SWK Holdings Corp (SWKH) 2022 Q1 法說會逐字稿

Good day, and welcome to the SWK Holdings first-quarter 2022 financial results call. (Operator Instructions) Please note, this event is being recorded. I would now like to turn the conference over to Jason Rando with Tiberend Strategic Advisors. Please go ahead.

Good morning, everyone, and thank you for joining SWK Holdings' first-quarter 2022 financial and corporate results call. Before the market opened this morning, SWK Holdings issued a press release detailing its financial results for the three months ended March 31, 2022. 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 the development of our consumer and drug product candidates, plans for future potential product candidates, and studies and our expectations regarding capital allocation and cash resources.

These statements are based on current expectations, and you should not place undue reliance on these statements. Actual results may differ materially due 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 first-quarter 2022 corporate and financial results. Winston, go ahead.

Thank you, Jason and everyone, for joining our first-quarter conference call. The first quarter 2022's results show increased interest in SWK as a preferred provider of non-dilutive funding for small and midsize life science companies with differentiated commercial products. We completed two transactions during the quarter, deploying $18.5 million of capital with initial $4.2 million invested with existing borrowers.

Though the life science sector is facing capital market challenges at the moment, our aim remains to selectively fund high-quality assets that are well-positioned to address important patient needs. First-quarter structured debt financing included $12 million to Advanced Oxygen Therapy for its US expansion and a $6.5 million secured loan to Acer Therapeutics to support the company as it awaits marketing approval for a treatment of urea cycle disorders.

We are pleased to help these companies meet their growth needs, especially when they can help improve medical outcomes for patients. We believe these transactions, coupled with our quarter-end income yielding assets of $188.4 million, illustrate how our platform is poised to take advantage of compelling investment opportunities.

In the midst of a very difficult investment climate, healthcare and life sciences growth companies draw on these financings to support the commercialization of their important medical innovations. We believe our suite of financial offerings can help our clients and future clients improve medical care and transform the lives of patients.

This year is shaping up to be an exciting one for SWK, and we are targeting to return to -- our new deal origination to historic levels. Supporting this effort, we have in excess of $63 million in cash plus revolver to meet opportunities in the market. As we announced last November and reaffirmed in early January, we remained committed to focusing on and growing SWK's core specialty finance business.

With our new Board of Directors now in place, we are focused on advancing our work to evaluate and implement strategic measures to improve our focused growth profile and capital allocation. As part of this work, as announced in our press release this morning, the Board has determined to allow the rights agreement or our NOL pill to expire on its termination date at the end of this month. We anticipate further announcements regarding this work in the coming quarters.

In 2012, SWK successfully deployed approximately $638 million of capital into 45 investments with 27 realizations that generated a realized internal rate of return of 20%.

I would now like to take time to discuss the steady progress made by our subsidiary, Enteris BioPharma. CEO Rajiv Khosla and his team are pursuing a two-pronged growth strategy to maximize potential of its Peptelligence and ProPerma technologies. The company has expanded its manufacturing facility and its contract manufacturing business.

Enteris is set to present two abstracts at the end of 2022 Annual Conference in June, highlighting research in the oral formulations of leuprolide. The compound incorporates Peptelligence technology that enables oral delivery of medications that were traditionally injected or infused. The company is also participating in the CPHI North America conference to showcase its drug delivery technology and contract manufacturing services.

Enteris's four ongoing feasibility studies are in a variety of indications that include cancer, women's health, and central nervous system disorders. In these programs, Enteris partners with drug companies to engineer the drug for oral delivery.

The goal of this process is to advance the development of the oral peptide or small molecules that could advance to license agreements between Enteris and its partners during the medium term, potentially providing new sources of license income.

Turning to SWK's financings -- finances, excuse me. As of March 31, SWK's total investment assets were $195.8 million, a decrease of 10.6% from a year ago. SWK received a $10.7 million cash payment from B&D Dental to resolve a long-running, non-accrual position that was carried at $8.3 million. The company also received a $5.6 million cash payment from Acerus Pharmaceuticals in its payoff. Please note that the quarter-end figures do not include portfolio movements post quarter.

At the end of first quarter of 2022, the weighted average projected effective yield of the finance receivables portfolio was 13.9%, including non-accrual positions, and was a slight increase from a year ago. Cash collections were better than forecast, leading to a realized yield of our finance receivable portfolio of 22.5% versus 16.7% from the year-ago period.

SWK reported non-GAAP tangible book value per share of $18.39 as of March 31, 2022, an increase of 12.7% from a year ago. That figure excludes the deferred tax asset, intangible assets, goodwill, and contingent consideration payable. Management views tangible financing book value per share as a relevant metric to value the company's core specialty finance business.

