Earnings Call Transcript - SWKH Q1 2022

Operator, Operator

Good day, and welcome to the SWK Holdings First Quarter 2022 Financial Results Call. This event is being recorded. I would now like to turn the conference over to Jason Rando with Tiberend Strategic Advisors. Please go ahead.

Jason Rando, Strategic Advisor

Good morning, everyone, and thank you for joining SWK Holdings First Quarter 2022 Financial and Corporate Results Call. Before the market opened this morning, SWK Holdings issued a press release detailing its financial results for the three months ended March 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'll be 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 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 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 will provide an update on SWK's first quarter 2022 corporate and financial results. Winston, go ahead.

Winston Black, Chairman and CEO

Thank you, Jason, and everyone, for joining our first quarter conference call. The first quarter 2022 results show increased interest in SWK as the preferred provider of nondilutive funding for small and midsized life science companies with differentiated commercial products. We completed two transactions during the quarter, deploying $18.5 million of capital with an additional $4.2 million invested with existing borrowers. Though the life science sector is facing capital market challenges at the moment, our aim remains to selectively fund high-quality assets that are well positioned to address important patient needs. First quarter structured debt financings included $12 million to advance oxygen therapy for its U.S. expansion and a $6.5 million secured loan to Acer Therapeutics to support the company as it awaits market approval for a treatment of urea cycle disorders. We are pleased to help these companies meet their growth needs, especially when they can help improve new outcomes for patients. We believe these transactions, coupled with our quarter-end income-yielding assets of $188.4 million, illustrate how our platform remains poised to take advantage of compelling investment opportunities. In the midst of a very difficult investment climate, healthcare life sciences growth companies really need financing to support the commercialization of their important medical innovations. We believe our suite of financial offerings can help our clients and future clients improve medical care and transform the lives of patients. This year is shaping up to be an exciting one for SWK, and we are targeting to return to our new deal origination to historic levels. To point this effort, we have in excess of $63 million in cash plus revolving credit to meet opportunities in the market. As we announced last November and reaffirmed in early January, we remain committed to focusing on and growing SWK's core specialty finance business. The new Board of Directors now in place is focused on advancing our work to evaluate and implement strategic measures to improve our growth profile and capital allocation. As part of this work, as announced in our press release this morning, the Board has determined to allow the rights agreement or annual bill to expire on its termination date at the end of this month. We anticipate further announcements regarding this work in the coming quarters. For 2022, SWK successfully deployed approximately $638 million of capital into 45 investments with 27 realizations that generated a realized internal rate of return of 20%. I would now like to take time to discuss the state progress made by our subsidiary in Enteris Biopharma. Rajiv Khosla and his team are pursuing a two-pronged growth strategy to maximize the potential of its Peptelligence and ProPerma technologies. The company has expanded its manufacturing facility and its contract manufacturing business. Enteris is set to present two abstracts at the end of the 2022 Annual Conference in June, highlighting research in oral formulations of leuprolide. The compound incorporates Peptelligence technology that enables oral delivery of medications that were traditionally injected or infused. The company is also participating in the CPHi North America Conference to showcase its drug delivery technology and contract manufacturing services. Enteris' four ongoing feasibility studies are in a variety of indications that include cancer, women's health, and central nervous system disorders. In these programs, Enteris partners with drug companies to engineer the drug for oral delivery. We believe this process advances the development of oral peptide or small molecules that could lead to licensing agreements between Enteris' partners during the medium term, potentially providing new sources of life sciences income. Turning to SWK finances. As of March 31, SWK's total investment assets were $195.8 million, a decrease of 10.6% from a year ago. SWK received a $10.7 million cash payment from B&D Dental to resolve a long-running nonaccrual position that was carried at $8.3 million. The company also received a $5.6 million cash payment from Acerus Pharmaceuticals as part of its payoff. Please note that the quarter-end figures do not include portfolio movements post-quarter. At the end of the first quarter of 2022, the weighted average projected effective yield of the finance receivables portfolio was 13.9%, including nonaccrual positions and with a slight increase from a year ago. Cash collections were better than forecasts, leading to a realized yield of our finance receivable portfolio of 22.5% versus 16.7% from the year-ago period. SWK reported non-GAAP tangible book value per share of $18.39 as of March 31, 2022, an increase of 12.7% from a year ago. That figure excludes the deferred tax asset and tangible assets, goodwill, and contingent consideration payable. Management views tangible book value per share as a relevant metric to value the company's core specialty finance business. For the first quarter of 2022, SWK reported total revenue of $11.1 million, an 18% increase compared to $9.4 million for the first quarter of 2021. That growth was largely driven by $2.6 million from fees and interest due to the early payoff of the two loans I noted before. The GAAP net income for the first quarter of 2022 totaled $3.5 million or $0.27 per diluted share compared to $3.4 million, $0.26 per diluted share for the first quarter of 2021. For the first quarter, adjusted non-GAAP net income generated by our special finance business totaled $8.4 million, a 25% increase from the first quarter of 2021. Looking ahead, the remainder of 2022 has the potential to be a fruitful year for SWK given the synergy between our financial offerings and ongoing capital market needs for small and mid-sized life science companies to fund innovation and bring treatments to market. As traditional routes of financing face new challenges in the current investment climate, a combination of our long-term investment strategy, permanent capital base, flexible mandate, and lack of regulatory constraints places us in an advantageous position. These dynamics, coupled with growing momentum and trends, offer the potential to foster a sustained period of value creation for SWK. With that, I will now open the call to your questions.

