Pharmaceutical Finance: The Right Medicine in a Volatile Market

Transcription

1 Pharmaceutical Finance: The Right Medicine in a Volatile Market

2 Forward-looking and Cautionary Statements Statements in this presentation that are not strictly historical, and any statements regarding events or developments that we believe or anticipate will or may occur in the future are "forward-looking" statements within the meaning of the federal securities laws. There are a number of important factors that could cause actual results, developments and business decisions to differ materially from those suggested or indicated by such forward-looking statements and you should not place undue reliance on any such forward-looking statements. Additional information regarding the factors that may cause actual results to differ materially from these forward-looking statements is available in our SEC filings, including our 2012 Annual Report on Form 10-K. The Company does not assume any obligation to update or revise any forward-looking statement, whether as a result of new information, future events and developments or otherwise. The specialty finance and asset management businesses will be conducted through separate subsidiaries and the Company will conduct its operations in a manner that is intended to be excluded from the definition of an investment company and exempt from registration and regulation under the Investment Company Act of This presentation, furnished on a confidential basis to the recipient, is neither an offer to sell nor a solicitation of any offer to buy any securities, investment product or investment advisory services, including such services offered by SWK Advisors LLC. This presentation is subject to a more complete description and does not contain all of the information necessary to make an investment decision, including, but not limited to, the risks, fees and investment strategies of investing in pharmaceutical securities. Any offering is made only pursuant to the relevant information memorandum, a relevant subscription application or investment management agreement, and SWK Advisors LLC s From ADV, all of which must be read in their entirety. All investors must be accredited investors and/or qualified purchasers as defined in the securities laws before they can invest with SWK Advisors LLC. Pharmaceutical securities may rely on milestone payments and/or a royalty stream from an underlying drug which may or may not have received approval of the Food and Drug Administration ( FDA ). If the underlying drug does not receive FDA approval, it could negatively impact the securities, including the payments of principal and/or interest. In addition, the introduction of new drugs onto the market could negatively impact the securities, since that may decrease sales and/or prices of the underlying drug. Changes to Medicare reimbursement or third party payor pricing could negatively impact the securities, since they could negatively impact the prices and/or sales of the underlying drug. There is also risk that the licensing agreement that governs the payment of royalties may terminate, which could negatively impact the securities. There is also the risk that litigation involving the underlying drug could negatively impact the securities, including payments of principal and/or interest on any securities. This presentation is not an advertisement and is not intended for public use or distribution and is intended exclusively for the use of the person to whom it has been delivered by the Company, and it is not to be reproduced or redistributed to any other person without the prior consent of the Company. 2

3 SWK Holdings Overview SWK Holdings is a publicly-listed, specialty finance company based in Dallas, Texas SWK s primary focus is on originating and investing in structured, asset-based debt transactions in the pharmaceutical and medical device space, including IP-based cash flow streams, synthetic royalties, legacy product acquisitions Invest balance sheet capital in transactions Manage separate accounts for several large, sophisticated family offices that co-invest in SWK-originated transactions Experienced team led by Brett Pope, who managed a $4 billion healthcare portfolio at Highland Capital Management Extensive healthcare, cross-asset and special situation investing experience Deep industry relationships and proprietary investment sourcing Investment Team managed a portfolio of over $200 million in pharmaceutical royalty assets with no defaults experienced to date Three year royalty debt track record from prior firm with strong returns Investments made in the following therapeutic categories: hormone replacement therapy, migraine, cardiology, eye infections, renal failure, heart disease, children's vaccines, sleeping disorders, depression, and schizophrenia. Over the last 24 months, SWK s management closed in excess of $125 million in structured life science transactions including royalty financings, structured corporate loans and product acquisitions 3

