SWK Holdings Corp (SWKH) 2019 Q4 法說會逐字稿

Good day and welcome, SWK Holdings Corporation fourth quarter and full year 2019 conference call. (Operator Instructions) Please note this event is being recorded. I would now like to turn the conference over to Mr. Jason Rando, Tiberend Strategic Advisors. Please go ahead.

Good morning, everyone, and thank you for joining SWK Holdings fourth quarter and full year 2019 financial results call. Yesterday evening, SWK Holdings issued a press release detailing its financial results with three months and year ended December 31, 2019. Press release can be found in the investor relations section at swkhold.com under news release.

Before beginning today's call, I would like to make the following statement regarding forward-looking statements. Today, we will be making certain forward-looking statements about future expectations, plan, event, circumstances, including statements about our strategy, future operations and the development of our consumers through our product candidate. Plans for future potential product candidate, studies and 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 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 [its forward-looking statement] 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'll provide an update on SWK's corporate achievements during the fourth quarter, SWK's fourth quarter and full year 2019 financial results and the status of the company's portfolio.

With that, I turn the call over to Winston. Winston, go ahead.

Thank you, Jason. And thank you, everyone, for joining our first quarterly conference call as a NASDAQ listed company. We achieved much during 2019 and early 2020 which collectively has positioned the company for what we believe -- substantial long-term growth. While the acquisition of Enteris BioPharma in August 2019 and the uplisting of our common stock to the NASDAQ capital market in January this year are clearly important highlights of the past 12 months. But surrounding those tangible events has been the ongoing strong performance of our core healthcare, especially the life science finance business, which continued to produce solid returns in 2019.

I'll discuss each of these initiatives in detail shortly, but I feel I must begin the topic [resonate] everyone's mind, the coronavirus outbreak. The coronavirus or the COVID-19 is an unprecedented global health crisis impacting all aspects of society and business. SWK, like all businesses, is not immune. We are actively taking measures to mitigate the impact of the situation as much as possible day by day. To ensure the safety and well-being of our employees and their families, we have instituted a company-wide work-from-home policy that halted work-related travel. With the ability to work remotely SWK believes that its daily operations are largely insulated from the impact.

Unquestionably COVID-19 is having a far-reaching effect on the health care sector. Everything from hospitals and doctors' offices, the companies that provide services, products and medication to patients and medical facilities. We are vigilantly monitoring the situation and in particular, the impact on our portfolio companies, the liquidity and contingency plans. Since the outbreak began, we have been in regular contact with the individual management team initially focused on supply chain disruptions and more recently focused on business visibility.

Thus far, we believe our portfolio is positioned to weather the challenges impacting their businesses. While we do expect some companies to see some choppiness in business trends. We believe much of this will be demand [deferral] versus demand destruction with many of these businesses poised to rebound as hospitals and doctors' offices reopen to address patient needs.

We believe this is due to SME case focused on investing small, medium lifestyle companies with strong intellectual property, protecting commercial products that [fill] important demands within the health care system. Example of this is DxTerity diagnostic, which is developing a COVID-19 diagnostic test offer through an enterprise subscriptions testing service called KEEP AMERICA WORKING. Additionally, a number of our portfolio companies have publicly disclosed successful capital raises over the past 12 months as we disclosed in our portfolio update in February.

SWK remains well capitalized with approximately $30 million of liquidity between cash on hand and availability of our revolver. Unlike business development companies, investment fund SWKs balance sheet is not heavily leveraged, illustrated by our positive net cash position. Given this, we are prepared to prudently support our partner companies during this unprecedented time of stress and also importantly remain actively identifying opportunities to put our capital to work, [Is that you thinking about our front], the unprecedented dislocation probably brought on by the coronavirus outbreak should undoubtedly creates compelling investment opportunities as a small leading health care companies otherwise strong product offering will be in need of capital.

It is ideally suited to our business model. In response to the dislocation of our stock price, Board of Directors has authorized repurchase of up to an aggregate of $2 million of the company's common stock from time-to-time through a 10b5-1 trading plan in compliance with Rule 10b-18 under the Securities Exchange Act 1934. This program will expire on September 30, 2020 and replaces the program that expired on February 28, 2020. SWK's Board will continue to evaluate additional stock repurchase programs as circumstances dictate.

