SWK Holdings Corporation (SWKH) Earnings Call Transcript & Summary

Good day, and welcome to 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 3 months and full year ended December 31, 2022. The press release can be found in the Investor Relations section at 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 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. There is appointment of the new leadership team, we have made considerable progress positioning SWK for a multiyear period of value creation. Of course, much work remains. On today's call, I want to update you on 4 areas of focus: growing the team and anticipation of scaling the business and tariffs, capital and the portfolio. Before discussing the 4 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 classing in a matter of days and other banks active in our space either collapsing or under consumable stress. SWK had no direct exposure to SVB via deposits or shared credit facilities. While some SWK's borrowers had deposit exposure. None had undrawn credit line 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 costs above our historical low to mid-teens costs. 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 4 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 the new SWK leadership team took the reins, we spend considerable time reviewing the financial and operational trends at in tariffs. 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 in tariffs 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 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 2 proprietary 505b2 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-add in Enteris. There are 4 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 has tied to Oral KORSUVA, which Cara is studying in 3 late-stage clinical trials. The cleanest look at the value of this asset on our balance sheet nis 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 is originally drew SWK's attention to Enteris. At this point, there's 3 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 discuss this asset in the past as it was not being developed. However, recently, a well-funded private pharma company has acquired the asset and its launching clinical trials. The second piece is we do 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's 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. And 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 Dags ] 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-add at Enteris is our 2 proprietary 505b2 drug assets. The first of these assets is oral leuprolide for semi rare pediatric indication. And we did get some positive news last month as the Phase II trial was successful with some doses of Ovarest achieving the primary endpoint of estradiol suppression. We are reviewing the full data set, and we'll be able to provide a further update later this year. The second 505b2 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 this program. Instead, as the trial work is completed and the data analyzed, we will partner -- seek a 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 is 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 developed an additional $6 million to existing borrowers. In the first quarter of 2023, we have closed one $5 million term loan and advanced approximately $8 million to existing borrowers. In the fourth quarter w sold the remaining interest in our Narcan royalty for $2.5 million which is -- 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 2.4x 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. And then at 12 -- at December 31, we had $18 million of finance receivables on nonaccrual, which is approximately 7.5% of the investment portfolio. We are working with 2 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 10b5 program. Since the start of 2023 SWK had repurchased roughly 30,000 shares at an average repurchase price of approximately $18.51. Before turning the call to Yvette, I want to thank Wendy DiCicco for a contribution to our Board of Directors. Wendy chose not to seek reelection 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 aligns with shareholders. I also want to welcome Jerry Albright to our Board. Jerry has an impressive professional resume, including serving as the CIO of Teachers Retirement System of Texas. Welcom 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. And 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 figures do 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 nonaccrual 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 we reserved on our TRT positions 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 new tangible finance book value per share as a relevant metric to value the company's core finance receivables segment. The finance receivables segment's 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 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 shares. 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 to the $15 million in the fourth quarter of 2021. reflecting a $5 million decline in licensing milestone revenue at in tariff. 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, and pharmaceutical development revenue decreased to $6 million from $16.8 million from the prior year, which reflected $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 opportunities that represents 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] We have a question from [ Scott Jansen ], one of private Investors.

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 noticed on Enteris' website that you're partnering with Aptar for nasal and oral liquid delivery. 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, is the first one. And then you kind of updated all the other things I was going to ask on Enteris.

Yes, absolutely. Yes. No, I appreciate it. I don't want to say much, and I would refer not to confirm or deny. It's -- what's on the websites it's on the website. The important is that we're working with on the CDMO business is, we're really focused on driving earlier-stage CDMO work through the plant. So the team is really -- they really have an expertise in working with [ partners ] and being creative and solving problems with [ partners ] and that could be peptides, that could be high potency things type of that may be nasal. And as we 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 nice high-margin work once you've got that this fixed infrastructure there. So the focus is really -- working with Paul to try to build a diversified set of CDMO revenue in business. So that's what we're really targeting there.

Okay. 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 seat non-dilutive financing for them?

Yes. So the answer is yes. I would say, yes, and once we've really dug in on the company, we've learned how they operate. We've got to know management. We kind of -- you kind of know where the skeletons are. 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 someday -- sometimes, you just have to tell folks, "Hey, sorry, we've done all we can do here and really you 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. But at the same time, we have to have disappointment and sometimes tell folks. Sorry, we can't do anything else for you.

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?

Yes. I think we're pretty well done here. I was looking at this before. 2022, we had a lot of onetime 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's 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 to 3 to 4 -- I guess, 4 investment professionals over the years, you can probably figure out what those people typically earn in the Dallas market. So I was sort of -- I think first quarter 2023, we'll be able to kind of show you what the run rate is. The 2022 was extremely lumpy with a lot of onetime costs, and it's a little bit hard to say. But it's going to be in that kind of $7 million to $8 million range, I think, on a go-forward basis.

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

Yes, I appreciate that. We've been a little frustrated. We cannot buy that. There's rules in this 10b5 program with the algorithm and with the trailing volume. So we are -- we've got a lot smarter on the 10b5 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.

[Operator Instructions] Our next question comes from [ William Koch ], another private investor.

This is Bill Koch. I own some shares, live in Connecticut. I was wondering if you have any idea what the potential annual revenues for an oral leuprolide drug would be?

Bill, thanks for the question. I think I do get a -- I get questions on this periodically. I think one thing that I would just sort of state is, this is not -- we're not studying it for broad women's health conditions, uterine fibroids or endometriosis. Leuprolide is a GnRH agonist, and this is kind of 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 a [ relugolix ] that is really where that market has gone. So this is not a $1 billion type opportunity. The indication we're studying it for is 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.

[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.

Yes. Thanks for everyone joining the call. Thanks for the questions. And 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.