SWK Holdings Corp (SWKH) 2022 Q4 法說會逐字稿

Good day, and welcome SWK Holdings fourth quarter and full-year 2022 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, from Tiberend Strategic Advisors. Jason, please go ahead.

Good morning, everyone, and thank you for joining SWK Holdings fourth quarter and full year 2022 financial and corporate results call. Earlier this morning, SWK Holdings issued a press release detailing its financial results for the three months and full year ended December 31, 2022. The press release can be found in the Investor Relations section of 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 make certain forward-looking statements about future expectations, plans, events, and circumstances, including statements about our strategy, future operations, and the development of 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 from SWK Holdings on today's call are Jody Staggs, President and CEO, and Yvette Heinrichson, Chief Financial Officer. They'll provide an update on SWK's fourth quarter and 2022 corporate and financial results. Jody, go ahead.

Thank you, Jason. And thanks, everyone, for joining our fourth quarter conference call. Since appointment of the new leadership team, we have made considerable progress positioning SWK for a multi-year period of value creation; of course, much work remains. On today's call, I want to update you on four areas of focus: growing the team in anticipation of scaling the business, Enteris, capital, and the portfolio.

Before discussing the four areas of focus, I want to briefly address the current life science finance market environment. The past month was a period of upheaval in our industry with the Gold Standard Bank collapsing in a matter of days and other banks active in our space, either collapsing or under considerable stress.

SWK had no direct exposure to SVB via deposits or shared credit facilities. While some SBK borrowers had deposit exposure, non had undrawn credit lines or revolvers with SVB. Of course, disruption drives opportunity, SWK intended to scale our business prior to the turmoil. However, the SVB bankruptcy drives new urgency as the ability for SWK to deploy capital is as attractive as it's been over the past decade. To quantify, we are currently issuing financing proposals at a mid-to-high teens cost above our historical low-to-mid teens cost.

Our first priority has been expanding our investment team to increase deal sourcing and underwriting capability. I'm pleased to announce we have achieved this goal with four investment hires since the second half of 2022. Recently, we hired a dedicated business development professional who comes from a large private equity firm. Also, a former SWK investment professional will be re-joining the team this month.

We believe the investment team is now staffed appropriately to close transaction volume in excess of the approximately $100 million we achieved in 2022, positioning SWK to responsibly grow our finance business over the next several years.

Turning to Enteris, when the new SWK leadership team took the reins, we spent considerable time reviewing the financial and operational trends at Enteris. We identified several valuable assets, but also business that was burning too much money and where the business plan was not aligned with the original mission, nor our current expectations. We took immediate steps to change Enteris direction and reduce burn.

First, we replaced the CEO with the COO, Dr. Paul Shields. Second, we reduced the headcount by approximately 50%. We have spent time with Paul and his team reforecasting the business and modifying the business plan. Paul and team have done an outstanding job of repositioning the business in a short period of time to both reduce costs and work towards securing sustainable CDMO revenue.

On the cost side, we expect cash OpEx will decline from approximately $2.6 million per quarter in 2022 to roughly $1.5 million per quarter by the third quarter of 2023. This is driven by the headcount reduction as well as the completion of R&D spend for our two proprietary 505(b)(2) assets.

On the revenue side, Enteris has developed informal partnership with a large pharma service company that is helping us source CDMO work. While the initiative is early, existing CDMO bookings will generate approximately $1 million of revenue in 2023. And we have bid on another $6 million of work. The combination of decreasing costs, combined with the potential for improved revenue is expected to drive improved cash flows by the second half of 2023.

I'd like to briefly discuss how we think about the value at Enteris. There are four major assets. The first is the Cara license and associated future cash flows. And at this stage, this is primarily a financial asset. And again, the Cara license is tied to Oral KORSUVA, which Cara is studying in three late-stage clinical trials.

The cleanest look at the value of this asset on our balance sheet is actually the $11.2 million of contingent consideration. And on our balance sheet, that's a liability. So this is a little confusing. That is the 50% of the cash flows owed to the original Enteris seller. Now this is an accounting driven valuation, and it's not where we would sell our portion. However, it's in the right [zip code].

The second asset is the Peptelligence intellectual property. And as a reminder, Peptelligence converts certain IV drugs into oral dosage and this is the asset which originally drew SWKs attention to Enteris. At this point, there's three primary pieces of value associated with Peptelligence. The first is we do have an additional existing license on a clinical stage drug that carries a low single digit royalty. We haven't discussed this asset in the past as it was not being developed.

However, recently a well-funded private pharma company has acquired the asset and is launching clinical trials. The second piece is we do have another biotech that's the later stage discussions to take a license. There's no certainty this will close. But I think it illustrates the Peptelligence value in the market.

The final piece of value here and really what's probably the largest piece is the remaining value if Enteris or another third party could close other licenses. As we've disclosed with Cara, these licenses carry material cash flow through Enteris.

The third piece of the value is a CDMO in the plant. Driven by the work of Paul, Tom Staggs, and the entire team, we now see a path for this business to have more value than simply the PP&E on the books, which totaled $5.8 million at December 31. While early days, we are optimistic about the potential for the CDMO business, and we'll update you throughout the year on the progress.

