Safeguard Scientifics Inc. Analyst Day Conference Call Transcript

Safeguard Scientifics Inc. (SFE)

Investor Day 2011

October 4, 2011 8:30 am ET

Executives

John E. Shave III – Vice President, Business Development & Corporate Communications

Peter J. Boni – President and Chief Executive Officer

Stephen T. Zarrilli – Senior Vice President and Chief Financial Officer

Kevin L. Kemmerer – Executive Vice President & Managing Director, Technology Group

David Langsam President & Chief Executive Officer, AdvantEdge Healthcare Solutions, Inc.

Dan Rosenberg – Senior Vice President of Business Development, MediaMath

James A. Datin – Executive Vice President & Managing Director, Life Sciences Group

Jane H. Hollingsworth – Chief Executive Officer, NuPathe Inc.

Jean Hoffman – Founder & Chief Executive Officer, Putney, Inc.

Ronald Blum – Chairman, President & Chief Executive Officer, PixelOptics, Inc.

Analysts

Vinny Olmstead – Bridgevine Inc.

Presentation

John E. Shave III

I've been here this morning, and especially our six partner companies that are going to be the highlight of our program today. We do have a jam-packed session. You will hear from four members of Safeguard management and six partner companies, and we’ll have you out of here at 11:30 sharp.

I’m sure that you will all make yourselves familiar with our Safe Harbor statements. We give this at the beginning of the program and have this be the Safe Harbor for each of our companies. I also want to remind everyone that the event is being webcast. So, for the presenters, when you do the Q&A, please repeat the question so that people viewing online get a good feel for what we are doing here.

And then when I was thinking about the event, and what really got me excited about it, it’s twofold. And two weeks ago I was at a Credit Suisse Conference down in Charlotte for emerging managers, and when they were laying out the data of venture capital and private equity investments, the 2006 vintage year venture investments have a 1.2x cash-on-cash return. And when I compare that against what we’ve been able to do, that tells me that we are performing at the highest levels against the broader group. That gets me excited.

And then the second thing that really got me excited was, when I looked at the companies that we're presenting, I thought it was a really good mix of a few companies that have been on – in the Safeguard family for a few years. So you can clearly see the value that’s being built in those. And then you also get a good feel for some of the newer things that we’re doing.

So two of our most recent partner companies will be here, Putney and PixelOptics, so you’ll get to hear all the good stuff some of our ’06 and ’07 and a ’08 companies are doing and you also get a good feel for the types of companies that we are working with today.

So with that, we have a good program lined up and I will turn it over to Peter Boni, our Chief Executive and President.

Peter J. Boni

Thank you, John. Good morning. So here at Safeguard, 58-year old firm with a real history of innovation, the first company of its kind listed on the New York Stock Exchange and actually the first company to do a subscription rights offering of a high-tech company, and this is how a couple of dozen firms actually got a public face, including QVC, Cambridge Technology Partners, Novell and a whole host of others.

We have an experienced team of people that you will see here today, participating in two attractive sectors of the economy, technology and life sciences. We’ve generated some very strong, proven results and have enormously shot up our balance sheet. So today, this is a raging buy for any would be shareholder.

We’ve been executing a five-part game plan since I joined the company at the end of 2005. If you recall ancient history, we had legacy firms, about a dozen of them that were stable services firms meant to give the company some stability after the burst of the Internet bubble, a lot of growth, lower valuation metric, high CapEx requirements.

The game plan was several fold, first of all build value in those legacy firms, realize the value with well timed exits, transform not only on our group of companies to be higher growth, higher valuation metrics, lower CapEx requirements, but also transform our balance sheet then begin to realize some value on those newer businesses that we’ve been putting on the books beginning in 2006. Now with the success there, go through some degree of platform expansion. So we are really pleased that we’ve been executing well against this game plan.

Among the team that you will see here today, Kevin Kemmerer, on the right of my picture, and Jim Datin on the left of my picture, and our support staff, General Counsel, Brian Sisko, John of course you know and Steve Zarrilli, our CFO.

