The Hanover Insurance Group Q4 2023 Earnings Call Transcript

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March 21, 2024

There are 4 speakers on the call.

Operator

Good morning, everyone, and welcome to the SWK Holdings 4th Quarter and Year End 2023 Conference Call. Please note this conference is being recorded. I will now turn the conference over to your host, Jason Rando with Tiboranda Advisors. Jason, over to you.

Speaker 1

Thank you, Jenny. Good morning, everyone, and thank you for joining SWK Holdings' Q4 2023 Financial and Corporate Results Call. Earlier this morning, SWK Holdings issued a press release detailing its financial results for the 3 months ended December 31, 2023. The press release can be found in the Investor Relations section of swkhole.com under News Releases. Before beginning today's call, I would like to make the following statement regarding forward looking statements.

Speaker 1

Today, we'll be making certain forward looking statements about future expectations, plans, events and circumstances, including statements about our strategy, future operations 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 ks 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 from SWNK Holdings is Jody Staggs, President and CEO, who will provide an update on SWK's Q4 2023 corporate and financial results.

Speaker 1

Jody, go ahead.

Speaker 2

Thank you, Jason, and thanks everyone for joining our Q4 conference call. Before beginning the call, I want to thank our former CFO, Yvette Heintzen for her 8 years of service to SWK. Over that period, Yvette upgraded our financial reporting controls and capital markets capabilities. Thank you, Yvette, and we wish you the best in your future endeavors. I also want to thank the team and our consultants at CFGI for working with us to get the 10 ks filed in a timely fashion.

Speaker 2

Thank you. 2023 was a productive year for SWK as we accomplished 3 of our 4 primary goals while growing our finance receivables portfolio to an all time high and repurchasing over $6,000,000 of stock at a 25% discount to the current book value. As a reminder, our 2023 goals were to build and train the team and prepare to scale the firm, to raise balance sheet capital to facilitate this expansion, to find a sustainable path forward for Enteris and to crystallize a third party capital strategy. Elaborating on the three goals we achieved. First, our investment team consists of 6 highly motivated credit professionals, the largest and most experienced the team has ever been, which allows us to originate, underwrite and manage more transactions than at any time in our history.

Speaker 2

The investment team is butchers by 2 support colleagues and we expect to replace the CFO position partners in First Horizon and Woodforest. We also raised a $33,000,000 unsecured baby bond. We have deployed a portion of this capital and have approximately $50,000,000 of liquidity to pursue core STVK life science finance opportunities. 3rd, as it relates to our Entera subsidiary, earlier this week, we announced an agreement with a large strategic partner that we believe positions the Entera's CDMO operations to generate potentially breakeven or better profitability over the duration of that agreement and may lead to the sale of certain tangible assets of Antares at a premium to book value. Finally, while we did not secure a JV or launch a fund during the year, we built our network and are better positioned to pursue this goal in 2024 and beyond.

Speaker 2

We believe these achievements set the stage for improved shareholder returns going forward. SAPK's core business is financing commercial stage life science companies. We do this through 1st lien term loans, royalties and hybrid structures and focus on financings of $5,000,000 to $25,000,000 This is a strategy we've honed over more than a decade and for which we have an extensive network, capabilities and experience spanning the 3 core functions of a direct credit firm. Those are origination, underwriting and portfolio management. We believe the combination of an attractive niche combined with the existing team and platform positioned to SABK to successfully originate, underwrite and manage a portfolio of mid teens plus yielding finance receivables.

Speaker 2

At Twelvethirty Onetwenty 23, our gross portfolio of life science finance receivables totaled $288,000,000 an all time high. The expansion of our portfolio is directly linked to the investments made in our team and underwriting process. Our portfolio consisted of $212,000,000 of performing senior secured term loans to 16 parties, dollars 51,000,000 of royalties to 7 entities and $26,000,000 of non accrual instruments to 5 parties. We also hold approximately $2,000,000 of warrants from public companies as well as warrants or CVRs for 12 private companies carried at 0 on our balance sheet. For the quarter, our portfolio effective yield was 14% and the realized yield was 14.1%.

