SWK Holdings Corp (SWKH) 2020 Q4 法說會逐字稿

Good day and welcome to the SWK Holdings fourth quarter and year end 2020 financial results conference call. (Operator Instructions) Please note this event is being recorded. I would now like to turn the conference over to Jason Rando with Tiberend Strategic Advisors. Please go ahead.

Good morning, everyone, and thank you for joining SWK Holdings fourth quarter and year end 2020 financial and corporate results call. Yesterday evening, SWK Holdings issued a press release detailing its financial results for the three months ended December 31, 2020. 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 will 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, who'll provide an update on SWK's fourth quarter and full year 2020 corporate and financial results. Winston go ahead.

Thank you, Jason and everyone for joining our fourth quarter conference call. The fourth quarter of 2020 close the book on a strong year for SWK, driven by solid returns from our specialty finance business. Even as the COVID-19 pandemic disrupted the healthcare industry, this segment generated a 16.6% realized yield and an 11.9% adjusted return on our tangible financial book value during the fourth quarter with income assets of $206 million at 17.6% increase from the same span last year and an 11.6% sequential gain from the third quarter of 2020.

We believe this reflects the growth potential of SWK business model and our continued success in distinguishing ourselves as a go-to capital provider for small, midsize life science companies with differentiated patent-protected commercial stage product. Looking ahead into 2021, we believe the industry dynamics should remain favorable and enable us to not only realize additional gains from our current holdings, but to also enhance our position in the industry.

Before I discuss our fourth-quarter results and achievements, I'd like to provide a brief update on the ongoing COVID-19 situation, our capital position and our subsidiary, Enteris Biopharma. In matter of days in March 2020, the world, as we know, it was up tended by a once-in-a-generation situation. It's no secret that COVID-19 pandemic has -- had a far-reaching impact on all aspects of daily life and the broader global economy. As we have previously reported SWK has been minimally impacted by the outbreak, thankfully.

We communicate regularly with the individual management teams of our portfolio companies, and we're pleased to recently report the impressive advances of our partner companies that made despite many challenges. We believe our portfolio's resilience validates our investment approach, focus on forging long-term partnerships with companies with strong intellectual property, tech and commercial products that offer compelling value to society by filling demand within the health care system.

During 2020, in recent weeks, SWK deployed approximately $42 million to close five new transactions that align us with companies and products that we believe have strong upside potential, given the market needs they serve and the anticipated trajectory of growth of each. In December, the $33 million, financing with Flowonix Medical included $10 million loan from SWK, which has receded during 2020 by three royalty transactions. In December, we purchased the royalties payable to EyePoint Pharmaceuticals under its license agreement with Alimera for ILUVIEN.

In October, we acquired royalty interest paid on a portfolio of products in the [ostomy] market from Trio healthcare. Finally, in August that we purchased royalties for Coflex, Kybella and Zalviso from PDL BioPharma. And most recently, in the last few weeks, we closed the $9 million financing with Sincerus Pharmaceuticals. These are all opportunistic transactions and very much in keeping with our approach to investment.

A good deal of this capital was deployed during the past few months. As of now, we have approximately $11.2 million of cash and revolver availability, plus future cash flows and the portfolio to support our partner companies and capitalize on potential investment opportunities, unlike the business development companies and some investment funds [as they] vacates balance sheet is not heavily leveraged.

Additionally, we are pleased with the progress of your subsidiary, Enteris BioPharma. Enteris has completed construction on the newly expanded manufacturing facility and expected to be cGMP operational in the coming weeks just to providing additional revenue stream to the company.

The [Rajiv Khosla] continues to execute a two pronged growth strategy and maximize the potential of the company's Peptelligence and ProPerma technologies through [internal] partnerships and advancing its own internal development pipeline. In that regard, which has been Enteris initially several feasibility studies over the coming quarters with one already secured in 2021. Securing a feasibility study is an important early step towards ultimate securing a license agreement and then Enteris' technology licensing model.

Additionally, Enteris expects to soon initiate a clinical program for one of its internal 505(b)(2) products. The potential for Enteris' technology platform is sizable and reflected by the ongoing success of the agreement with Cara Therapeutics. During the fourth quarter, Enteris announced it received two milestone payments totaling $5 million from Cara for the ongoing development of Oral Korsuva of which SWK received $3 million for the contractual splits to reach through in that acquisition agreement.

