser, Colliers Securities.

Hey, Winston. Good morning, thanks for all the updates here. Maybe can you talk a little bit about upcoming catalysts we should keep an eye out for within the Enteris business? I know you walked through a couple of them, but I didn't quite catch them. And I just want to make sure we know what to look out for over the next 12 months.

Sure. So as we -- we really don't like giving much forward guidance, but the things that we are looking for to demonstrate the advancement of the business will be -- first on the manufacturing side is the continued build-out and completion of that expansion project. And then of course, any public announcements that are made by our various licensees of our Peptelligence technology including Cara. And so of course, we'll be watching to see how they continue to hit their milestones.

And then, any updates regarding kind of numbers or feasibility studies, and then potential new licenses regarding the -- (inaudible) the business. That's really the things that we're looking at as they are demonstrating advancements there.

Okay. And I think you mentioned Q4 of this year and then first half of next year. And what milestones were -- I think it was with Cara and clinical trial activity? (multiple speakers) again?

Sure. I am not telling you anything they haven't announced publicly. So for the second-quarter update a week or so ago, they announced that they intend to begin the safety portion of their Phase 3 trial -- patient trials in the fourth quarter of this year. And they expect to have the FDA end of Phase 2 meeting during the first quarter of 2021. And then they expect to have additional Phase 2 results in the first half of 2021 for their other two Phase 2 trials in atopic dermatitis and in pruritis in patients with hepatic impairment due to primary biliary cholangitis.

Got it. Perfect. Thank you. And as we think about deployment of cash, do you have a preference for share repurchases or to make it through COVID and conserve cash to support the current portfolio? Or do you think you have enough fresh capital to deploy for new investments? I'm just trying to understand how you're prioritizing and deploying cash through COVID here.

Sure. I guess first I'd point out that thankfully the portfolio continues to perform well. So the capital that we have today is not a static pool, the portfolio does continue to generate healthy cash flow. So as we think about the point, both the flow of cash flow that we'll be getting over the coming quarters and years, plus the liquidity we have today, it's mentioned in the last quarter, it really is a bit of a balancing game and as we seek to invest our capital to the highest return areas. Because there's a lot of ways for companies to build shareholder value.

And so we're always evaluating share repurchases and we're, of course, looking at new transactions and we, of course, (inaudible) want to make sure that there's enough liquidity to support portfolio companies as circumstances change. Because, as everyone knows, these are uncertain times. And while we feel great about how things are going, generally, there may and will be surprises that we may have to help the company's with.

And of course, as we look at opportunities with Enteris too, as we further understand, for example, our opportunities on some known asset development potential. It may be that we decide that that actually will be -- create that price has deployed corporate resources. So yes, I think as we think about building the book and building Enteris and returning value to shareholders, we'd like to allocate the capital in the most judicious way that would be possible.

Got it. And certainly a lot of fresh capital that you can deploy for each of those and including Enteris, which I didn't mention. So appreciate that. As it relates to the specialty finance side of the business, is it a competitive market out there? I mean, what's the activity like as you evaluate new deals?

Is there less activity from other competitors bidding on deals? Is it a little bit easier maybe to avoid those types of situations where it comes down to competitive front and you're going up against some other people? Or is it still pretty active and there's still other companies that are looking to deploy capital to some of these high-quality names?

Yes, I think the first part of the answer to that question isn't exactly what you asked, but I think the first thing that I'd point out is we continue to see a multitude of really attractive opportunities. And so, I think we're a little lucky in that we can be picky in evaluating different deals.

And so we're, of course, grateful for that and I think testament to the platform we've built. But regarding competition itself, it really depends on what segments you're looking at. In some places, it's getting fairly competitive, in other places of the world (inaudible) deals where there [are] any other potential lenders around.

And so, another thing that is interesting is, I think from our perspective, the level of competition doesn't necessarily indicate the credit quality of an asset from our perspective. And so, I don't know that my perspective would be any increase in the competition in certain segments isn't producing the credit quality of opportunities. And we're still able to (inaudible) in the deals that we've been working hard on to achieve our typical returns that we may have in the past.

