SWK Holdings Corp Q4 FY2022 Earnings Call

Good day, and welcome to the SWK Holdings Fourth Quarter and Full Year 2022 Financial Results Conference Call. All participants will be in listen-only mode. After today’s presentation, there will be an opportunity to ask questions. 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 Releases. 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 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 from SWK Holdings on today’s call are Jody Staggs, President and CEO; and Yvette Heinrichson, Chief Financial Officer. They will 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 the 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 a major 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 this bank via deposits or credit facilities. While some SWK boards have deposit exposure, none had undrawn credit lines or revolvers with that bank. Of course, disruption drives opportunity. SWK intended to scale our business prior to the turmoil; however, the bank's bankruptcy drives new urgency as the potential for SWK to deploy capital is as attractive as it’s been over the past decade. Quantifying, 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 am pleased to announce we have achieved this goal of 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 rejoining 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 our new leadership team took the reins, we spent considerable time reviewing the financial and operational trends at Enteris. We identified several valuable assets, but also a 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 the team have done an outstanding job of repositioning the business in a short period 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 was driven by the headcount reduction as well as the completion of R&D spend for two proprietary 505b2 assets. On the revenue side, Enteris has developed an 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 of Enteris. There are four major assets. The first is the Cara license and associated future cash flows. At this stage, this is primarily a financial asset. 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 the $11.2 million of contingent consideration, which on our balance sheet, that's a liability. 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 reflective of where we would sell our portion. However, it's in the right ballpark. The second asset is the Peptelligence intellectual property. Peptelligence converts certain IV drugs into oral dosage. There are three primary pieces of value associated with Peptelligence. First, we do have an 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 have another biotech that’s in 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 to Enteris. The third piece of the value is the CDMO in the plant. Driven by the work of Paul, Tom Daggs and the entire team, we now see a path for this business to have more value than simply the property and equipment on the books, which totaled $5.8 million at December 31. While early days, we’re optimistic about the potential for the CDMO business and we’ll update you throughout the year on the progress. The final asset is our two proprietary 505b2 drug assets. The first of these assets is oral leuprolide for a semi-rare pediatric indication. We received some positive news last month as the Phase 2 trial was successful with some doses of Ovarest achieving the primary endpoint of estradiol suppression. We are reviewing the full data set and we will provide a further update later this year. The second 505b2 asset is a nasal psychiatric product. We’re finishing up preclinical work that any licensed partner would want to see before transacting. SWK does not currently expect to fund additional R&D dollars into this program. Instead, as the trial work is completed and the data analyzed, we will seek to partner to fund the next stages of development in exchange for downstream economics to Enteris. Turning to 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 the associated foreign exchange hedge, totaled $18.1 million and put an additional $6 million to existing borrowers. In the first quarter of 2023, we closed one $5 million term loan and advanced 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 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. 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. 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 10b5 program. Since the start of 2023, SWK has repurchased roughly 30,000 shares at an average repurchase price of approximately $18.51. Before returning 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 has 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 Teacher 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 movements 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. The fourth quarter realized yield on finance receivables was 11%, which was impacted by the $3.5 million reserve on our 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 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 receivable segment. The finance receivable segment's adjusted return on tangible book value was 9.9% for 2022 versus 14.2% for the previous year. In the fourth quarter of 2022, we recognized provision for credit loss expense of $3.5 million as well as a $5.2 million loss and 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. 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 receivable segment revenue decreased to $35.5 million from $39.3 million from the prior year. The pharmaceutical development revenue decreased to $6 million from $16.8 million from the prior year, reflecting 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 the 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.

We have a question from Scott Jensen, one of our 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’ website that you are 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? Are you giving up royalties? Or how should we view that partnership? I guess is the first one, and then you kind of updated all the other things I was going to ask on Enteris, so thank you.

Yes, absolutely. I appreciate it. I don’t want to say much, and I would prefer not to confirm or deny. What I can say about the CDMO businesses is we’re really focused on driving earlier stage CDMO work through the plant. The team has really demonstrated expertise in working with powders and being creative and solving problems with powders, whether that’s peptides or high potency products like nasal formulations. As we’ve looked at the assets, we have the IP and some proprietary capabilities, 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 with sticky, high-margin work once you’ve established that fixed infrastructure. So the focus is really working with Paul to build a diversified set of CDMO revenue in business—that’s our target there.

Okay, thanks. And I guess my second question is just watching one of your portfolio companies, BIOLASE, who seems to be doing a fantastic job in the dental space, but their stock just keeps getting, like destroyed. I’m wondering if there are 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. Once we’ve really dug into the company, we’ve learned how they operate. We’ve gotten to know management and kind of know what the challenges are. Those are situations where we are open to and do like putting additional money in. It takes time to truly understand what’s going on with the company. Now, that said, there has to be some discipline in terms of how many times you do it and how many times you touch these things. Sometimes we have to tell folks, 'Hey, sorry, we’ve done all we can do here, and you really need to go raise equity.' So, I would say absolutely, yes, over the years, we’ve worked with our existing borrowers to upsize facilities. Those have been some great deals for us, but at the same time, we sometimes have to have difficult conversations and say sorry we can’t do anything else for you.

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

Yes, I think we’re pretty well done here. I was looking at this before. In 2022, we had a lot of one-time costs, including legal and separation costs. I would say, I’m looking at our G&A number, maybe something in the $8 million a year, I think, would be more than enough. It’s not really going to move a lot compared to what it has been, especially given the addition of three to four investment professionals over the years. You could probably gauge what those individuals typically earn in the Dallas market. So I believe in the first quarter of 2023, we will be able to show you what the run rate is. The 2022 numbers were extremely fluctuating with many one-time costs, making it a bit difficult to assess. But I think it will fit in that $7 million to $8 million range on a go-forward basis.

And then my final thing is saying keep buying back stock. Thank you for that. But it looks like they’re going to keep presenting your opportunity.

Yes, I appreciate that. We’ve been a little frustrated. We cannot lie that there are rules in this 10b5 program with the algorithm and with the trailing volume. We’ve gotten smarter on the 10b5 and 10b18. 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.

Our next question comes from William Kok from another private investor. Please, William, go ahead.

Good morning, everybody. This is Bill Couch. I own some shares; I live in Connecticut. I was 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 get calls about this periodically. I think one thing I would state is we're not studying broad women’s health conditions, uterine fibroids, or endometriosis. Leuprolide is a GnRH agonist; this is kind of the Generation 1 version of treating these conditions. The market has moved on to the 2.0 version, which is the antagonist. If you look at medications like relugolix, that's really where that market has gone. So this is not a billion-dollar type opportunity. The indication we’re studying for is interesting; it is kind of a semi-rare pediatric condition. It’s not rare, it’s probably not orphan. But the market we’ve looked at will likely be in the low hundreds of millions of dollars type opportunity.

This concludes our question-and-answer session. I would like to turn the conference back over to Jody Staggs for any closing remarks.

Yes, thanks for everyone joining the call. Thanks for the questions. Please reach out to myself or Yvette with anything else, and hope everyone has a great day.

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