Item 1. Business
ITEM
1. BUSINESS
Overview
SWK
Holdings Corporation (the “Company,” “we,” or “us”) was incorporated in July 1996 in California and
reincorporated in Delaware in September 1999. In
July 2012, we commenced a strategy of building a specialty finance and asset management business. In August 2019, we commenced a complementary
strategy of building a pharmaceutical development, manufacturing and intellectual property licensing business. Our operations comprise
two reportable segments: “Finance Receivables” and “Pharmaceutical Development.” We evaluate and invest in
a broad range of healthcare related companies and products with innovative intellectual property, including the biotechnology, medical
device, medical diagnostics and related tools, animal health and pharmaceutical industries (collectively, “life science”).
We allocate capital to each segment in order to generate income through the sales of life science products by third parties and related
earned income sources. We are headquartered in Dallas, Texas.
Finance
Receivables Segment
Our
Finance Receivables segment strategy is to be a leading healthcare capital provider by offering sophisticated, customized financing
solutions to a broad range of life science companies, institutions and inventors. This segment is primarily focused on monetizing
cash flow streams derived from commercial-stage products and related intellectual property through royalty purchases and financings,
as well as through the creation of synthetic revenue interests in commercialized products. Our business partners are primarily
engaged in selling products that directly or indirectly cure diseases and/or improve the wellness of people or animals, or they
receive royalties paid on the sales of such products. For example, our biotechnology and pharmaceutical business partners manufacture
medication that directly treat disease states, whereas our life science tools partners sell a wide variety of research instrumentation
to help other companies conduct research into disease states. We have been deploying our assets to earn interest, fees, and other
income pursuant to this strategy, and we continue to identify and review financing and similar opportunities on an ongoing basis
with financial solutions that are tailored to the individual needs of our business partners. In addition, through our wholly-owned
subsidiary, SWK Advisors LLC, we provide non-discretionary investment advisory services to institutional clients in separately
managed accounts to similarly invest in life science finance. SWK Advisors LLC is registered as an investment advisor with the
Texas State Securities Board. We intend to fund transactions through our own working capital and our revolving credit facility,
as well as by building our asset management business by raising additional third-party capital to be invested alongside our capital.
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We
fill a niche that we believe is underserved in the sub-$50 million transaction size market. Since many of our competitors that
provide longer term, non-traditional debt and/or royalty-related financing options typically have much greater financial resources
than us, they tend not to focus on transaction sizes below $50 million, as it is generally inefficient for them to do so. In addition,
we do not believe that a sufficient number of other companies offer similar types of long-term financing options to fill the demand
of the sub-$50 million market. As such, we believe we face less competition from such investors in transactions that are less
than $50 million.
As
of March 17, 2023, and since inception of the strategy, we and our partners have executed transactions with 50 different parties
under our specialty finance strategy, funding an aggregate of approximately $725.2 million in various financial products across
the life science sector. Our portfolio includes senior and subordinated debt backed by royalties and synthetic royalties paid by companies
in the life science sector, and purchased royalties generated by sales of life science products and related intellectual property.
The
objective of our Finance Receivables segment is to maximize our portfolio total return in the context of a prudent level of risk,
and thus, increase our net income and book value by generating income from three sources:
1.
primarily owning
or financing through debt investments, royalties or revenue interests generated by the sales of life science products and
related intellectual property;
2.
receiving interest
and other income by advancing capital in the form of secured debt to companies in the life science sector; and
3.
to a lesser extent,
realizing capital appreciation from equity-related investments in the life sciences sector.
In
our portfolio we seek to achieve attractive risk-adjusted current yields and opportunities with the potential for equity-like
returns with protection that credit provides.
The
majority of our finance receivables transactions are structured similarly to factoring transactions whereby we provide capital
in exchange for an interest in an existing revenue stream. We primarily provide capital to companies following the commercialization
of a product, although in rare situations we consider pre-approval financings as well. The existing revenue stream can take several
forms, but is most commonly either a royalty derived from the sales of a life science product (1) from the marketing efforts of
a third party, such as a royalty paid to an inventor on the sales of a medicine, or (2) from the marketing efforts of a partner
company, such as a medical device company that directly sells its own products. Our structured debt investments may include warrants
or other features, giving us the potential to realize enhanced returns on a portion of our portfolio. Capital that we provide
directly to our partners is generally used for growth and general working capital purposes, as well as for acquisitions or recapitalizations
in select cases. We generally fund the full amount of transactions up to $25 million through our working capital.
In
circumstances where a transaction is greater than $25 million, we typically seek to syndicate amounts in excess of $25 million
to both other investors and our investment advisory clients. We do not expect to earn investment advisory income in transactions
where we partner with investors other than our investment advisory clients.