SWK is also eligible receive additional potential milestone payments for the next several quarters, subject to achievement of certain development milestones for Oral Korsuva. Perceive of these first two milestones from Cara is an exciting moment for us to be key in our shareholders.

Now let me highlight the value proposition that Enteris represents, but also illustrate the monetization opportunity that Enteris' Peptelligence and ProPerma platforms offer and development of oral tablet formulations of peptides and small molecules. Importantly, for future potential partners, we believe this process of Cara program validates the breadth and depth of Enteris' comprehensive pharmaceutical capabilities.

Turning to our finances, as of December 31, 2020, SWK's portfolio of royalties and structured credit backed by royalties products totaled approximately $206 million across 25 partners. This compares favorably to $184 million -- or $185 million as of September 2020. In the fourth quarter of 2020, as we previously discussed, SWK paid $16.5 million to purchase royalties for Iluvien payable to EyePoint under its agreement with Alimera and deployed another $3.9 million to purchase of royalty interest in the ostomy market from Trio Healthcare.

At the end of Q4, the weighted average projected effective yield of the finance receivables portfolio was 13.8%, which includes nonaccrual positions. This compares with 13.2% as of the end of the fourth quarter of previous year. Mean while, SWK report a book value per share of $18.80 as of December 31, 2020, which includes and 91% per share negative impact from amortization of Enteris intangibles during 2020. $18.80 compares to $18.31 as of December 31, 2019.

Tangible financing book value per share was excludes the deferred tax asset, intangible assets, goodwill and contingent consideration payable totaled $15.84. Management views the tangible financing book value per share as a relevant metric to value the company's core specialty finance business.

For the fourth quarter of 2020, SWK reported total revenue of $10.9 million compared to $9.4 million for the fourth quarter 2019. The $1.5 million net increase in revenue was primarily driven due to the pharmaceutical development revenue generated by Enteris.

Full year 2020 revenue was $36.7 million compared to $30.7 million for the full year 2019. The increase in revenue during 2020 was primarily due to $0.7 million increase in interest and fees earned on our finance receivables and a $5 million milestone revenue related to the Cara license agreement.

Income before taxes for the fourth quarter of 2020 totaled $3.3 million, which compares to $0.6 million for the same period of the previous year. This increase was primarily driven by the increase in revenue, which was partially offset by decrease in impairment expenses from last year.

For the full year 2020, we reported GAAP net income of $5.2 million. I'd like to point out that this $5.2 million did include $4.4 million expense related to the increase in the contingent consideration value and $11.7 million of amortization expenses related to the Enteris in intangibles. And just a quick note on the the $4.4 million expense for the remeasurement of the contingent consideration. That actually is a good thing in that it means that we expect the contingent consideration to increase in terms of what's going to be paid out over time. Unfortunately, it results in expense for us, but it's important to point that out.

GAAP net income for the fourth quarter ended December 31, 2020, totaled $4.6 million or $0.36 per diluted share, which compares to $8.8 million or $0.68 per diluted share for the fourth quarter. 2019. For the Q4 2020, adjusted net income was $7.5 million, which compares to $4.8 million for the fourth quarter, 2019.

The fourth quarter of 2020 non-GAAP net income generated by the specialty finance business totaled $6.4 million, which compares to $6.2 million for the prior year. Income-producing assets, which again we define as finance receivables and corporate debt securities, totaled $206 million as of December 31, 2020. This is a increase compared with the income-producing assets from December 31, 2019 of $175.1 million. As evidenced by the results, our specialty finance business continues to perform well. We're working hard to identify new transactions that leverage our areas, expertise and the growing need among small to midsize life science companies, access capital.

At Enteris, the company's overall growth strategy continues to take shape. Bolstered by new personnel and an expanded management team, the company remains committed to its mission to be a leader in development of orally delivered peptide and small molecule therapeutics. We look forward to what can be accomplished once the expanded manufacturing capabilities go online. Nearly a year after being named CEO, [Dr. Khosla] who continues to make his mark in Enteris for the more robust business development program.