And then the final and the fourth piece of value at Enteris is our two proprietary 505(b)(2) drug assets. The first of these assets is oral leuprolide for a semi rare pediatric indication. And we did get some positive news last month as the Phase 2 trial was successful with some doses of Ovarest achieving the primary endpoint of the estradiol suppression. We are reviewing the full dataset and we'll be able to provide a further update later this year.

The second 505(b)(2) asset is a nasal psychiatric product. We're finishing up preclinical work that any license partner would want to see before transacting. SWK does not currently expect to fund additional R&D dollars into these programs. Instead as the trial work is completed and the data analyzed, we will partner -- seek to partner to fund the next stages of development in exchange for downstream economics to Enteris.

Turning to the third priority capital, we are working diligently to secure both balance sheet and off-balance sheet funding to deploy into an attractive opportunity set. While we do not have a specific development today, this is a priority for management as one of our incentive compensation metrics for 2023.

Turning to the portfolio, we ended the quarter with approximately $238 million of investment assets, which is an all-time high. During the quarter, we closed a royalty transaction, which including an associated foreign exchange hedge, totaled $18.1 million and put an additional $6 million to existing borrowers.

In the first quarter of 2023 we have closed [one $5 million] term loan in advance of approximately $8 million to existing borrowers. In the fourth quarter, we sold the remaining interest in our Narcan royalty for $2.5 million, which was in excess of the $500,000 book value at the end of the third quarter. This was a phenomenal investment for SWK generating a 2.4 times multiple on invested capital.

SWK also sold its shares in Bioventus and Harrow Health, generating approximately $4 million of proceeds. During the quarter, we fully reserved our TRT position, which totaled $3.5 million. And then at 12 -- at December 31, we had $18 million of finance receivables on non-accrual, which is approximately 7.5% of the investment portfolio. We are working with two of these borrowers to position each business for success. And we'll update once resolution is achieved.

Our North Star is driving value per share and repurchasing stock below book value is beneficial to this goal. During 2022 SWK repurchased approximately 64,000 shares at an average cost of $17.78 per share under our 10b-5 program. Since the start of 2023, SWK has repurchased roughly 30,000 shares at an average purchase price of approximately $18.51.

Before turning the call to Yvette, I want to thank Wendy DiCicco for her contribution to our Board of Directors. Wendy chose not to seek re-election to the Board of Directors due to external professional commitments. Wendy is a talented business executive and contributed considerably to SWK with a particular emphasis on improving our executive compensation plan to better align with shareholders.

I also want to welcome Jerry Albright to our Board. Jerry has an impressive professional resume, including serving as a CIO of Teachers Retirement System of Texas. Welcome, Jerry. With that, I would like to turn the call over to our CFO, Yvette Heinrichson, for an update on our financial performance for the quarter.

Thank you, Jody. Good morning, everyone, and thank you for joining us. SWK had a solid fourth quarter that was in line with expectations. As of December 31, 2022, SWK's total investment assets grew to approximately $238 million, an increase of 25.4% from $190 million at the end of 2021. Please note that the quarter-end figure does not include any portfolio movement post quarter end.

At the end of 2022, the weighted average projected effective yield of our finance receivables portfolio, including non-accrual positions, was 13.9%. This represents an increase of 0.9% from a year ago. Fourth quarter realized yield on finance receivables was 11%, which was impacted by the $3.5 million reserved on our TR position -- TRT position during the quarter.

As Jody mentioned earlier, SWK reported non-GAAP tangible finance book value per share at $19.02 at the end of 2022, an increase from $18 from the prior year. This figure and excludes deferred tax assets, intangible assets, goodwill, and the contingent consideration payable.

Management needs tangible finance book value per share as a relevant metric to value the company's core finance receivables segment. The finance receivables segment adjusted return on tangible book value was 9.9% for 2022 versus 14.2% for the prior year. In the fourth quarter of 2022, we recognized a provision for credit loss expense of $3.5 million as well as a $5.2 million loss in change in fair value of acquisition related contingent consideration, which led to net income of $2.8 million or $0.22 per diluted share. This compares with net income of $6.3 million or $0.49 per share for the fourth quarter of 2021.

Revenue fell to $[9.8 million] in the fourth quarter of 2022 compared with $15 million in the fourth quarter of 2021, reflecting a 5 million decline in licensing milestone revenue at Enteris. For the full year of 2022, SWK reported total revenue of $41.5 million, a decrease from $56.2 million from the prior year. Finance receivables segment revenue decreased to $6 million from $16.8 million from the prior year.

Excuse me, finance receivables segment revenue decreased to 35.5 million from $39.3 million from the prior year. In pharmaceutical development, revenue decreased to $6 million from $16.8 million from the prior year, which reflected a $10 million decrease in licensing milestone revenue from Cara Therapeutics. GAAP net income for 2022 totaled $13.5 million or $1.05 per diluted share, compared to $25.9 million or $2.02 per diluted share for full year 2021. I'll go ahead and turn the call back over to you, Jody. Thank you.