4 SWK Holdings Team Brett Pope CFA, Chief Executive Officer Mr. Pope co-founded PBS Capital Management in April 2009, a healthcare oriented investment partnership designed to leverage the principals expertise in special and misunderstood situations in the healthcare sector. Mr. Pope spent seven years at Highland Capital Management, resigning in May 2008 as Partner and Co-Head of Private Equity. Mr. Pope moved from Portfolio Analyst to Partner in less than four years. Prior to moving to Private Equity, Mr. Pope managed a $7 billion portfolio ($4 billion in healthcare), which consisted of leveraged loans, high-yield bonds, distressed debt, public and private equity, and pharmaceutical royalties. Prior to joining Highland Capital Management, Mr. Pope served as an equities analyst with Streetadvisor.com, Southwest Securities, and Hodges Capital Management. He also spent two years at Associates First Capital. Mr. Pope graduated magna cum laude with a BBA in finance from the University of Texas at Austin and has earned the right to use the CFA designation. Winston Black, Managing Director Mr. Black co-founded PBS Capital Management in April 2009 Mr. Black was a Senior Portfolio Analyst at Highland Capital Management where he managed a $2.3 billion portfolio of healthcare leveraged loans, high-yield bonds, distressed debt, public and private equity, and pharmaceutical royalties. Mr. Black deployed in excess of $600 million of capital during his tenure. Prior to joining Highland Capital Management, Mr. Black was COO/Analyst and Chief Compliance Officer at Mallette Capital Management, a $200 million biotech hedge fund where he was responsible for idea generation & oversight of back office operations. Prior to Mallette Capital, Mr. Black was Vice President, Corporate Development for ATX Communications, Inc. where he focused on M&A, corporate finance, and restructuring. He began his career as an Analyst in the Healthcare and Telecommunications investment banking groups at Salomon Smith Barney. Mr. Black received MBAs with distinction from both Columbia Business School and London Business School, and he received a BA in Economics from Duke University, where he graduated cum laude. 4

5 OTC-traded public equity Corporate History $32mm market cap, $37mm book equity, approximately $450mm NOLs Largest shareholder: Carlson Capital (29%) Poison pill to protect NOLs Prior corporate life of SWK Holdings Founded as Kana Software in 1996, a software company that sold customer service based products In 2009, Kana s assets were sold to a KKR portfolio company for $40.6mm and the company was renamed SWK Holdings Corporation From 2010 to 2012, SWK sought to redeploy its capital in opportunities where income/capital gains produced would leverage the firm s NOLs Brett Pope and Winston Black were hired in May 2012 to launch SWK s new specialty finance focus Prior life of Brett Pope and Winston Black Left Highland Capital in 2008 and 2009, respectively Founded PBS Capital Management in 2009 as an RIA and pursued the same investment strategy SWK is now employing on behalf of family office clients PBS Capital sold its client contracts to SWK when Misters Pope and Black were hired by SWK Since May 2012 Relocated corporate headquarters to Dallas, TX from Provo, UT Replaced CFO with The Pine Hill Group Completed three investments, utilizing $18.5mm of balance sheet cash; $52.5mm total transaction size Registered SWK Advisors LLC as a TX RIA Hired Senior Analyst to supplement investment capabilities 5

6 Organizational Structure Brett Pope, CEO and Winston Black, Managing Director Manage day to day activities / source & execute investments Daily accounting handled by part-time VP Finance Quin Mallette, MD: Senior Analyst assists in reviewing deal opportunities and prosecute deal flow o o MD & MBA from Duke University Sell and buy side experience General Counsel: Parth Munshi, Partner at Prabhu Patel & Banerjee, LLC Over 15 years experience advising small cap to Fortune 50 companies on SEC, corporate governance and M&A matters CFO: Charles Jacobson, Managing Director, The Pine Hill Group CPA advisory firm. Each partner has prior experience at Big Four, corporate C-level and private equity Mr. Jacobson: CPA with 20 years experience, served as CFO/CAO/Controller of public clients and financial services companies /funds including FS Investment Corporation (BDC, SEC filing responsibility) Ed Sweeney, Managing Director: assists Mr. Jacobson on certain matters. Prior experience includes Vice President, Controller and Chief Accounting Officer of Endo Pharmaceuticals RIA Counsel: John Fahy, Partner at Whitaker, Chalk, Swindle & Schwartz, LLC Significant regulatory experience, including prosecuting cases for the SEC and the Texas State Securities Board Served as general counsel of two broker-dealers and an investment adviser Compliance Consultant: Linda Shirkey, Founder and President Oversee SWK Advisors registration with the Texas State Securities Board 6