For the first quarter of 2021, SWK reported total revenue $11.1 million, a 19% (sic - see Press Release, "18%") increase compared to $9.4 million for the first quarter of 2021. Revenue growth was largely driven by $2.6 million from fees and interest due to an early payoff of the two loans I noted before.

The GAAP net income for the first quarter of 2022 totaled $3.5 million or $0.27 per diluted share compared to $3.4 million or $0.26 per diluted share for the first quarter of 2021. For the first quarter, adjusted non-GAAP net income generated by a special finance business totaled $8.4 million, a 25% increase from the first quarter of 2021.

Looking ahead, the remainder of 2022 has the potential to be a fruitful year for SWK in the synergies between our finance offerings and ongoing capital market needs for small and midsize life science companies to fund innovation and build treatments to market.

As traditional roots of financing face new challenges in the current investment climate, the combination of our long-term investment strategy, permanent capital base, flexible mandate, and lack of regulatory constraints places us to be [carrying] an advantageous position. These dynamics, coupled with growing momentum at Enteris, offer the potential to foster a sustained period of value creation for SWK. With that, I will now open the call to your questions.

(Operator Instructions) Kyle Bauser, Lake Street Capital Markets.

Great, thank you. Hey, Winston, thanks for all the updates. Hope you're doing well.

Hi Kyle.

So maybe we can just chat on the activity out there. I mean, with things as depressed as they are, debt is becoming more attractive, I think, than equity, particularly in its mid-cap space for a lot of different players. To the extent that's true, have you seen more activity in your realm of things as people contemplate ramping up their operations and their financials through debt or equity?

Sure. Good question, Kyle. I think, certainly, your observation is accurate. As equity values have been compressed, it really highlights just really how accretive our nondilutive debt financings can be for companies. And also, you're right, these companies do need to finance as they look to grow, and that puts us in a very good spot.

Yes. I'd just say, generally speaking, the pipeline activity is definitely brisk. And we are seeing a good amount of deals get done. So between ourselves and, of course, the rest of the market -- so I think it's a pretty robust period out there.

I appreciate that. And it sounds like -- I think you said you've got access to about $63 million that you could deploy. So you're probably pretty good for a while. But is there, I think, an appetite for eventually taking on more leverage in your business? Or do you think you're good for the [rate interim], and there's plenty of activity and capital at your disposal that you can do that? I'm just curious how you're thinking about leverage going forward.

Sure. Yes. We've talked about this in the past, and I made an indirect reference to this during my prepared remarks today. So yes, but we're definitely evaluating what our optimal capital structure should look like with -- going back to November last year and early this year, we had made some public comments about the desire to build out our capital structure as we think about growing this business and enhancing our returns profile for the benefit of stockholders.

And now that we're basically five, six weeks in with our new Board, we're squarely focused on looking at this issue, as well as all other issues, to make sure that we are well positioned for the business going forward. So we don't have anything to announce right now regarding what that quantum of debt capital may potentially look like that we're considering putting on. But yes, but suffice to say, we are evaluating that, and expect to be able to make some announcements in the coming months.

I appreciate that. And if you were to potentially scale up by taking more leverage, how do you anticipate needing to expand your internal organization? I mean, do you feel like you've got quite a bit of bandwidth still? Or are you at capacity? And so, you maybe want to add a member or two to your investment team? Or -- just trying to understand, if you do scale up, what resources would you need internally?

Sure. Again, another [excellent] question. From internal resources perspective, yes, we definitely have capacity to do more. Everyone works very hard. But to your point, we actually did add a director-level investment professional towards the end of the quarter -- yes, the first quarter. I think JD started it on March 1.

And as part of this, we also implemented a dedicated business development function at SWK. So we're -- yes, I think we're well positioned. And I think we'll -- we're always looking for exceptional investment professionals. So we'll definitely be on the lookout for additional resources as we like to grow. But at this point, we're not currently hiring someone from that perspective.

Sure, got it. I appreciate that as well. And just lastly, on the Enteris business, you mentioned, of course, the four feasibility studies. Maybe you could talk a little bit more about how you envision your internal development playing out. So you've got four feasibility studies. Is the plan to license them, or do you want to bring them to the FDA internally on your own? Just trying to understand what the playbook is for your internal assets.

Yes, sure. So I guess, one, a clarification there. The feasibility studies are actually work that the Enteris team is doing with third-party pharmaceutical partners. So those aren't necessarily -- those aren't our assets.