The (inaudible) for the Safeguard Scientifics talent base is we have operational experience at the sea level as well as experience on the deal side of the house, and that goes for our support staff, as well as our deal teams and this is a significant differentiator for our business.

Now my mother is right, you are judged by the company you keep and I never like to be a lone ranger; I like friends and family along the way to help us out. We have developed great alliances and syndication partnerships with leaders in their fields. To include, the venture arms of J&J, Pfizer, Lilly, Glaxo and the like. We have built a strong advisory board of technology and life sciences professionals with great domain expertise in the areas that are strategic to our interest and our board of directors, similarly experienced, technology, life sciences, private equity, venture capital, finance and the like.

Our game plan or our business model is very simple. We are deploying capital in new and interesting situations in the tech and life sciences sector. We might do growth buyout financing, growth equity financing, we could do some early stage financing and we have the capacity also to do some selective debt financing. We partner with our partner companies in tech and life sciences and we work to build value, and we realize that value with well-timed exits.

That’s the driver of the economic engine; we are not an operating company. Revenue and EBITDA is not the way to measure the success of Safeguard Scientifics. Now, many people hear that and they say, well, Safeguard is a public venture capital vehicle, or Safeguard is a public private equity vehicle. There is some similarity, but there are many more differences.

First of all, we don’t play quite as early as the A round venture capital community. We don’t play quite as late as the private equity community. We’re somewhat of an in-betweener. We’re in early enough that we have a chance for a ten-bagger but we’re not in so early that we’re going to face 40% of everything that we deploy as a goose egg, which is the A round formula, 40% goose egg, 40%, you’re lucky if you get your money back and 20%, you’re making money. That’s not our formula.

We provide operational support services to our partner companies. We don’t fish for them but we help teach them how to fish as they go and grow in their business.

Now recognizing that our people have operational experience at the sea level, when we take board seats we don’t give advice based upon some case study we read in business schools. We give advice based upon scars of experience on our backs and that is usually valued to be much more helpful to growing a business.

Now from a shareholder perspective, you can put in a little bit or a lot. If you are a limited partner and a venturer or a private equity firm, you'll also have two choices; you put in a lot or a lot more. Here, you have immediate liquidity; you don’t have to wait several years for a distribution. There is plenty of liquidity. You can get in or out at any time, or in, out and back in again at any time.

And remember, this is New York Stock Exchange governance, so all of the transparency that comes with that as opposed to cloaking everything we have with a great deal of secrecy. So lots of differences in the Safeguard model. And our business model is different. When we have an exit, any gain that we’ve had has been sheltered from taxes by our NOLs and the money has been evergreened on our balance sheet, hence with self-funding to a management team, that says that we have a little bit more patience built into our model and we’re not likely to do a forced exit in a few years in order to return capital to limited partners and then raise a big fund every few years. So lots of differences in our model.

We have categorized our companies in four different buckets. We have developmental stage companies, and by the way, green is life sciences and blue is technology. Developmental stage company does not have revenue. They go into perhaps the latter pieces of the FDA approval process or they could be getting out of beta test and getting ready to go to market.

We have some initial revenue stage companies, up to $5 million just gaining penetration with their product offering and developing a testimonial customer base. We have some expansion stage companies, 5 to $20 million in revenue, full management team, full infrastructure, really gaining position and notoriety in their space and then we have a whole host of high traction companies, 20 to over $100 million in size, leadership in their space, making money, growing rapidly or on the edge of turning profitable. We can enter at any stage and we can exit at any stage. We don’t have to start on the left and then work our way all the way to the right before we exit.

To give you some examples, I’ll go from bottom to the top. The last two, Clarient and Avid were some exits that Safeguard had in the December timeframe of last year. Clarient, as you might remember, was once upon a time ChromaVision Medical Systems. This was a failing legacy company in the portfolio when this management team came in at the end of 2005, the beginning of 2006.