Speaker 2

As a reminder, the effective yield is the GAAP yield that assumes future cash flows are received in line with our modeling, whereas the real life yield uses actual period finance receivable interest income and fees. Over the past 5 years, STPK's realized yield has averaged approximately 17% with variance based on timing of investment realizations, royalty performance and non accruals. Turning to portfolio activity. During the Q4, we closed 4 transactions committing $60,000,000 of capital with $55,000,000 of deployed. We closed 3 senior secured loans, a $20,000,000 loan to Journey Medical, a dermatology focused pharmaceutical company, a $20,000,000 loan to Shield Therapeutics, a pharmaceutical company commercializing a unique iron replacement therapy and a $6,000,000 loan to Nicoya Life Sciences, a leader in bench top surface plasmid resonance tools.

Speaker 2

We also deployed $14,100,000 to purchase a series of sales based milestones related to a portfolio of immune globulins. During the quarter, our finance receivables generated $3,700,000 of adjusted finance segment net income and for the full year of 2023, the segment generated $24,400,000 of adjusted segment net income. This is a 10% adjusted return on our tangible finance book. Finance segment adjusted net income and return on tangible book are the primary financial metrics we use to gauge our core business progress. 2023 Finance segment results included a $2,300,000 negative impact from the CECL reserve build, which totaled $13,900,000 at year's end.

Speaker 2

As a reminder, throughout 2023, we built a general allowance for loan loss to comply with CECL. On each new loan, we reserve 4.4 percent upfront for potential future loan losses. 2023's growth in book value per share was negatively impacted by this build. We think we're in the later innings of building this general loan loss reserve, although it will increase in proportion to growth in our finance receivables portfolio. Turning to the Antares agreement.

Speaker 2

On March 18, we signed an exclusive option and asset purchase agreement with a strategic partner that is a global leader in the design and manufacturing of a broad range of drug and consumer product dosing, dispensing and protection technologies. The agreement grants the partner a 2 year exclusive option to purchase certain Antares tangible property and equipment at a premium to the September 30, 2023 book value or approximately $6,000,000 Other tangible assets including inventory will be valued if our partner opts to exercise the agreement. In consideration for the grant of the option, the partner agreed to pay in tariffs a low single digit $1,000,000 option fee with the first portion paid at closed and the second portion payable by January 1, 2025 if the option has not been exercised by that date. If the option is exercised, the option fee is credible to the purchase price. However, if it is non refundable, the option fees are non refundable if the option is not exercised.

Speaker 2

The partner also agreed to guarantee 2 Antares minimum annual revenue payments under an existing collaboration agreement totaling mid single digit $1,000,000 for each of the calendar years 2024 2025. The agreement does not include any of the Enteris IP, which includes the Enteris PEPTelligence oral dosing formulation, the licensing agreement with Cara Therapeutics and corresponding milestones and royalties, other licenses or any of Antares' additional IP, including the oral luprolide program. We are working with the Antares' management team to monetize these assets. The agreement immediately reduces the cash burn Antares and we believe the business will be breakeven or better over the duration of the agreement. Importantly, the agreement allows SWK to prioritize our core specialty finance business and allows our shareholders to participate in earnings of the finance business to a greater extent.

Speaker 2

At December 31, 2023, our book value per share was $22.43 compared with $21.80 at the end of 2022. On a non GAAP basis, our tangible finance book value per share was $19.61 compared to $19.02 at the end of 2022. SAPK shares trade at an approximately 10% discount to the twelvethirty onetwenty 23 tangible book value. As a reminder, that book value, that tangible book value does not include the $13,900,000 CECL reserve. Or said another way, the CECL reserve provides a $13,900,000 buffer to potential future loan losses on top of that $19.61 per share.

Speaker 2

The tangible book value also does not include any value for the Antares CDMO, Antares IP, the tax assets nor the value of private warrants or other fees that may be off balance sheet. With share trading at this we view the repurchase of stock as a prudent use of shareholder capital. During the Q4 of 2023, we repurchased approximately 14,000 shares of stock for $200,000 and year to date through March 19, 2024, we repurchased an additional 51,000 shares for a total cost of approximately $900,000 In conclusion, we ended the year on a strong note with foreclosed deals and our gross finance and investment portfolio totaling approximately $90,000,000 an all time high. The Antares agreement positions that business to be potentially profit neutral or better over the next 2 years and allows STBK to focus on our core specialty finance business. We've been repurchasing shares at a valuation we believe represents a compelling use of shareholder capital.