Those are our partners' assets that we are evaluating using our technology to make oral versions of those assets. And that business development pipeline continues to build and we're -- that can potentially be a very important revenue driver for us because those sorts of feasibility agreements are the things that turn into a license agreement like the Cara license agreement.

On the internal pipeline, we're -- we talked about the one program that we're really focused on, and we're -- so at this point, it's really the primary focus is on getting that through its current clinical trial. The team is continuing to look at additional opportunities to leverage our technology. And I think as the year goes on, we'll hopefully have some more things to say about that.

That sounds good. Well, thank you, Winston, for all the updates, and I'll jump back to the queue here.

I appreciate it, Kyle.

(Operator Instructions) [Scott Jensen], private investor.

Good morning, Winston, and --

Hey, Scott.

-- a good uneventful -- an uneventful call in this case is well appreciated. To follow on some of Kyle's areas of questioning. In this space, now that you're seeing more opportunities -- and obviously, interest rates are going up -- are you able to adjust your -- the prices that you get from your clients in lockstep with the market?

Yes, it's a very interesting question. On one hand, our structured debt transactions are typically indexed to LIBOR. And so, we are getting that benefit from across the portfolio as well as on new deals from changes in LIBOR. And obviously, at some point, we'll be moving to a new reference rate. So we do see the benefit from that perspective.

And on overall pricing, things have remained relatively constant. The market hasn't moved I think all that much. Generally speaking, I would say it's probably plus or minus 25, 50 basis points either way. That said, the thing that will be interesting to see is that these capital markets [formal] conditions continue into the second quarter and perhaps throughout the rest of the year.

How that actually looks, we certainly will be looking to take price where we can, I think with the idea also that we do want to be mindful of not overburdening our borrowers and creating an issue, if you will. So of course, we'll look at other levers within our investment structures to try to enhance our returns for stockholders.

Excellent. That answers my question. Now as far as the leuprolide trial, which is recruiting according to the -- clinicaltrials.gov, what is the timeframe we could expect to get that Phase 2 data since you're looking at a month cycle? Do we have second half of this year, first half of next year? Do we have any guidance for when that might be?

Sure. We -- [I personally] hope that we would be able to talk about it at some point this summer. But the recruitment is taking a little bit longer. Issues that we're seeing on patient recruitment is not all that dissimilar from what other pharmaceutical companies have noted over the last couple of quarters. Yes, so I think we are eyeing sometime later the second half of this year to be able to have some results.

But at this point, really, it just depends on the pace of patient recruitment. And the team is very focused on that and has been looking to expand the number of trial centers and implementing additional measures to make sure that we can get the trial done and as expeditiously as possible. But we'll see because that's really the gating factor on the timing.

Okay. And then to follow on Kyle's point about the Phase 3, which usually you have a larger cost component, are you thinking that you would be interested, or you'd be open to partnering with somebody to go to a Phase 3? Or would this -- or would you get more value by it doing it yourself [to see that]?

Yes, there's definitely an art on the licensing side in terms of do you license a preclinical Phase 1, Phase 2, Phase 3 post approval? And with that sliding science scale as you advance it with the -- generally, with the royalty rates and so forth increasing, you, of course, have to spend more of your own money and be more at risk to get to those higher levels.

Yes, I think, frankly, it depends on what the -- how the data shape up and what we think, from a regulatory perspective, is required to actually get an asset across the line. I think we'll -- those things will inform what the Phase 3 costs would be, and then we'll essentially make that decision at that time.

I think, though, to the extent we are able to demonstrate in patients that we're having the desired effect for a 505(b)(2) type program, that may be the optimal time to license it. But we would, of course, consider all the factors I just mentioned as part of that analysis.

Excellent. And my final question for you is, is the Board considering a buyback considering there sometimes are optimal times where the market isn't there to maybe catch your stock? Are you thinking that maybe you guys could be one of those people that catch the stock?

Yes, a well-timed question. Referring back to what I noted to Kyle --.

Is that just my friends and myself who might have caught it?

Sure. So we're definitely thinking about that deal. I think we all had hoped that we would have been in a position earlier this year to be able to make some more announcements on some of these capital allocation-type decisions. But I think now, with our new Board really getting into work now for -- we've been together five weeks, six weeks, something like that.

We're definitely looking at that. We're looking at everything, of course, from dividends to capital structure and so forth. And I think the first part of that was the determination to allow the rights agreements to expire at the end of this month. And we'll be -- doing initial analysis to get -- to be able to make more announcements about buybacks and so forth in the coming months.

Great. Thank you. That's it, and I'll hop off.

I appreciate the interest, Scott.

There are no more questions in the queue. This concludes our question-and-answer session. I'd like to turn the conference back over to Winston Black for any closing remarks.

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

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