In closing on these points, it's best to say that coronavirus outbreak will continue to impact businesses for some time. However, we believe that SWK's restructure focus will allow us to withstand the difficulties and potentially position us for near term compelling opportunities as they arise and certainly when the price [subside].

For those new to SWK, we provide unique financing solutions that allow our partners to monetize future cash flow with no dilution to their equity stakes. Our services include direct and synthetic royalty investments, first-in debt financings, mixed offerings and product acquisition. We focus on transactions in the $5 million to $20 million range for which there is substantial market to just certain dynamics and healthcare industry.

As of December 31, 2019, SWKs portfolio royalties and structured credit backed by royalties totaled approximately $175.1 million across 23 partners with a GAAP effective yield of 13.2%. That compares favorably to $175.5 million as of September 30, $169.7 million as of June 30, and $167.1 million as of December 31, 2018.

SWK reported a book value per share of $18.31 [for] December 31, 2019, compared to $16.47 as of December 31, 2018. And after (inaudible) reported, tangible book value per share for our specialty finance segment of $14.74 which eliminates our deferred tax asset net asset value of Enteris.

SWK's fourth quarter revenue was $9.4 million with our specialty finance revenue, increasing 37% year over year, driven by strong outstanding results. SWK's consolidated fourth quarter GAAP net income was $8.8 million or $0.68 per diluted share and non-GAAP adjusted net income of $4.8 million or $0.37 per diluted share.

Our non-GAAP adjusted net income and the non-cash items, including the periods benefit from income tax accruals, mark-to-market changes in equity positions and the amortization of Enteris related intangibles. Record net income results were impacted by a $1.6 million write down to a royalty asset due to a lowering of our expected results for that asset. $4.5 million of Enteris related intangibles amortization and $8.2 million benefit from income taxes. For 2019, SWK reported $30.7 million in revenue, an 18% increase year over year for the specialty finance division driving $30.1 million results.

SWK's 2019 consolidated GAAP net income was $23.8 million or $1.85 per diluted share, and non-GAAP adjusted net income was $21.4 million or $1.66 per diluted share. 2019 the [nakem] of results were impacted by $4.8 million of Enteris related intangibles amortization and a $7 million benefit from income tax rules. Excluding the operating results at Enteris BioPharma and costs associated with that acquisition, the core specialty finance business generated adjusted non-GAAP net income of $24.4 million or $1.89 per diluted share for 2019 and Non-GAAP adjusted net income of $6.2 million, or $0.48 per diluted share for the fourth quarter of 2019.

The strong fourth quarter results capped a strong year for the specialty finance segment, punctuated by 12.6% adjusted return on tangible book value. I'd like to note that this was also achieved without leverage. SWK was active during 2019, deploying capital with an aggregate deployment of approximately $32 million across, specialty finance segment and Enteris. The trend has continued into 2020 with SWK deploying an additional $5.5 million during the first quarter through existing partners pursuant to their credit agreements. As noted earlier, we anticipate announcing additional transactions this year as our core business remains the primary growth driver for SWK.

As evidenced by these results, our specialty finance business in 2019 on strong footing and are working hard to maintain our momentum in 2020 despite recent events,

I'd like to share a quick note on the Enteris's related intangibles amortization. As we noted in the announcements for the acquisition, we do expect to receive substantial milestone payments under the existing license agreements in the near to medium term. As a result of this, in GAAP accounting SWK will be amortizing license-related tangibles over the expected receipt timeframes.

Going forward, we expect to continue executing a two-pronged strategy to build value for our shareholders. The first involves expanding beyond our traditional specialty healthcare finance business through synergistic transactions that offer both attractive valuations and upside optionality capable of driving returns for our shareholders.