7 Why Pharmaceutical Finance Achieve high current yield from investment in non-correlated assets Invest in royalty, revenue, equity & debt interests from healthcare companies, research institutions and inventors Royalties: strong underlying existing cash flow profile without material exposure to marketing, litigation or development costs Structured debt: high coupon drives current yield; backed by collateral value & paired with equity upside Utilize debt structures to protect principal through superior investment structuring Debt investments have a priority claim over pharmaceutical/royalty cash flows and assets, and have substantially better downside protection Loan-to-value cushion prevents overpaying for royalty assets Selectively pursue equity interests in products through outright royalty or product ownership Mitigate FDA risk and Company-specific risk Commercial-stage products with IP protection and/or regulatory moat If appropriate, bankruptcy remote structures are used to eliminate credit risk from the royalty seller Drug licensors remitting the royalty payments are typically well-capitalized issuers Create a diversified portfolio along multiple criteria Therapeutic category Product life cycle (new product launch, steady growth, mature asset) Marketer profile 7

8 Pharmaceutical Market Trends Worldwide Prescription Drug Market Worldwide Biotechnology Market Source: IMS Health Market Prognosis, May Constant US$. Source: IMS MIDAS, Mar 2012 Pharmaceutical drug sales growth driven by biotechnology Biologic drugs typically more insulated from generic competition, with many drug developers emphasizing biologics in their pipelines By 2014 biotech drugs are predicted to make up 50% of the leading 100 drugs, compared with 28% in 2008 and 11% in 2000 (1) Low correlation to the broader equity and credit markets Number of NMEs launched are at a ten-year high, driven by pharma s successful focus on diseases with high unmet medical need (2) R 2 of vs. GDP and R 2 of vs. S&P 500 from 1Q07 to 1Q10 Demand driven by demographic trends and technological innovation (1) EvaluatePharma. Biotech set to dominate drug industry growth, 17 June (2) Thomson Reuters 2012 Pharmaceutical R&D Factbook. 8

9 Pharmaceutical Finance Access to capital remains scarce for small/medium sized pharmaceutical (and medical device) companies Traditional alternatives of primary equity and convertible debt typically highly dilutive Fixed income /structured deals below $25 million often considered too small for institutional investors Companies with approved & marketed pharmaceuticals and/or royalty streams have very valuable collateral, even if they still burn cash Products are highly portable among marketing organizations Once ingrained into therapeutic practice, many products continue to sell themselves Small products often do not justify the cost of supporting a stand alone sales force and are highly accretive to larger companies; face-to-face detailing can cost upwards of $70/minute (1) Revenues are predictable Drug launch curves are relatively stable with much supporting data from comparables New competition is identifiable up to a decade in advance; long approval lag times Key analysis: marketing exclusivity due to Intellectual Property and/or regulatory moat Structured debt transactions provide reasonably priced capital to smaller companies that they then can deploy into higher return projects (1) Business Insights, The Pharmaceutical Sales Force Outlook, June

10 Investment Opportunities Royalties Pharmaceutical and biotech companies Fund pipeline development & expansion Leverage lower ROIs for higher return on investment projects Research institutions and inventors Capital planning for operating budgets and/or fund research and development initiatives Financial asset diversification Synthetic Royalty Marketer creates a royalty by selling an interest in a future revenue stream earned with a single product or basket of products in exchange for an upfront payment and potential future payments Ability to structure tiered revenues, reverse tiers, minimum payments, caps, step-downs and buy-out options, similar to a license agreement between innovator and marketer Hybrid Financing Combination of royalty and revenue-based financings Can take on many forms, including structured debt and equity investments Product acquisition Acquire legacy products with established, mature revenue trends, minimal sales effort and infrastructure requirements 10

11 Asset Investment Characteristics Underlying Assets Cash flows from certain approved pharmaceuticals via royalty license agreements or direct from the company, secured by intellectual property or similar regulatory moat and marketing agreement rights Senior secured and structured conservatively to allow for significant underperformance of underlying drug sales before any impairment of returns to debt holders Royalties: payments generally from large, well-capitalized, investment grade drug marketers (Lilly, Merck, GSK, Pfizer, etc.) though each transaction is unique Majority of pharmaceuticals are reimbursed through some private or public insurance scheme Inefficient Market Few buyers of these assets in the market due to expertise required to structure and diligence transactions Alternatives available to issuers are highly dilutive and difficult to execute Benefits to Investors Attractive risk/reward opportunities that are uncorrelated to the broader market Structural protections to minimize yield impairment through drug underperformance Historic volatility is low and typically declines with an increasing number of products in the portfolio Limited Default Risk Typically drugs are pulled from the market only after severe safety signals arise post substantial patient years of exposure; such events are extremely rare (Vioxx vs. Tysabri and Avandia) Pharmaceutical debt is structured with short duration, amortizing bond prior to accumulation of sufficient data required to tease out safety concerns 11