Speaker 2

Finally, we have the team, expertise, network and platform to successfully deploy capital into the attractive $25,000,000 in under life science finance opportunity set. With that, let's open the call to questions.

Operator

Thank you very much. We are now opening the floor for questions. Thank you. Your first question is coming from Mark Argento of Lake Street. Mark, your line is live.

Speaker 3

Hey, Jody. Thanks for taking my question. Just wanted to just get a high level read on the overall market. We've had kind of a higher rate environment for a little while here. It seems like that's been kind of fully priced in.

Speaker 3

Capital markets, especially on the small end of the market cap spectrum, seem like they're picking up steam or gaining some momentum finally. How do you see the overall book, the environment right now in terms of the books access to capital or some of your blended clients, their access to capital right now and other forms? And then overall kind of the pipeline, how do you feel like you're positioned here in terms of the ability to put more capital to work over the near term?

Speaker 2

Yes. Thanks, Mark, and good morning. Yes. So it's interesting, 6, 7, 8 months ago, everyone was afraid to do deals sitting on their hands. And of course with S and P and Bitcoin and those things hitting all time highs, but folks are doing deals more frequently and folks are able to access capital.

Speaker 2

So the positive is our portfolio is made of companies that are commercializing products. They need to raise money and this environment is better for them. So we've had couple of companies raise money. We have a couple of other companies out there raising money and the reception seems to be quite a bit better than it was say 9, 12 months ago. In terms of the pipeline, we have we saw the solid pipeline in our segment of the market.

Speaker 2

A lot of these companies have don't have a lot of options at any given time of the cycle. We still got a lot of deals we're hunting and hope to close. I will say over the last sort of 3 months, we've had a handful of deals that I thought we would close like good solid core SWK Life Science deals. One of those they ended up taking equity and that was one we worked long and hard on and thought we had a really compelling proposal and had key stakeholder buy in and they took equity, which was understandable. We had another one where I think we got outbid.

Speaker 2

But there's still plenty of things for us to do out there and plenty of these small companies that need checks of $25,000,000 or less are still out there trying to raise money, don't have a lot of options.

Speaker 3

That makes sense. And then in terms of from a strategic perspective, are you still focused on the opportunity to JV or find partner capital? Anything changed now as you're kind of a quarter end of the New Year in terms of the strategy?

Speaker 2

Yes. No, we still would like to do that. I think the goal last year really was let's get ready to grow, let's get the team ready to grow, let's have the machine down and then raise the balance sheet capital. I think we did a pretty good job on that. The JV and some kind of third party capital, it's really interesting to us.

Speaker 2

We have an interesting sourcing, origination, management capabilities. We've talked to a lot of larger alternative asset managers and credit firms. They find it interesting. I think for us, it will allow us to continue to grow assets, perhaps expand our size a little bit in terms of check size and sort of our aperture. And then for shareholders, we would collect a fee, which would be fantastic as well and help our ROE.

Speaker 2

Now all that's Easter said than done, obviously. And we've got to find the right partner and the right structure. But yes, we're still interested. We're still talking to people. Nothing is imminent, but it's I know it's the Board is pushing us hard to find something there in 2024.

Speaker 2

Thanks, Jody. Good luck. Yes. Thank you, Mark.

Operator

Thank you very much. Okay. We don't appear to have any further questions in the queue. I can hand back over to Jody for any closing comments.

Speaker 2

Yes. Thanks, Ginny. Yes, just thanks everyone for joining the call. As highlighted on the call, we're bullish about our prospects in 2024, given increased finance receivables portfolio, plenty of availability to fund new deals and continued demand for our customized loan and royalty products targeting innovative life science companies. Hope everyone has a great day.

Operator

Thank you very much, Jody, and thank you everyone. Today's conference is now concluded. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.

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The Hanover Insurance Group Q4 2023
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