Safeguard Scientifics, Inc. ( SFE)

Q2 2011 Earnings Call

July 27, 2011 9:00 am ET

Executives

John Shave – VP, Business Development and Corporate Communications

Peter Boni – President and CEO

Steve Zarrilli – SVP and CFO

Analysts

Greg Mason – Stifel Nicolaus

Matt Dolan – ROTH Capital Partners

Paul Knight – CLSA

Nick Helen – Sidoti

Presentation

Operator

Good day, ladies and gentlemen. And welcome to the Safeguard Scientifics Second Quarter 2011 Results Conference Call. At this time, all participants are in a listen-only mode. Later, we’ll conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions)

As a reminder, this conference is being recorded. I would now like to turn the conference over to your host Mr. John Shave, Vice President of Business Development and Corporate Communications.

John Shave

Good morning. Thank you for joining us for Safeguard Scientifics second quarter financial results conference call and update. Joining me on today’s call are Peter Boni, Safeguard’s President and Chief Executive Officer; and Steve Zarrilli, Senior Vice President and Chief Financial Officer.

During today’s call, Peter will review second quarter 2011 highlights and other developments and Steve will discuss Safeguard’s financial results and strategies. After that, we will open up the lines for your questions.

Before we begin, I must remind you that today’s presentation includes forward-looking statements. Reliance on forward-looking statements involve certain risks and uncertainties, including but not limited to the uncertainty of future performance of our partner companies and the risks of acquisition or disposition of interest in partner companies, capital spending by customers and the effect of regulatory and economic conditions generally, as well as the development of the life sciences and technology markets and other uncertainties that are described in our filings.

During the course of today’s call, words such as expect, anticipate, believe and intend will be used in our discussion of goals or events in the future. Management cannot be certain that final outcomes will be as described today. We encourage you to read Safeguard’s filings with the SEC, including our Form 10-K, which described in detail the risks and uncertainties associated with managing our business. The company does not assume any obligation to update any forward-looking statements made today.

Now here is Safeguard’s President and CEO, Peter Boni.

Peter Boni

Thanks, John. And thank you all for joining us today for updates on Safeguard Scientifics and our partner companies. Results for the second quarter ending June 30th were distributed earlier today. Our progress quarter-over-quarter and over the past six months has not only been significant but we’re really pleased with our progress, the strategic game plan is firing on all cylinders.

More hard work lies ahead but we believe Safeguard is well-positioned with a talented team or continue growth and we really couldn’t be more optimistic about Safeguards’ prospects.

Value creation has been the driver behind Safeguards exceptional financial activity and achievements over the past quarter. Consider the following, we deployed $45.8 million of capital in new and existing partner companies including NovaSom, PixelOptics and OvaRex.

We formally announced that we will acquire a 36% interest in Penn Mezzanine, the management company in General Partner. Penn Mezzanine is a lending firm that will provide subordinated debt and structure that could be financing to lower middle market businesses in the middle Atlantic and adjacent regions. We committed $3.7 million of initial capital with the potential to deploy an additional $26.3 million over a several year period.

We believe this strategic partnership is an important diversification for the Safeguard business platform and it will generate solid opportunities for fee income and profit participation for us. This transaction is also expected to close by the end of August.

We announced two great acquisitions of our partner companies by prominent top tier multinational firms, Shire’s acquisition of Advanced BioHealing and McKesson’s acquisition of Portico Systems.

Portico officially closed yesterday for which Safeguard expects to receive $38.1 million in aggregate cash proceeds, that represents a four times cash-on-cash return and a 36% IRR, now that’s on the heels of GE Healthcare and Eli Lilly’s acquisition of Clarient and Avid Radiopharmaceuticals respectively that occurred in December of 2010.

As a result of all this activity, Safeguard enjoys improved financial strength and flexibility with excellent liquidity and access to capital.

In March, we repurchase substantially all of Safeguard’s convertible notes due in 2024. Our debt-to-equity ratio improved to 1 to 8 at June 30th, that’s from 1 to 3 at year end 2010 and 1 to 2 at year end 2009. Now in 2006 as we embarked upon this current strategy that ratio stood at 1 to 1. So as you can see, we’ve improved a much of our long-term obligations with exit expectations and cash deployment plans.

Value creation is both the objective and the motivation behind Safeguard’s progress. Our life sciences and technology partner companies remain well-positioned for continued growth and improved profitability. Our deal teams continue to evaluate promising, high potential businesses in our targeted verticals.

Now, our optimism is really high for creating additional value in 2011 and beyond. That confidence stems from Safeguard’s disciplined focus on specific segments of life sciences and technology industries that exploit five strategic growth driving themes maturity, migration, convergence, compliance and cost containment.

In life sciences we target opportunities in the areas of lower relative technological and regulatory risk, namely in the molecular and point-of-care diagnostics, medical devices, regenerative medicine, specialty pharmaceuticals and selected healthcare services.

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