Operator, Operator

Our first question comes from Kyle Bauser from Lake Street Capital Markets.

Kyle Bauser, Analyst

Winston, thanks for all the updates. So maybe we can just chat about the activity out there. I mean, with things as depressed as they are, debt is becoming more attractive than equity, particularly in the mid-cap space, for a lot of different players. To the extent that's true, have you seen more activity in your realm of things as people contemplate ramping up their operations and their financials through better equity?

Winston Black, Chairman and CEO

Sure. Good question, Kyle. I think certainly, your observation is accurate as those equity values have been compressed, it really highlights just how accretive our non-dilutive debt financings can be for companies. And also, you're right, these companies do need to finance as they look to grow, and that kind of puts us in a very good spot. I would say, generally speaking, the pipeline activity is definitely brisk, and we are seeing a good amount of deals getting done. So between ourselves and, of course, in the rest of the market. I think it's a pretty robust period out there.

Kyle Bauser, Analyst

And I appreciate that. And it sounds like, I think you said you've got access to about $63 million that you could deploy. So your position is pretty good for a while. But is there, I think, an appetite for eventually taking on more leverage in your business? Or do you think you're kind of good for the interim, and there's plenty of activity and capital at your disposal? I'm just kind of curious how you're thinking about leverage going forward.

Winston Black, Chairman and CEO

Sure. Yes. We've talked about this in the past, and I kind of made an indirect reference to this during my prepared remarks today. So yes, we're definitely evaluating what our optimal capital structure should look like. Going back to November last year and early this year, we made some public comments about the desire to build out our capital structure as we think about growing this business and enhancing our returns profile for the benefit of stockholders. Now that we're basically about 5 to 6 weeks in with our new Board, we're fairly focused on looking at this issue as well as all other issues to make sure that we are well positioned for the business going forward. We don't have anything to announce right now regarding what that quantum of debt capital may potentially look like that we're considering putting on. But suffice to say, we are evaluating that and expect to be able to make some announcements in the coming months.

Kyle Bauser, Analyst

I appreciate that. And if you were to potentially scale up by taking more leverage, how do you anticipate needing to expand your internal organization? I mean, do you feel like you've got quite a bit of bandwidth still? Or are you at capacity? And so you may want to add a member or two to your investment team? Just trying to understand if you do kind of scale up, what sort of resources you would need internally.

Winston Black, Chairman and CEO

Sure. Again, another excellent question. From an internal resources perspective, we definitely have capacity to do more. Everyone works very hard. But to your point, we actually did add a Director-level investment professional toward the end of the first quarter. I think JD started on March 1. As part of this, we also implemented a dedicated business development function at SWK. So I think we're well positioned. And we're always looking for exceptional investment professionals. So we would definitely be on the lookout for additional resources as we look to grow. But at this point, we're not currently hiring someone from that perspective.

Kyle Bauser, Analyst

Fair. Got it. No, I appreciate that as well. And just lastly, on the Enteris business, you mentioned the four feasibility studies. Maybe you could talk a little more about how you envision your internal development playing out. You've got four feasibility studies; is the plan to kind of license them? Or do you want to bring them to the FDA internally on your own? Just trying to understand what the playbook is for your internal assets.