As I mentioned previously, Peptelligence forms a backbone of Cara is Oral Korsuva program, which has expanded and now encompasses four separate clinical studies. Each was expected to meet important clinical and regulatory milestones in 2021. New Enteris is advancing internal product pipeline that could lead to attractive out-licensing opportunities. We look forward to being active and supportive partners Enteris advances, its external and internal (inaudible) programs and pursues new licensing and partnership opportunities that leverage the platform.

In conclusion, the 2020 fiscal year continued what has been a sustained period of growth for SWK. All this is made possible by diligent efforts of our SWK Holdings team. I would once again like to thank our employees for their dedication and loyalty, especially all the hard work during a difficult 2020. And of course, thank our stakeholders for their continued support as we evolve our model and grow SWK.

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

(Operator Instructions) Kyle Bauser, Colliers Securities.

Great. Thanks, Winston. Thanks for all the updates to (inaudible). So I didn't quite catch it. How much is left in terms of capacity and the revolver?

We just said is $11.2 million of cash and availability on the revolver. There is the roughly $10 million -- forget exactly what the number was, but a little over $10 million drawn toward the end of March.

Okay. Got it. And then I think, that expires in June. Any kind of update there? Plans for renewing it, expanding it, maybe other methods you might take that down? Just any color there.

Sure, yes, no, that's a great question. We did talk a little bit about it in the -- Kyle, we are exploring increasing that line, and we'll hopefully have something to announce about that here in the near future.

Okay. Got it. And appreciate the updates on the Enteris pipeline and various feasibility studies, there are going to be kicking off here. Could you talk a little bit about how we should anticipate milestone cadence for this year, maybe non-Cara related milestones first?

Sure. Well, the -- in terms of the actual license agreement milestones, the only material ones that we'll be receiving would be related to Cara. So in terms of other milestones for the business, just to -- with business advancement kind of measurement, we'll be looking for additional feasibility studies this year as well as advancements that we can talk about on the internal pipeline.

And then lastly, any sort of updates that we can provide on the -- with the manufacturing facility in terms of any sort of outsourced work that the team is able to secure. So, those are the kind of the main things we're going to be watching.

Got it. No, I appreciate that. And then just lastly, on depreciation and amortization expense, I think I was modeling a little bit less than the current run rate for some reason in the subsequent quarters here, should we anticipate depreciation and amortization to be about similar levels to what we've seen over the last couple of quarters. I'm just kind of wondering.

Yes. No, that's a great question. And so the pace of the amortization of intangibles will be slowing down quite a bit this next year. And we do have a table in the [K] that kind of list what that expected amortization is, just seen if I can flip here quickly to it, -- I think that the number's closer to like $4 million or so for the year. But don't put me on that (multiple speakers).

It's in the K we list out kind of what it is by year. So yes, the amortization should -- the expense should slow down materially.

And that will kind of slow down over time here. So won't drop down to that right away? Or would it right in Q1 here?

It should slow down. I think kind of right away but I would need to go back and check because I don't have that at the tip of my fingers, but it should be coming down pretty quickly.

I'll dig into that as well. Great. Thanks so much for the update and congrats on the progress here.

Appreciate it, Kyle.

Michael Diana, Maxim Group.

Hey, Winston.

Hi, Mike.

You mentioned in the release that you continue to source and evaluate numerous loan and royalty opportunities on your finance side. Can you talk about that, some obviously, you're not going to -- not specifics and also sort of the opposite of the pipeline, which is prepays, can you?

Sure.

Again, you can't predict it, but just any comments on both those topics?

Sure. So we're -- our investment team remains rigs -- working kind of flat out on a new opportunity to -- which is great. I think our pace of seeing new opportunities continues to be very robust with what you've seen two new companies weekly. And so from kind of a pipeline perspective of newer opportunities that does contain to be robust and which we're very encouraged by. And I think the quality of new opportunities that we continue to see remains good, so we remain optimistic about that new transactions.

(multiple speaker) Does that include royalties, too? Because I know you like the duration of royalties, right?

Yes. No, that's exactly right. It's hard to predict if the new transaction is going to be the royalty or loan and kind of the mix definitely changes a little bit over time. Obviously last year we saw more royalties that we liked and executed on that than we did on loans. Yeah, I think that would expect generally that our kind of current portfolio mix of loans and royalties will kind of be what we execute going forward in terms of the weight between the loans and royalties.