The second concerns enhancing our position as a publicly traded company, bringing in new investors to SWK. The uplisting of SWK stock in NASDAQ capital market with a centerpiece of this plan and we expect the move to NASDAQ will serve to raise SWK's visibility and enhanced trading liquidity by broadening our field of our stock through a larger shareholder base as we execute our business plan and drive long-term shareholder value. These efforts in maximizing our investment in Enteris's BioPharma,

And in terms of the deal in August 2019, SWK paid $21.5 million upfront and agreed to share with the seller, the milestone and royalty proceeds, with the non-exclusive license agreement between Enteris and Cara Therapeutics, which was executed on August 20, 2019. In that license agreement, Enteris license is proprietary Peptelligence oral drug formulations to Cara for use with its oral KORSUVA drug development candidate.

Enteris which now operates as a wholly owned subsidiary of SWK is a biotech company offering innovative formulation solutions utilizing as proprietary oral drug delivery technology Peptelligence.

Revenue generating with a proven platform technology, internal development pipeline and manufacturing capabilities, we believe that Enteris is a classic diamond in the [rough], it is yet to realize its full economic potential. Our vision is to provide capital and resources for Enteris to accelerate its growth, which we believe has the potential to produce significant returns based on current and future licensing and royalty partnerships and out-licensing economics that were not reflected in Enteris's valuation at the time of acquisition.

Enteris currently derives revenue from technology licenses consisting of milestone royalties as well as formulation and development work and clinical trials, tablet manufacturing. Similar to SWK' specialty finance segment, Enteris had a strong 2019 with total 2019 revenue exceeding $13.5 million with approximately $600,000 of that realized books close.

We expect 2020 to be an investment year for Enteris as we position the company for the future. The expansion of manufacturing capabilities and Enteris's [prudent] majorities facilities underway and should be completed in 2020. We are working with Enteris to bolster its management team and augment it's business development efforts. In February this year, Enteris hired as its new Chief Medical Officer, Dr. Gary Shangold, a biopharma industry veteran with an unmatched blend of executive experience in drug development, regulatory and commercialization.

Gary has been tasked with advancing Enteris' external and internal programs, and most importantly, to work with the business development team to develop new licensing partnership opportunities that leverage Enteris's Peptelligence platform which is key to the company's future.

Peptelligence has already been validated in numerous clinical trials spanning multiple drug candidates, including three executed technology out-licensing agreements. In fact, the licensing agreement with Cara announced in August, in our opinion, is a significant derisking event and our acquisition of Enterisin. Enteris received an upfront fee of $8 million in cash and stock from Cara is entitled to undisclosed future milestones and royalties, which, as described previously, will be shared by SWK and [its sala].

The Cara program is currently evaluating Oral KORSUVA in three separate clinical trials studies. In December last year, Cara announced positive top line results from a Phase 2 dose-ranging trial for oral KORSUVA for the treatment of pruritus in patients with moderate to severe chronic kidney disease. [Gary] announced that they intend to advance to Phase 2 trials in the second half of 2020. Top-line data from Phase 2 trials in atopic dermatitis and chronic liver disease associated tried is above expected this year.

In conclusion, the 2019 fiscal year was a clear reflection point in the growth of SWK. And we look forward to benefiting from the initiatives have been undertaken. All this is made possible by wills and efforts of our SWK team. I'd like to thank our employees for dedication and loyalty, and our stakeholders for their continued support as we evolve our model at SWK Holdings.

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

(Operator Instructions) Mr. Kyle Bauser, Dougherty & Company.

Hi, good morning, Winston. Thanks for taking my question.

Hi, Kyle. Appreciate you joining.

Absolutely. So it's of course, been a difficult situation out there with COVID-19, so having a $30 million cash available gives you quite a bit of flexibility right now. And it sounds like there's been minimal disruption in the portfolio, which is great. So I know it's a fluid situation, but do you anticipate not having to deploy much capital to support your portfolio companies through this situation?

There's certainly some opportunistic investments out there at these new levels. I guess just kind of curious how you're thinking about deploying that cash in addition to that buyback.

Sure. Great question. And something that we are looking at my moment, of course, as things change.

Yes, I think the first thing is it will be critical to make sure that we're there to support the portfolio to the extent that companies is needed. In the prepared remarks, we have been working very closely with all the portfolio management teams to make sure that they're prepared and have contingency plans, some of them we are now talking even every couple of days.