12 Illustration: Royalty Stream Creation Small Biotech enters into marketing collaboration with Big Pharma. Customers (Patients) 2 $ Drugs Marketing Rights 1 Big Pharma Small Biotech Upfront Payment + Royalty Stream (10%) 1. Small Biotech licenses marketing rights of Drug A to Big Pharma in exchange for upfront payment and a 10% royalty stream. Agreement may require Big Pharma to make minimum royalty payments. 2. Big Pharma markets the drug and begins to pay a 10% royalty stream on the sales of Drug A to Small Biotech. Big Pharma retains the remaining 90% of the sales. 12

13 Royalty Market Overview Worldwide royalty market estimated at $7-10 billion, with a 25%+ CAGR over the last decade (1) Research institution monetizations alone grew from $260 million in 2004 to $1.9 billion in 2007 (1) Product licensing market is estimated to be $37 billion in 2009 (2) Current market conditions set the stage for increasing royalty monetizations Equity and credit markets remain challenging for small biotech companies, stressing need of alternate financing Growing attractiveness of royalty financing as source of capital for royalty holders Supply/demand imbalance makes for a favorable licensing environment for innovators (2), leading to a larger royalty securitization market opportunity Big Pharma patent cliff of +$60 billion from (3) ; M&A cost savings are not enough to save P&Ls Product development increasingly being outsourced particularly as unproductive R&D is a central focus of cost savings, and newer, specialized technologies must be inlicensed to create differentiated products Biotech has over 600 compounds in development; over 25 are awaiting FDA approval (5) Currently there are limited number of participants in the market, most with AUM >$1 billion Not attractive hedge fund assets due to royalty duration and liquidity profile, resulting in less competition on transactions, particularly in the sub-$50 million market Fewer market participants preserves high coupons and permits select opportunities for securing additional collateral and equity participation Few investors understand how to invest in these structures; similarly few understand investing in tail or orphaned pharmaceutical products despite steady cash flow characteristics (1) IP finance, October/November 2005 and The Deal, September 5, 2008 (2) US Biotech Industry Fundraising, Burrill & Company, April 9, (3) IMS Health September 30, 2009 (4) BioMed Tracker database, July

14 Legacy Product Opportunity SWK will selectively invest in mature, cigar butt pharmaceutical products Many legacy products are not attractive for pharmaceutical companies to maintain Small, no-growth tail assets do not warrant sales force attention and do not meaningfully impact the PNL (1) Keeping such products forces Pharma to maintain much larger list of contract manufacturers than desired or maintain plants at suboptimal capacity (2) Pharma has divested such products historically due to M&A, manufacturing facility consolidation, etc. Legacy products typically sell themselves and can be managed by virtual operations Distributors can manage entire supply chain, including product ordering, retail distribution and payment collection Established drugs already have their place in the treatment armamentarium for targeted indications Opportunities exist in the US and Canadian markets Small products typically fulfill a distinct niche Product criteria include Well defined market and established treatment paradigm for the product Little-to-no sales force support required to achieve target sales levels Adequate IP or regulatory moat protection to limit exposure to generic challengers Established reimbursement High operating margins (1) Van Brunt, Jennifer. Specialty Pharmas Reduce the Risk. Innovaro Pharmalicensing, (2) Outsourcing Roundtable Review". Pharma; Claygate. FindArticles.com. 23 May,

15 Expected Portfolio Structure Target Returns Target gross unlevered returns in the mid-teen%s; IRR further enhanced with OID, warrants and call premiums, resulting in equity-like return potential Utilize limited leverage on the portfolio to increase buying power and enhance returns to equity Investments Investments will include debt backed by existing pharmaceutical and medical device sales Based on opportunities, would invest in royalty securitizations, actual royalties, synthetic royalties or hybrids thereof, and legacy product opportunities Portfolio Diversification Sourcing Portfolio will be diversified by limiting the portfolio s exposure to individual therapeutic classes Intend to invest in FDA approved products, thereby limiting regulatory risk Will consider investments based on sales of pharmaceuticals or medical devices Majority of marketers are expected to be well-capitalized pharmaceutical and medical device companies Investments will be sourced through 3rd party underwriters and proprietary SWK relationships Investment Considerations Intellectual property or regulatory moat Medical rationale of the product Market size & competition and reimbursement Marketer core competencies Actual product license 15