Thanks, Yvette. As you've heard, the current opportunity set presents an attractive opportunity for SWK in our financing solutions. We are focused on taking the actions to capitalize on this opportunity and drive per-share value. With that, let's open the call to questions.

(Operator Instructions) [Scott Janssen], one of private investors. Please go ahead, Scott.

Good morning, Jody. Thanks for the update. I guess you went over a lot of the questions that I was going to have for Enteris because I had noticed on Enteris's website that you're partnering with Aptar for nasal and oral liquid delivery. And I'm just guessing that's the large pharmaceutical company in the CDMO space. What is that kind of relationship? Is that are you giving up royalties or how should we view that partnership? I guess it's the first one. And then you updated all the other things I was going to ask on Enteris, so thank you.

Yes, absolutely. Yeah. No, I appreciate it. I don't want to say much. And I would prefer not to confirm or deny, what's on the website, it's on the website. I think working on the CDMO business is we're really focused on driving earlier stage CDMO work through the plant. So the team has really, they really have an expertise in working with powders and being creative in solving problems with powders. And that could be peptides, that could be high-potency things, that may be nasal.

And as we've looked at the assets, we've got the IP and some of the proprietary stuff, but we also have CDMO capabilities. And that is really interesting for those of you who follow the space, it's a very attractive industry, very sticky, I mean, a nice high margin work once you've got that fixed infrastructure there. So I mean, the focus is really working with Paul to try to build a diversified set of CDMO revenue in business. That's what we're really targeting there.

Okay, thanks. And I guess my second question is just watching one of your portfolio companies, BIOLASE, who seems to be doing like a fantastic job in the dental space, but their stock just keeps getting like destroyed. I'm wondering if there are like other opportunities in this kind of market, as you say, dislocated, that you have an opportunity to go back to some current clients and seek non-dilutive financing for them?

Yes. So the answer is yes, I'll say yes. And once we've really dug in on a company, we've learned how they operate, we got to know management, we know the skeletons or those are situations that we are open and do like putting additional money in. It takes time to really understand what's going on in the company.

Now that said, there has to be some discipline in terms of how many times you do it, how many times you touch these things. And sometimes it's hard to tell folks, hey, sorry, we've done all we can do here and really need to go raise equity. So I would say, absolutely, yes, we've over the years, we've worked with our existing borrowers to [upsize] facilities. Those have been some great deals for us. At the same time, we have to have discipline and sometimes tell folks, sorry, we can't do anything else for it.

Okay. And then finally, on your building out the staff, how should we look at that as far as the cost going forward for SG&A?

Yeah, I think we're pretty well done here. I was looking at this before. 2022, we had a lot of one-time costs. There was a lot of legal costs and separation costs and things, right. I think I would say, I'm looking at our G&A number, maybe it took something in the $8 million a year, I think would be more than enough. So it's not really going to move a lot versus what it has been talking about adding three to four, I guess four investment professionals over the years.

You can probably figure out what those people typically are, you know, in the Dallas market. So I was sort of, I think first quarter 2023, we'll be able to show you what the run rate is. The 2022 was extremely lumpy with a lot of one-time costs. And it's a little bit hard to say, but it's going to be in that $7 million to $8 million range, I think, on a go-forward basis.

And then my final thing, as I say, keep buying back stock. Thank you for that, but it looks like they're going to keep presenting your opportunities.

Yes, I appreciate that. We've been a little frustrated. We cannot lie that there's rules in this 10b-5 program with algorithm and with the trailing volume. So we've got a lot smarter on the 10b-5 and 10b-18. And we're hopeful that going forward, we can do a bit better there. But, yes, at these prices, we think it's a great use of capital.

Great, thanks.

(Operator Instructions) [William Cuch], private investor.

Good morning, everybody. This is Bill Cuch. I own some shares. I live in Connecticut. I'm wondering if you have any idea what the potential annual revenues for an oral leuprolide drug would be?

Hey, Bill, thanks for the question. I think, I do get -- I get questions on this periodically. I think one thing that I would just sort of stage is this is not -- we're not studying it for broad in women's health conditions, uterine fibroids or endometriosis. Leuprolide is a GnRH agonist. And this is the Gen 1 version of treating these conditions. And that market has moved on to the 2.0, which is the antagonist.

And if you look at like relugolix, that is really where that market has gone. So this is not a billion dollar type opportunity. The indication we're studying it for as we think it's pretty interesting. It is sort of a semi rare pediatric indication. It's not rare, it's probably not an orphan. But the market we've looked at is it's going to be in the low hundreds of millions of dollars type opportunity.

Thank you.

(Operator Instructions) And this concludes our question-and-answer session. I would like to turn the conference back over to Jody Staggs. Please go ahead with any closing remarks.

Yeah, thanks for everyone joining the call and thanks for the questions. And please reach out to myself or Yvette with anything else. And I hope everyone has a great day.

And this concludes the conference. Thank you for attending today's presentation. You may now disconnect.