So, it's a little bit of a mix. And so I don't know that that's really all that different from prior periods where certain [scientific additive] and that goes away and other segments could be competitive.

Got it. Okay. Great. Well, that's it for me and thanks for all the updates today.

Great. I appreciate the questions.

Nat Stewart, N.A.S. Capital.

Hey, Winston. Great job. [Great] to see the credit portfolio hold up so well. Honestly, better than I expected, given all the crazy stuff that's gone on. I just had a few questions. I noticed the very synthetic royalty performed very well. If I remember, it has a step down in the royalty rate once some milestone -- once some targeted return is met. I was just curious where that synthetic royalty is and if there's any detail just on how -- the strong performance it's had?

Sure. I guess first on, the strong performance, yes, the team there has just done a great job in growing that the [extra two] products. And so, we're obviously benefiting from that, and we're very thankful for their strong execution. And so, (inaudible) going quite well.

You recall correctly, the way that deal works is until we receive a -- I guess a [1.7625] times cash-on-cash return from the initial $10 million invested, until we hit that, we [can] receive a higher royalty rate. Once that multiple has been achieved, it then steps down to 5%. And then the royalty can be terminated by -- the residual royalty there can be terminated by buying it out on a change of control type of transaction.

In terms of how much further we have to go until we hit that multiple -- yes, I don't have that number off the top of my head. But I think it's north of Phase 1 (inaudible) of $5 million. But I can look that up and get back to you afterwards. All the cash we received are obviously public, so it could be figured out in the public document. I'll look it up and get it to you there.

Yes, it looks -- I mean, it looks like -- I mean, it shows the quality of these different royalties and the credit agreements you have that I can look at them and a number of them I can determine I think they're really worth more than the book value.

But my second question was on the contingent consideration. I think it's probably a little confusing for many people how the Enteris deal was accounted for with the amortization, as a divergence and accounting values because I think you're actually building value there. But for the time being, the short-term, it's hidden by the funny accounting treatment.

But I was just curious about the contingent consideration because that stepped up. That's actually a good thing. It's a liability increasing. And I was just curious, what was the cause of that. If I understand correctly, that's just based on the potential milestone payments. So it sounds like, if I'm remembering correctly, the milestone payments went up a bit, which is a good thing. Is there any more detail you can provide on that?

So I guess first on the accounting itself, GAAP requires us to book the value of any payments that would have been made as to the seller's part of the deal. As a reminder, we did have sharing of the proceeds of our license agreements as well as any sort of proceeds on the initial three owned assets that the company has on product candidates.

And so for us, we have to book the full value of that as an asset, meaning the [$4.00] that will be paid out on a risk-adjusted basis. And then the amount that will be paid out to the seller is booked as the contingent liability.

So you're exactly right that our general expectation, based on the developments of our license in particular, have increased and, as a result, that [liability] results in a loss in the P&L and an increase to the liability even though (inaudible) was no [doubt] offsetting amount on the asset side. (multiple speakers)

Yes, that's what's so peculiar.

Yes, it's really counterintuitive. I mean, the contract, we had lower expectations and with marking the asset down, the fact that we would get a gain.

[It's strange]. That would be a bad sign.

Yes, I agree it's funky. But it is indeed a good thing. And then -- and you are right in that the value of the purchase price that was ascribed to existing licenses, because we do expect -- as we noted during the initial conference call that we do expect a lot of them to buy cash proceeds in the near to medium term.

That resulted in those assets being amortized over that period, which, if you look at it, I agree. I think the business has increased in value. Yet here we are, it's [shrinking] my balance sheet. But that's the way (multiple speakers).

It is going to be a discrepancy for a period of time, but I think it will resolve itself over a period of years or as things further develop on the revenue side. So, I just wanted to clarify that.

Yes, I think that's right, I appreciate that. Yes, thank you for that.

Okay. Well, that's it. Keep up the good work. Thanks.

Thanks, Nat. Appreciate it.

(Operator Instructions) At this time, we have no more questions. This concludes the question and answer session. I would like to turn the conference back over to Winston Black for closing remarks.

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

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