16 Illustrative Underwriting Process Sourcing Initial Analysis Based on Company / Dealers / Consultant Model Detailed Discussion with Consultants & Advisors SWK initial diligence includes review of medical and commercial viability, including review of relevant literature, Street assessments, management meetings Consultants, if needed, commissioned to provide an independent assessment of the collateral (pharmaceutical product/device being monetized) created through substantial primary and secondary research. Such review includes evaluation of medical efficacy and competition Modeling scenarios evaluated to stress test valuation and cash flow forecasts. Variables analyzed include pricing assumptions, growth of population diagnosed with disease in different markets, market share capture, generic challenges, competition, detailed cash flow waterfall analysis Internal Modeling and Relative Value Analysis Investment Committee Comprehensive legal review covering underlying regulatory filings, royalty agreements, intellectual property matters and any relevant regulatory issues Investment committee meets to approve each investment Time to close from initial contact is generally three to nine months Ongoing monitoring of prescription volumes, revenues Monitoring 16

17 Current Portfolio $6.5mm Structured Loan to commercial-stage neurology specialty pharmaceutical company SWK arranged a $22.5mm senior secured financing amongst itself and its SMA clients 16% floating interest rate with a lien termination payment due at maturity that increases the target IRR Repaid through a reverse tiered revenue interest charged on product sales; revenue interest flows into a waterfall that pays interest first, with any remaining amounts amortizing principal Collateral value is the marketed product Company recently conducted an M&A auction process prior to the loan funding that indicates the loan was issued at 35-50% LTV Based on annualized 4Q12 sales, loan would require product to be sold for 1.4x sales to cover the debt. Typically, similar products are sold at 2.5-3x sales $6mm investment in purchase of an approved beta blocker treatment for high blood pressure SWK and a client invested $13mm alongside an operator ($2mm) to purchase a legacy product from big pharma SWK licensed the product to the operator, creating a royalty-like asset; investors still own the product NDA Operator contributes cash flow from another product until all investors receive 1x return Operator to begin marketing the product in 2013 Beta blocker approved in 2003 and not promoted by big pharma though drug continued to sell; IP through 2021 Investment cash flow positive day 1, with 1x return expected in 3 years; risk of capital impairment very low due to current cash flow characteristics $6mm purchase of a royalty paid on sales of Besivance SWK and partner invested $15mm to buy royalty paid on WW sales of Besivance, an ophthlamic antibiotic treatment; SWK owns % Royalty grew from $1.2mm in 2010 to $2.1mm in 2011; IP expires in mid

18 SWK Advantages Investment Team managed a portfolio of over $200 million in pharmaceutical royalty assets at a prior employer and closed in excess of $110 million in pharmaceutical finance deals over the last two years Brett Pope was head of the healthcare group at Highland Capital Management, and managed the firm s $4 billion healthcare portfolio. He was also a partner of the firm Mr. Pope managed the team that implemented the royalty investments from inception through 2007; Winston Black worked under Mr. Pope and worked on a portion of the transactions. Other team members who are not part of the SWK team also contributed to the Highland platform At PBS Capital and SWK, Messrs. Pope and Black closed 5 direct originated deals and 2 secondary market trades Established collaborative relationships with royalty equity and debt holders Significant relationships with industry experts allow SWK to rent expertise on highly technical matters Extensive risk management focus including Extensive intellectual property, manufacturing and forecasting diligence Design innovative structural features to maximize recovery Ability to source and execute proprietary transactions SWK team has participated in royalty structures that cover therapeutic classes including: hormone replacement therapy, migraine, renal failure, heart disease, children's vaccines, sleeping disorder, depression, schizophrenia, and eye infections SWK manages pharmaceutical finance focused separate accounts for large family offices 18

19 Contact Information Brett Pope: Phone: Winston Black: Phone: Office address: Dallas Parkway, Suite 1290 Dallas, TX