SWK Holdings Corp Q3 FY2021 Earnings Call

Good day, and welcome to the SWK Holdings Inc. Third Quarter 2021 Financial Results Conference Call. Please note, this event is being recorded. I would now 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’ Third Quarter 2021 Financial and Corporate Results Call. After the close of the market on November 12, SWK Holdings issued a press release detailing its financial results for the three months ended September 30, 2021. The press release can be found on 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 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. He'll provide an update on SWK’s third quarter of 2021 corporate and financial results. Winston, go ahead.

Thank you, Jason, and everyone for joining our third quarter conference call. SWK Holdings' business strategy is focused on providing non-dilutive financing opportunities to small and mid-sized bioscience companies with differentiated commercial stage products. This has been our mission from inception to today because it provides returns for our company and shareholders during that time. It is a straightforward business, and one that, when executed with discipline and care, works well because the small to mid-sized companies fuel innovation in the life sciences industry and barely require access to capital to bring the resulting therapies, products, and technologies to market. We have been successful at finding those opportunities where our financing products provide the right capital infusion at the right time, empowering companies to unlock the value of their technologies, and in turn, enabling SWK to realize a positive return on our investment. Since 2012, the SWK team has successfully deployed approximately 600 million of capital into 42 investments with 23 realizations that generated an IRR of 20%. Earlier this year, in partnership with our largest shareholder, SWK formed a strategic review committee to identify, review and explore strategic alternatives for SWK with a view to maximizing stockholder value. As we announced earlier this month, the committee and its financial and legal advisors completed their review and determined that our specialty finance business, which I just described, is a very good business, ideally suited to drive the company's future growth and shareholder value going forward. The Board’s vision was informed by our own internal valuation, the company's assets, and by an independent third-party valuation that supports our belief that SWK’s core specialty finance assets have value in excess of our GAAP carrying value. Illustrative of this analysis is that third quarter performance of our specialty finance portfolio, which produced an 18.8 realized yield. This was strong in our line credit trends, despite the overhang of the review process. As you can appreciate, the view of the outcome and the team's ability to deliver these results is very gratifying, and for our shareholders, a clear sign that what we are doing works. With this strategic review now completed, SWK is squarely focused on our specialty finance business segment that we temporarily paused new deal originations during the strategic review process. We have been closely monitoring the life science investment environment and expect new deal originations to return to our surrogate levels over the next few quarters, foreseeing multiple opportunities to deploy capital. We'll be pursuing opportunities from a position of financial strength, with our current liquidity profile consisting of roughly 80 million of cash and revolver availability for enhancing our liquidity muscle. SWK's Board of Directors has committed to prudently increasing leverage as we scale the business to help improve capital allocation and improve returns for stockholders. We anticipate restoring normalized deployment levels during 2022. The third quarter in recent weeks also marked the continued progress of our subsidiary, Enteris BioPharma, highlighted by advances in the clinical program for one of its internal 505(b)(2) products and the signing of one more Peptelligence feasibility study. The Peptelligence and ProPerma technologies developed by Enteris enable the oral delivery of peptides and BCS class II, III, IV small molecules, respectively. These drugs are usually administered via injections due to poor bioavailability or permeability. The ability to develop safe and effective oral formulations is a game changer that could enhance the commercial markets for various drug candidates, reshaping therapy categories, treatment paradigms, and providing improved treatment options for patients. Last month, Enteris announced the successful completion of the Phase I clinical trial of optimized Peptelligence