Although
we have partnered with investment advisory clients in the past, we currently do not have any transactions in which we have partnered
with investment advisory clients. We expect to continue to offer transaction opportunities to our investment advisory clients,
as appropriate for each client’s investment strategy. When a client opts into a transaction, each client receives its pro
rata allocation of income produced by a transaction in which it participates, and the client pays us management and incentive
fees according to a written investment advisory agreement. Fees paid by clients may differ depending upon the terms negotiated
with each client and are paid directly by the client upon receipt of an invoice from us. We may seek to raise discretionary capital
from similar investors in the future.
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We
source our investment opportunities through a combination of our senior management’s proprietary relationships within the
industry, outbound business development efforts and inbound inquiries from companies, institutions and inventors interested in
learning about our capital financing alternatives. Our investment advisory clients generally do not originate investment opportunities
for us.
Pharmaceutical
Development Segment
During
2019, we commenced our Pharmaceutical Development segment with the acquisition of Enteris BioPharma, Inc. (“Enteris”).
Enteris is a clinical stage biopharmaceutical company offering innovative formulation solutions built around its proprietary oral
drug delivery technologies, the Peptelligence® platform.
Our
Pharmaceutical Development segment strategy is to utilize the technology platform to create a wholly-owned portfolio of milestone
and royalty income by out-licensing our technology in two ways. First, we intend to continue to out-license our Peptelligence®
technology to pharmaceutical companies to create novel and important oral therapeutic treatments for a wide variety of indications.
Second, we intend to out-license to pharmaceutical companies assets from our internal product pipeline of off-patent previously
approved drug compounds with which we seek to create novel formulations using our proprietary technology to develop treatments
that have meaningful therapeutic benefits for patients and caregivers. We also seek to generate income by providing customers
pharmaceutical development, formulation and manufacturing services.
Competition
In
our Finance Receivables segment, we face competition in the pursuit of outside investors, investment management clients and opportunities
to deploy our capital in attractive healthcare related companies. Our primary competitors provide financing to prospective companies
and include non-bank financial institutions, federal or state chartered banks, venture debt funds, venture capital funds, private
equity funds, pharmaceutical royalty and other investment funds, business development companies and investment banks. Many of
these entities have greater financial and managerial resources than we have. Some of these competitors may also have a lower cost
of capital and access to funding sources that are not available to us, which may create a competitive disadvantage for us. As
a result, we tend not to compete on price, but instead focus on our industry experience, flexible financing options and speed
to evaluate and complete a transaction. In addition, since many of our competitors that provide non-traditional debt and/or longer
term, royalty-related financing options have much greater financial resources than us, they tend not to focus on transaction sizes
below $50 million as it is generally inefficient for them to do so. As such, we believe we face less competition from such investors
in transactions that are less than $50 million.
In
our Pharmaceutical Development segment, we face competition in introducing products that improve efficacy, safety, patients’
and clinicians’ ease of use and cost-effectiveness. The success of new product offerings will depend on many factors, including
our ability to properly anticipate and satisfy customer needs, obtain regulatory approvals on a timely basis, develop and manufacture
products in an economic and timely manner, obtain or maintain advantageous positions with respect to intellectual property, and
differentiate products from competitors. A failure by us to successfully commercialize existing or planned products could have
a material adverse effect on our business, financial condition and results of operations.
For
additional information concerning the competitive risks we face, see Item 1A., Risk Factors .
Governmental
Regulation
For
additional information concerning the effect of existing or probable government regulation on our business, see Item 1A., Risk
Factors .
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Employees
As
of December 31, 2022, we had 21 employees, all of whom are full-time. None of our employees are represented by a labor union,
and we consider our employee relations to be good.
Additional
Information
We
file annual, quarterly and current reports, proxy statements and other information required by the Securities Exchange Act of
1934, as amended (the “Exchange Act’’), with the Securities and Exchange Commission (“SEC”). Our
SEC filings are available to the public from the SEC’s internet site at http://www.sec.gov.
Our
internet site is http://www.swkhold.com. We will make available free of charge through our website in the “Investor Relations
- SEC Filings” section our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy
statements and Forms 3, 4 and 5 filed on behalf of directors and executive officers and any amendments to those reports filed
or furnished pursuant to the Exchange Act as soon as reasonably practicable after we electronically file such material with, or
furnish it to, the SEC. Also, posted on our website in the “Investor Relations - Corporate Governance” section are
charters for our Audit Committee, Compensation Committee and Governance and Nominating Committee as well as our Code of Ethics
and Insider Trading Policy governing our directors, officers and employees. Information on or accessible through our website is
not a part of, and is not incorporated into, this Annual Report.
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