Yeah. And then on prepays.

Sure. On prepays, you're exactly right, it is very difficult to predict that. We do have a couple of positions in the portfolio that do actually mature in the coming quarter or two. So I think we do expect to get those back. In terms of any sort of other prepays, it is very difficult to predict. And that's the one thing that we did over the last couple of years that we've been -- because we've been trying to continue to invest in the portfolio with our partners. We have been trying to structure a loan so we are able to keep them out longer and prevent some early prepays. So we can keep our capital deployed. So I don't know that we're anticipating a bunch of those to come back early. But of course, you never know.

Okay. And then on Enteris' manufacturing facility, would you say your high potency suites going to be operational in the next few weeks? In your remark in the release that's a capacity constrain segment. Could you just comment some on that?

Sure. It is a -- I guess I meant the manufacturing in the US in particular -- that's our understanding that the availability of high potency sweeteners is fairly limited. When we have had a little bit of kind of reverse inquiry actually regarding that facility and its capabilities from some pharmaceutical partners. And so, as that facility opens up and the team begins to utilize it, we'll have more to share about it. But it's not something that we were initially all that you're focused on as opportunities, we're really focused on the licensing opportunities there. But it may be that is actually pretty interesting for us.

Okay. And in regard to the licensing this just -- you've talked -- since you made the acquisition of Enteris about Peptelligence. And I see you mentioned a ProPerm, is that something new? Or is that just a sort of variation of Peptelligence?

Yes, it's really kind of separating the peptides and small molecules kind of platforms. They are a little bit different. And I think in the past, we've really just kind of talked about it all generally, but as the company it's marketing, it's different capabilities. They're now making that distinction. And so that's reflected in our commentary.

Okay, great. Thank you.

Appreciate, Mike.

Nat Stewart, N. A. S. Capital.

Hi, Winston. Thanks for taking my question.

Absolutely. Thanks Nat.

I had a chance to review the 10-K last night. It looks really great. I like to see the progress with the credit portfolio -- looks very strong. The royalties, some of them came in higher than I expected. I thought some of my expected to decline, they went up. So I congratulate you on the strong performance there.

Thank you.

My question is, people have asked a lot of what I wanted to ask, but if you think about the pipeline of opportunities, and also the performance you've kind of generated for a few years, very solid with the credit portfolio, kind of a different way of asking a similar question. If you were just kind of looking from an ideal circumstance, like what type of leverage ratio you think this business could prudently support to boost return on equity?

I'm not saying it's the deal you're going to find, but what do you think would be ideal, if you could kind of give this the kind of leverage profile you wanted? If you're able to find the right agreement, is there is there kind of a range you think would be ideal? Do you think it's mostly a cash investment business that could it support a lot substantially more leverage if you could find it? What do you think about that?

Sure. So the [aim is] business for a long time, I think the one thing about leverage is obviously it can turbocharger returns, but also can turbocharge losses if things don't go well. So we're certainly always going to be prudent about the quantum of leverage that we put on the business. We -- in terms of the kind of next credit facility, the amount of capital that we can deploy and leverage the company with. I think, something that we have in the 50 to 100 range. It's we think about the pace of capital deployment as well as just being prudent. I think that definitely makes sense for us.

Getting towards one to one is probably too much for us. And I think it is not necessarily that I'm worried about the credit quality of our portfolio generally. But I think this is the -- as a Board and a company where we tend to be more conservative on -- over-leverage situations and just kind of reflect in how we look at our borrowers that we partner with. We tried to make sure we don't overlap of those situations. That's when you get into trouble. But I think that 50 to 100 range is would be would be very comfortable. And we kind of grow from there and demonstrate that works. And I think we'll evaluate near anything further.

So maybe it's somewhat like 100 would be a stretch and 50 would be a very comfortable level and you could kind of work within that range. Is that kind of my understanding?

Yes, I think that's right, and I think from -- if we just had 100 right now, it would be, I think a little overcapitalized for probably our pace of deployment is and so we sort of when this rates are there, but --.