Oral Leuprolide, demonstrating delivery of drug levels comparable to or greater than subcutaneous or depo injection. Enteris is advancing the program, and we will provide additional details as the program advances. Enteris CEO, Rajiv Khosla, and his team continue to execute a dual-arm growth strategy to maximize the value of the company’s Peptelligence and ProPerma technologies as new manufacturing and CDMO business. So far this year, Enteris has initiated six Peptelligence feasibility studies, in which Enteris partners with peptide therapeutics developers to engineer their drugs for oral delivery. The goal of this process is to advance the development of the oral peptide leading to Enteris and their respective companies entering license agreements for the newly developed oral product. An example of this strategy in action is Cara Therapeutics and its Oral KORSUVA product, which is developed using Enteris’s Peptelligence technology across multiple patient populations. Oral KORSUVA has now four separate clinical programs, and Cara expects to initiate Phase II programs for the treatment of moderate to severe pruritus in both atopic dermatitis and non-dialysis dependent chronic kidney disease patients during the first quarter of 2022. Over the past 12 months, Enteris has received three milestone payments related to its Oral KORSUVA program, with more milestones anticipated in the coming quarters. Turning to our finances, as of September 30, 2021, SWK’s portfolio of royalties and structured credit backed by royalties totaled approximately 206.2 million across 26 partners, which compares favorably to 187.1 million for the year-ago period. During the quarter, SWK did not deploy any capital with existing companies. On June 30 of this year, SWK closed a 9.5 million financing with Trio Healthcare Limited, with 5.1 million funded to closing. For the quarter ended September 30, 2021, the company collected 7.1 million of principal payments. More recently, we collected 31.6 million in facility repayment proceeds from Misonix’s 518 million acquisition by Bioventus. We also received 1.9 million in cash and 71,361 shares of common stock, which will be recognized in the fourth quarter. As of November 8, 2021, SWK had 6.4 million of unfunded commitments. SWK reported a book value per share of $20.36 as of September 30, 2021, which includes a $0.05 per share negative impact from the amortization of Enteris intangibles and a $0.08 per share negative impact from legal and financial consulting expenses associated with our strategic review. This compares favorably to $18.44 as of September 30, 2020. Tangible financing book value per share, which excludes deferred tax assets, tangible assets, goodwill, and contingent consideration payable, totaled $17.50 per share, a 12.7% increase over $15.52 per share for the same period last year. Management views tangible financing book value per share as a relevant metric to value the company's core specialty finance business. For the third quarter of 2021, SWK reported total revenue of $9.6 million compared to $10.6 million for the third quarter of 2020. The decrease in revenue is primarily due to a $2.6 million decrease in revenues in the pharmaceutical development segment due to a milestone payment from Cara in the third quarter of 2020. This is partially offset by a $1.5 million increase in interest and fee earnings on our finance receivables. GAAP net income for the third quarter ended September 30, 2021, totaled $2.2 million, or $0.17 per diluted share, compared to $4.3 million, or $0.34 per diluted share for the third quarter of 2020. For the third quarter of 2021, non-GAAP adjusted net income was $4.3 million compared to $6.7 million for the third quarter of 2020. Lastly, for the third quarter of 2021, non-GAAP net income generated by the specialty finance business totaled $7.7 million as compared to $6.6 million for the prior period. SWK remains well-positioned to harness our expertise to deploy capital for compelling value-adding investment opportunities. The prudent addition of leverage will optimize SWK’s capital structure going forward. We are also considering other measures to improve shareholder returns, including a dividend policy. As for Enteris, Rajiv and his team continue to work on partnership agreements and advancing its 505(b)(2) pipeline. In conclusion, the 2021 fiscal year has so far continued as a period of consistent performance for SWK. All this is made possible by the diligent efforts of the SWK Holdings team, and I would like to thank our employees for their dedication and loyalty, and our stakeholders for their continued support as we evolve our model and grow SWK. With that, I want to open the call to your questions.