Winston Black, Chairman and CEO

Yes, sure. So yes, a clarification there. The feasibility studies are actually work that the Enteris team is doing with third-party pharmaceutical partners. So those aren't necessarily our assets; those are our partners' assets that we are evaluating using our technology to make oral versions of those assets. That business development pipeline continues to build, and that can potentially be a very important revenue driver for us because those sorts of feasibility agreements are the things that turn into license agreements like the Cara license agreement. On the internal pipeline, we have talked about the one program that we're really focused on, and so at this point, that's really kind of what the primary focus is on getting that through its current clinical trial. The team is continuing to look at additional opportunities to leverage our technology, and I think as the year goes on, we'll hopefully have some more things to say about that.

Operator, Operator

Our next question comes from Scott Jensen, Private Investor.

Unknown Attendee, Investor

An uneventful call and this space is well appreciated. Kind of to follow on some of Kyle's areas of questioning. In this space, now that you're seeing more opportunities and obviously, interest rates are going up, are you able to adjust the prices that you get from your clients in lockstep with the market?

Winston Black, Chairman and CEO

Yes, it's a very interesting question. On one hand, our structured debt transactions are typically indexed to LIBOR. So we are getting that benefit across the portfolio as well as on new deals from changes in LIBOR. Obviously, at some point, we'll be moving to a new reference rate. We do see the benefit from that perspective. Overall pricing has remained relatively constant. The market hasn't moved, and I would say, generally speaking, it's probably plus or minus 25 to 50 basis points either way. That said, the thing that will be interesting to see is that if these capital market formal conditions continue into the second quarter, perhaps throughout the rest of the year, how that actually looks. We certainly will be looking to take price where we can. But we want to be mindful of not overburdening our borrowers and creating an issue. So, of course, we'll look at other levers within our investment structures to enhance our returns for stockholders.

Unknown Attendee, Investor

Excellent. That answers my question. Regarding the leuprolide trial, which is currently recruiting according to clinicaltrials.gov, what is the expected timeframe for receiving that Phase II data? Since you are considering a month, do we have any guidance on when that might be?

Winston Black, Chairman and CEO

Sure. I personally hope that we would be able to talk about it at some point this summer, but the recruitment is taking a little bit longer. We're seeing issues with patient recruitment, not all that dissimilar from what other pharmaceutical companies have noted over the last couple of quarters. So I think we're eyeing some time in the later part of the second half of this year to be able to have some results. At this point, it really just depends on the pace of patient recruitment. The team is very focused on that and has been looking to expand the number of trial centers and implementing additional measures to ensure we can get the trial done as expeditiously as possible. But we'll see, as that's really the gating factor on the timing.

Unknown Attendee, Investor

And then to kind of follow on Kyle's point about the Phase III, which usually has a larger cost component. Are you interested in partnering with somebody to go to a Phase III? Or would you get more value by doing it yourself?

Winston Black, Chairman and CEO

Yes. There's definitely an art on the licensing side in terms of whether to license preclinical, Phase I, Phase II, Phase III, or post-approval. With that, there is a sliding scale as you advance. Generally, the royalty rates and expenses increase as you progress, and you are more at risk to get to those higher levels. I think it depends on the data. What we see from a regulatory perspective is required to actually get an asset across the line. We'll make that decision at that time. To the extent we can demonstrate in patients that we are having a desired effect – a 505(b)(2) type program may be the optimal time to license it, but we would, of course, consider all the factors in that analysis.

Unknown Attendee, Investor

Excellent. And my final question for you is, is the Board considering a buyback, considering there are sometimes optimal times where the market isn't there to catch a stock? Are you thinking that maybe you guys can be one of those people to catch the stock?

Winston Black, Chairman and CEO

Yes. A well-timed question. We're definitely thinking about that. We had hoped to be in a position earlier this year to make more announcements on some of these capital allocation decisions. But now with our new Board really getting to work, which we've been together for about 5 to 6 weeks, we're looking at everything, including dividends, capital structure, and so forth. The first part of that analysis was determining to allow the rights agreement to expire at the end of this month. We'll be doing additional analysis to be able to make more announcements about buybacks and so forth in the coming months.

Operator, Operator

There are no more questions in the queue. This concludes our question-and-answer session. I'd like to turn the conference back over to Winston Black for any closing remarks.

Winston Black, Chairman and CEO

Thanks, Jason. In closing, I appreciate everyone's time and attention and look forward to future updates as we continue to advance SWK Holdings. I would also like to extend my sincerest wishes and good health to all. Thank you.

Operator, Operator

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