Yeah, okay. Yeah, that makes sense. It's probably about what I would have guessed. In terms of the ongoing expenses at Enteris, I don't know if some of the expenses in 2020, some of it might have been related to building out the facilities. What do you see as -- I was looking at the manufacturing research development cost and the G&A, would you expect that to be somewhat similar just at the Enteris level next year, or is that going to be growing more, or some of that cost isn't going to be there? What are you expecting?

Sure. From an overall headcount perspective and what's happening in the business, yes, we're anticipating that changing all that materially. The one thing that will change is kind of the -- these are amounts that we end up spending on the internal pipeline. So we did spend some last year on some R&D and we will be spending some more this year.

Yes. I think the expense base will be relatively similar. There's always kind of one-offs and things that happened from period to period. But when you look at the kind of the aggregate amounts it should be relatively the same.

Relatively similar. Okay. In terms of -- I think if I remember right, the share repurchase was either used up or expired. I don't remember actually, but is there any additional thoughts on capital return going forward? It sounds like you have plenty to reinvest them, but will there be a reauthorization for our repurchase agreement or anything like that this year?

Sure. Great question. It's something that the Board keeps looking at and particularly given work then on the stock. Stock is in trading; it would be very accretive to book to keep buying shares themselves. The program did expire and it was basically losses as well. So that would need to be renewed. And that's something that the Board continues to look at. So I don't have any specific to update you on. But just to agree that buying stock here is accretive and the Board continues to look at it.

Okay. Well, that sounds good. And I like seeing the progress and I think the business is in an exciting point right now. So keep up the good work.

Thank you, sir. Appreciate it.

Steve Hale, Hale partnership.

Hey, Winston. Can you hear me?

Yes, I can.

Hey good. I down on spring break, but I just want to dial and congrats on another good year fundamentally operationally, and that just hit one of my questions was just the capital return. So understanding and just wanted to highlight, I mean, you guys have made a lot of progress fundamentally positioning the book and generating fundamental returns. So kudos to you and Jody and the whole team on the management and operational side.

On the capital allocation side, I'd just echo (inaudible) and I know you guys are aware of it, but the discount that the company is trading at now. It probably largely arises from structure, not from fundamentals being [nas] lifted being profitable for a couple of years. So anything that can be done on a capital return program, share repurchase authorization, systematic return would strongly encourage. But my question is, aside from that comment is -- on the NOLs in the K, it shows there's [$289] million, the majority of which are [part] of this year.

Looking at the DTA that's booked on the balance sheet, you pretty much booked everything that doesn't expire this year. Can we take that away from those two data points?

I'm sorry, Steve, I didn't quite hear the question regarding NOLs. You kind of broke up after the quantum of [286].

Would you mind repeating, I am sorry.

There's $289 million on the balance sheet and then $289 million in the footnote and $27 million booked on the balance sheet with a majority expiring this year. Have you guys booked everything that doesn't expire this year?

I'm not sure what booked everything that doesn't expire.

So on the $289 million, I think the language is majority, but you have a call it roughly half is what expires by this year. So there's still going to be a pretty material NOL asset going forward. In terms of the amount that on the balance sheet, yes, that's I think a conservative view of what we expect the business to actually use. So the way that works is not a booking on the DTA on the balance sheet of what's expiring on that. It's really looking at what we expect the business to use.

Yeah, understood. I guess I'm just saying if you've got $289 million and $145 million expire this year and you got $145 million less, you had a 21% tax rate, that's $30 million and you got $27 million on the balance sheet. I was just confirming you guys have booked almost everything onto the balance sheet. Do you expect to utilize under the GAAP rules that doesn't expire this year. It's really close. There might be [$30 million] left in the book. But just as we think about the upside of what's not on the balance sheet from relative to that footnote. There's not a lot, but I just wanted to confirm that.

Yes, your math is right. We kind of get to it a different way. But from the way you described that, I think that's right.

Perfect. Thank you, keep up the good work.

Thanks, sir. Appreciate it.

And this concludes our question-and-answer session. I would now like to turn the conference back over to Winston Black for any closing remarks.

Thank you. And in closing, just mostly I appreciate everyone's time and attention and look forward to future updates as we continue to advance SWK holdings. And I'd also like to extend my sincerest wishes of good health to everyone. Appreciate it.

Thank you. The conference has now concluded. Thank you all for attending today's presentation. You may now disconnect your lines. Have a great day.