Enzon Pharma

• $440 M in cash


• NOL carryforwards of 90M and 72M for federal and state taxes respectively


• Many famous value investors on the stock owner list including Klarman, Icahn, Highbridge capital and Iridian Investment.Iridian investment CEO is on board.


• Core expertise has been in engineering improved versions of injectable therapeutics through the chemical attachment of PEG. Currently, there are six marketed biologic products that utilize our proprietary PEG platform, two of which we had marketed through our specialty pharmaceutical business, Adagen and Oncaspar, and three for which we continue to receive royalties, PEGINTRON, Macugen and CIMZIA.


• CFO`s performance bonus is tied to "Complete the evaluation and potential sale of PEGINTRON royalties" for 2010


• CEO resigned in Feb 2010 and was replaced by CTO


• In Jan 2010 they sold off their specialty pharmaceutical business.This reduced their Research and development – specialty and contracted services expense by $24M per year.


• Currently their main R&D effort is linked to developing compounds using PEG-SN38 technology for cancer treatment and LNA technology.


• PEG-SN38 is in Phase 2 of the clinical trial for its efficacy against colorrectal cancer and breast cancer.


• Corporate research and development expense was $45.6 million, $43.5 million and $44.0 million for the years ended December 31, 2009, 2008, and 2007, respectively.


• The Royalty income is from 3 drugs PEGINTRON(Merck), CIMZIA(UCB Pharma) and Macugen(OSI Pharma).


• In August 2007, we sold 25 percent of the future royalties from the sales of PEGINTRON for $92.5 million in gross proceeds.


• It seems PEGINTRON is their cash cow and selling it will bring lots of money. From 10k "Our current sources of liquidity are our cash reserves, interest earned on such cash reserves and royalties — primarily those related to sales of PEGINTRON. In January 2010, we received approximately $300 million net proceeds from the sale of specialty. Once our board of directors has determined the funding needs for the continuing operation of our business, some portion of the value derived from the sale of specialty may be returned to our stockholders.."


• Royalty revenue for past 3 years have been 54M,59M and 67M.

So how do we value this business as of Q2 2010 ?

1. Cash + Marketable Securities(US bonds) = 440M + 70M = 510


2. Royalty business = 3*92.5M based on valuation that Merck paid = 277.5


3. R&D expense for future will be in range of 43per annum


4. G&A = 24M per year. 1Q G&A was outlier because of stock options and salary cost of employees of the sold speciality business.


5. Debt = $134M 4% notes convertible to common stock at 9.55 per share before June 2013
6. Company repurchased $12.4M of common stock at price of $10.41 per share in first half of 2010

In short they have $10.7 per share of close to liquid assets. With current price of $10.4 we are getting their development pipeline with its potential upside for free. Following is quoted from a writeup at VIC

In many other, similar situations, I would not expect a pharmaceutical company to curb research and development spending; management typically stands to benefit substantially from the success of R&D spending, but bears none of the cost of failure. Enzon's Board and management, however, are not typical. They were installed after a proxy fight launched precisely because prior management was misallocating capital to research and development. Prior management ran into the arms of Carl Icahn to defend themselves in the proxy fight--prior management is now gone and Icahn has four people on the Board; Iridian has one. Chairman Alex Denner was previously a portfolio manager at Viking. So you have a Board that considers capital allocation as you do. Enzon authorized a $50 million share repurchase in December 2009 (8.4% of the then outstanding stock) and repurchased over $20 million of its convertible notes at a discount in 2009.

I would start a small position at current price of 10.4 and buy more on dips.