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.
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Finance Receivables Segment
Our
Finance Receivables segment strategy is to be a leading healthcare capital
provider by offering 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 treat 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
commercialize medicines that treat disease states, whereas our life science tools partners sell a wide variety of research instrumentation
to help other companies conduct clinical research. We have deploy 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
are able to 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.
We
fill an underserved niche in the sub-$50 million transaction size market.
Since many of our competitors that provide non-traditional debt and/or royalty financings typically have greater financial resources than
us, they prioritize transaction sizes above $50 million. As such, we believe we face less competition in transactions that are less than
$50 million.
As
of March 14, 2024, and since inception of the strategy, we and our partners have executed transactions with 55 different parties
under our specialty finance strategy, funding an aggregate of approximately $779.4 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 typical credit protections.
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 certain 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
marketed by a third party, such as a royalty paid to an inventor on the sales of a medicine, or from the commercialization by 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. 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 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
development and manufacturing organization providing development services to pharmaceutical partners as well as innovative formulation
solutions built around its proprietary oral drug delivery technologies, the Peptelligence® platform. We seek to generate income by providing
customers pharmaceutical development, formulation and manufacturing services as well as licensing its internally developed intellectual
property. With an effective date of January 1, 2024, we entered into an Option and Asset Purchase Agreement with AptarGroup, Inc. (“Aptar”)
on March 14, 2024 which granted Aptar an exclusive option to acquire certain of Enteris’ assets related to its business of providing
good manufacturing practice (GMP) manufacturing and clinical supply services through Phase 1 and 2 to third parties, subject to certain
exclusions. Aptar must exercise the option by or before January 1, 2026.
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 royalty financing
have greater financial resources than us, they prioritize transaction sizes above $50 million. As such, we believe we face less competition
in transactions that are less than $50 million.
In
our Pharmaceutical Development segment, we face competition in providing clinical development and manufacturing services. We also 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.
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 .
Human Capital Resources
As
of December 31, 2023, we had 23 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.
Our human capital resources objectives include, as applicable, identifying, recruiting, retaining, incentivizing and integrating our existing and additional employees. The principal purposes of our equity incentive plans are to attract, retain and motivate selected employees, consultants and directors through the granting of stock-based compensation awards and cash-based performance bonus awards. We regularly evaluate our compensation programs and utilize industry benchmarking in an effort to ensure competitiveness compared to similar companies with which we compete for talent, as well as fair and equitable treatment across our workforce with respect to gender, race, and other personal characteristics.
We are an equal opportunity employer and we maintain policies that prohibit unlawful discrimination based on race, color, religion, gender, sexual orientation, gender identity/expression, national origin/ancestry, age, disability, marital and veteran status.
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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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