Our first question today will come from Kyle Bauser with Colliers Securities. Please go ahead.

You mentioned that the review committee also independently valued the specialty finance business, which aligns with your internal analysis of a larger carrying value. I'm curious about the committee's thoughts on the biopharma business and the valuation they calculated for Enteris. How does that fit into the overall picture?

So, yes, the committee has definitely evaluated Enteris alongside the specialty finance business. One thing I'd point out, as we think about our book value, for example, Enteris is currently valued at $1.10 a share, which is only 5% of the book value. While we see a tremendous opportunity with Enteris, we want to be conservative about the value of our assets and the potential within them. So yes, we continue to see a lot of upside there, but it is a 5% position, and we also want to be careful in how we communicate value. As the business performs, we'll be able to demonstrate that and discuss it further.

Got it. It makes a lot of sense. It sounds like you've got the green light to leverage as necessary. I think you said you have 60 million or 80 million in cash currently available. What sort of debt levels do you think would make sense for the business? Or to ask it another way, what would align you more closely with some of your peers? Just curious how you're looking at adding onto that.

Sure. To clarify, we have roughly 60 million of cash, and with our revolver, that takes us to about 80 million of general liquidity. Regarding debt levels, there are, of course, two ways to look at it. The first is the maximum amount of debt we could take on per the 2014 Stockholders' Agreement with Carlson, which allows us to get up to one-to-one. As we look to scale the amount of leverage, we would aim for the 25% to 50% type range, and then grow from there depending on how it evolves. On one hand, leverage can help turbocharge returns; however, it can also turbocharge losses if you don’t scale it right. So, yes, we believe there's definitely more room to develop our portfolio, but we also want to be prudent and measured in our steps.

And just lastly, if I may, assuming you did leverage up and take on more debt and utilize existing cash, are you seeing a lot of activity in the market? Would you be able to put it to work relatively quickly? Just trying to understand what the environment is like for deal flow and if you would deploy it all right away?

Sure. First, I want to clarify that we don’t want to have this money burning a hole in our pockets. We are always very diligent and measured in deploying our shareholders' capital. Nothing will change from that perspective. Regarding the deal environment, I think it remains very active out there. Even though we haven't been deploying much capital over the past couple of quarters, we've certainly been monitoring things and continue to develop our pipeline of opportunities. I think we expect to return to our normal historical operation sometime next year. There are some competitive pockets in the market, but others continue to be really attractive, and we'll look to execute where we see the best risk-adjusted returns.

Our next question today will come from Michael Diana of Maxim Group.

I also want to ask about the leverage too, as I think that opportunity is very interesting. In relation to that, and regarding Enteris, you mentioned that you're evaluating dividends. My guess is more leverage could be good for dividends, while keeping Enteris could mean you want to use any earnings to drive growth in Enteris. Do you have any comment on that?

Sure. We do have a lot of opportunities to deploy capital, and yes, regarding the dividend, that’s something we've been considering for a while. However, as noted in our release on November 1 regarding the SRC process conclusion, it requires Carlson's consent, which we don't quite have yet. I would like to update on the state of the dividend policy and the efforts to implement it. So, stay tuned there; unfortunately, I can't share more about that at the moment. You're exactly right regarding Enteris and the various transactions we examine. There are multiple opportunities for us to deploy capital. Whether we're paying a dividend or not, I don’t necessarily think that will limit our ability to find opportunities to deploy capital with Enteris. We want to ensure our shareholders are participating in the success of the business, and both buybacks and dividends are two common ways to do that. As for Enteris, one aspect we’re considering is how to finance our asset development pipeline. We can easily overspend, which isn't beneficial for a business aiming to compound book value and generate cash flows. We've been taking a measured approach to our development efforts, as we see tremendous value in that, but we're also being cautious with the amounts we dedicate to that. Our goal is to provide formal guidance on that as we enter the New Year to help shareholders understand our capital allocation policies.

You mentioned you now have 71,000 shares of buyback stocks. Do you have a policy about what you do when you receive stock? Do you sell it right away or keep it and look for an opportunistic exit? Do you have any policy around that?

Yes, great question. This applies not just to the Bioventus equity that we have but also applies to any warrants we hold in public companies. The approach we take depends on whether we have any material non-public information that requires cleansing. Once we determine that we can move forward, we evaluate what we think each investment is worth and then determine the right time to exit based on market prices and liquidity. That said, we’re not looking to speculate in public equities; we certainly aren't going to try to get the last cent out of our calculated value for any position. We will use that framework to look for appropriate exit opportunities.

Okay. And while you hold it, do you have to mark it, is that right?

Yes, that's correct. Just like the Misonix equity we had, we mark to market because we're public with observable inputs. That's also how we mark our public warrants, so we do mark those at each quarter end.

Okay, great. Thank you.

Ladies and gentlemen, this will conclude our question-and-answer session. At this time, I'd like to turn the conference back over to Mr. Black for any closing remarks.

Thank you. In closing, I appreciate everyone's time and attention and look forward to future updates as we continue to advance SWK Holdings. I also extend my sincere wishes of good health and wealth.

The conference has now concluded, and we do thank you for attending today's presentation. You may now disconnect your lines.