Among the things that we're doing to help ensure there's enough cash around we, of course, making sure that these companies are aware of all the SBA and kind of disaster, funding sources that may be available to them, which will certainly help.

Yeah. We of course, are starting to see some new interesting opportunities that are kind of starting to come our way. Yes, I think we'll be prudent in terms of deploying the capital. As we, of course, don't want to spend too much of it and then find out that would be great to have some additional capital around to help some of the portfolio companies. So I think we'll -- I think we're taking these things at a measured pace. And as we get new information and see new opportunities, we'll allocate that $30 million as best as we can.

Okay. Got it. [That's] helpful. And we saw some positive results in December that you mentioned for Cara Therapeutics Phase 2 trial, and that looks like the next milestones here will be beginning the Phase 3 trial and that two other Phase 2 data readouts later this year. So maybe more specifically as we think about the next 12 months, can you speak about other key milestones we should anticipate as it relates to Peptelligence platform?

Sure. And so quite in center will be Cara, and we'll be watching their developments, of course. But we also will be watching this development efforts ramp as part of that we're looking for additional feasibility studies there. What we are looking for any sort of movement we can have on internal pipeline in terms of allies I think we're more focused on the technology itself and getting additional pharmaceutical companies using it and then seeking additional licenses. So that's really what we're going to be looking for then, I guess on the manufacturing side, I think during the balance of this year, we're of course we will be looking at the completion of that facility buildout which we believe will also be helpful on business development front.

Okay. And just a couple of more here. If we take out the loss associated with Enteris operations, let's just kind of focus on at specialty finance, we saw a massive sequential step up in adjusted earnings from $0.52 in '18 to 100 -- or $1.89 in 2019. So I realize the income-producing asset has increased year over year, but maybe you can kind of call out any other key contributors to this step and perhaps on the expense side of thing.

Sure, yes. I think the -- on the expense side, the biggest driver would have been in the second half 2018. We did have so material write-down, which impacted the financial results. And of course, while we did have a write-down in Q4, there are much less significant year over year, so that partially contributed to it. But on the top line, as you noted, the revenue was up quite nicely during the year. That was driven, particularly in Q4 by the exit of our Cheetah Medical Facility as well as the outperformance of a couple of the royalties added during the period. It was a strong quarter,

Definitely. And just I guess lastly, on a macro level, there's quite a large disparity. It seems between the current share price and the company's book value, uplisting to the NASDAQ, I think certainly helped here. And as awareness builds on the [store], I think that gap will likely close a bit. But just kind of curious about your thoughts on the reason for the disparity here and any color you might have. Thank you.

Terrific. I appreciate that question. We do get that frequently, the policy acquisition of Enteris and the uplisting in NASDAQ -- yeah, I think, the discount to book did close quite considerably with the stock trading and there was a $14 range right before the coronavirus crisis kind of destroyed the equity markets. Yeah, that set of -- that level was trading at a discount, of course, now it is trading at an even more substantial discount in --. Yeah, I think as we look at our capital resources and being prepared for this environment, thinking about different investments we could make about the buying our stock back at these levels is certainly one uses of that capital.

And with that said, we do want to be mindful of the needs of the portfolio and make sure that we are well capitalized to be able to help them in unforeseen circumstances and the course to be able to take advantage of very compelling opportunities. So I think in the near term, we will was skewed on this buyback and then as things normalize and we continue to help the story, to extent we continue to trade at material discounts and will the noted during the prepared remarks, we'll keep looking at additional buyback opportunities to return capital to shareholders in an efficient manner.

Got it. That makes sense. Certainly, a good time for the buyback program. Well, some really great updates here and appreciate you taking my questions.

Thanks, Kyle. Appreciate it as well.

(Operator Instructions) This concludes our question-and-answer session. And I'd now like to turn the conference over to Mr. Winston Blackfor any closing remarks. Please go ahead.

Thanks, Nick. In closing, I appreciate everyone's time and attention and look forward to future updates as we continue to advance SWK Holdings. I like to extend my sincerest wishes of good health to all during these unprecedented times. Thank you all for attending the call.

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