Now, as opposed to just selling this off, like we did with the other 11, we had a vision of taking the cellular imaging technology and using it to build a cancer diagnostics services business. We rebranded the business, Clarient, CLRT under NASDAQ, brought in a strong management team headed by Ron A. Andrews, who did a marvelous job working with Safeguard to build that business from $11 million to a $120 million in revenue. The company was making money, growing, and GE Healthcare found that to be really strategic asset for them. As a matter of fact, they are advertising GE Healthcare on television, featuring that they can now diagnose cancer at the molecular level. That is Clarient; they are advertising Clarient.

This was a $208 million of aggregate proceeds that Safeguard picked up from a series of exits in Clarient. That was the largest cash return in Safeguard's 58-year history and actually it was a 5x increase in the value from the time we repositioned the business until the time we sold it to GE. So we were really pleased about that exit.

Avid Radiopharmaceuticals was a developmental stage company with a diagnostics for neurogenerative diseases starting with Alzheimer’s and dementia. They proceeded through all three phases of the FDA. We are going to an NDA, and Eli Lilly, that was a venture investor, a syndication partner at Avid, put an offer on the table that was really very strong. It was a 3x cash-on-cash return for Safeguard initially, but with an earn out that if achieved could be 8x. So we are really pleased with this exit as well.

We had 2 exits so far in 2011, Advanced BioHealing and Portico Systems. Just to give you a case study on ABH, this was a regenerative medicines company that was once upon a time inside of the British firm, Smith and Nephew. Smith and Nephew penetrated the marketplace to a small degree. They built a lavish, beautiful manufacturing facility in Southern California, but they never figured out the pricing and reimbursement model. So what did they do? They closed the whole business; they shut it down.

Safeguard acquired the assets along with the syndication partner and worked with their management team. We hired back all the people and brought in another management team. We worked with that CEO and his management team . So we defined the pricing and reimbursement model, and they went back to the marketplace with their lead product Dermagraft in 2007. This was a cellular-based artificial skin used for diabetic foot ulcer and burn patients.

They increased their revenue from nothing in 2007 to $145 million in 2010 and filed an S1 and were getting ready to price an IPO when Shire came in and offered a 25% premium on the midpoint of that pricing range. And that was earlier this year.

The aggregate proceeds for Safeguard on that was $145 million back for the $10.8 million we put in. That was over 13 times cash-on-cash return or 90% IRR. That’s the example of the ten-bagger. We want to do that everyday, but it sure is nice when you do it. So we were just thrilled with how well ABH had built itself and were pleased to be a partner with them.

Portico Systems was a IT healthcare firm with the piece of software that enabled health insurers to design, build, manage, reimburse and support their healthcare provider networks. If the mandates that the payer and provider Portico Systems just to give you a case study on ABH. This was regenerated to the medicine’s company that was once upon a time inside of the British firm Smith & Nephew. Smith & Nephew penetrated the marketplace to a small degree, they built a lavish beautiful manufacturing facility in Southern California, but they never figured out the pricing in reimbursement model. So what did they do? They closed the whole business, they shut it down.

Safeguard acquired the assets along with the syndication partner and worked with their management team as we hired all back, we hired back all the people and brought in a new management team, we worked with that CEO and his management team to redefine the pricing and reimbursement model. And they went back to the marketplace with their lead product Dermagraft in 2007.

This was a cellular based artificial skin used for diabetes foot ulcer and burn patients. They increased their revenue from nothing in 2007 to $145 million in 2010 and filed an S1 and were getting ready to price an IPO when Shire came in and offered a 25% premium on the mid point of that pricing range and that was earlier this year.

The aggregate proceeds for Safeguard on that was a $145 million back for the $10.8 million we put in. That was over a 13 times cash on cash return or 90% IRR that’s the example of the (inaudible). We won’t do that everyday but insures nice when you do it. So we were just thrilled with how well ABH had built itself and we’re pleased to be a partner with them.

Portico Systems was an IT healthcare firm with a piece of software that enabled health insurers to design, build, manage, reimburse and support their healthcare provider networks, if a mandates to the payer and provider of healthcare must use commonality of various claims to protect the privacy of any patient, this regulatory compliance were among the things that Portico enabled.

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