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Executives

Jeffrey H. Buchalter – Chief Executive Officer

Craig A. Tooman – Chief Financial Officer

Ralph Del Campo – Executive Vice President of Technical Operations

Dr. Ivan D. Horak M.D. – Chief Scientific Officer

Paul S. Davit – Executive Vice President of Human Resources

Analysts

Ian Sanderson – SG Cowen Securities

Matt Renna – Soleil-Neponset Equity Research, Inc.

[Richard Manceri – DCM Funds]

Mark Kronenfeld – Ridgemark Capital

[Brad Gold]

Enzon Pharmaceuticals Inc. (ENZN) Q1 2008 Earnings Call May 7, 2008 10:00 AM ET

Operator

Welcome to Enzon Pharmaceuticals first quarter earnings conference call. (Operator Instructions) At this time I would like to introduce your host for this call, Craig Tooman, Executive Vice President of Finance and Chief Financial Officer of Enzon Pharmaceuticals. Please go ahead sir.

Craig A. Tooman:

Morning, and thank you for joining us today. I'd like to remind you that during today's conference call we will be making forward looking statements that represent the company's intentions, expectations or beliefs concerning future events. These forward looking statements are qualified by important factors set forth in today's press release and the company's filings with the SEC which could cause actual results to differ materially from those in such forward looking statements. Furthermore, information discussed on today's call is accurate as of today. We undertake no duty to update.

First let me focus on some quarterly updates and then Jeff can update you on our business and new strategic initiative also announced this morning. This quarter all business segments reported strong results. We were also successful in significantly reducing the outstanding debt balance due in July 2008 to $12.5 million, again, ahead of the required timeline. As you can see from the release, Enzon reported net income of $1.5 million or $0.03 cents per diluted share this quarter as compared to a net loss of $2.8 million or $0.06 cents per diluted share for the three months ended March 2007. Again, the results this quarter were impacted by strong revenues across all business segments.

Sales of the product segment specifically comprised of Oncaspar, DepoCyt, Abelcet, and Adagen, increased 21% to $27.4 million this quarter compared to $22.7 million for the comparable period in 2007. Higher revenues this quarter were mostly attributed to sales from our oncology product, Oncaspar. The increase this quarter benefitted from a $1.2 million international shipment, growth from additional adoption in the AOL market, as well as a price increase. As you will recall we implemented the price increase to offset the increase in raw material cost and the development cost needed to insure long term supply.

Sales of DepoCyt for treatment of lymphomatous meningitis were 2.0 million this quarter, down from 2.4 million for the comparable period in 2007. And sales of Adagen, an enzyme replacement therapy used to treat patients with severe or combined immunodeficiency disease increased to $6.2 million this quarter from $5.1 million in the first quarter of 2007.

I would like to remind you that these products treat a small number of patients, so quarter-to-quarter variability is not at all uncommon.

Sales of Abelcet in U. and Canada was $7 million versus $7.7 million in the quarter ending March 2007. The decline is due to the continued competitive pressure in the antifungal market; however the rate of decline has decreased from prior years.

Revenues from the company's royalty segment decreased 10% this quarter to $14.7 million, as compared to $16.3 million for the same three months last year. The reduction in royalties this quarter was due to the 25% reduction in royalties on sales of PEG-Intron. As you recall, we monetized 27% of the future royalty stream to refinance the 2008 debt. However, we continue to see underlying growth in PEG-Intron.

Additionally in April, Cimzia was approved by the FDA for treatment of moderate to severe Crohn's Disease. The product was developed by UCB and utilized as the company's PEGylation technology, so we are entitled to royalties on its net sales. Due to the revenue lag we implemented in 2006 on royalties we do not anticipate revenues from Cimzia to affect our results until the latter half of 2008.

The company's revenues from its contract manufacturing segment increased to $6.6 million for the three months ended March 31st, 2008; as compared to $2.5 million in the corresponding period in the prior year. This increase was due to the combined results of the timing of shipments to our customers and additional non-routine services provided to our existing customers. It is not anticipated that the level of sales achieved this quarter will continue throughout the year in that segment.

In the first quarter of 2008, the company's cost of goods sold increased to $16.1 million from $11.5 million. The increase is directly attributable to the increase in product and contract manufacturing sales. The margins have remained the same.

The company's R&D expenses were flat at $13.2 million for the three months ended March 31st, 2008 as compared to 2007. We continue to be excited about our ongoing programs in our pipeline which Jeff will update you on shortly. We're also investing our currently marketed products, Oncaspar and Adagen. As we previously stated, these products require some new investment to improve the current manufacturing processes. Our goal is to control the manufacturing process, including the source of raw material, and at the same time enhance the pharmaceutical properties of the products. We are currently transferring the manufacturing process of the raw materials to Enzon. As previously mentioned the investment in these products will be fairly significant in the next couple of years as we improve these products and continue to make them available to patients.

This quarter SG&A decreased to $15.4 million from $17.1 million in the comparable period of 2007. The company continues to make selective investments in the selling and marketing initiatives for our currently marketed products and have been proactive in identifying operational efficiencies such as the realignment of our sales team.

Consolidation of our manufacturing operations in our Indianapolis, Indiana site is on schedule. The company incurred $1.3 million this quarter compared to $600,000 for the three months ended March 31st, 2007. We anticipate all operations from our South Plainfield, New Jersey site to transfer to the Indiana facility this year in line with our original guidance.

Now turning to our cash position, total cash reserves which include cash and cash equivalents, short term investments and marketable securities; were $198.8 million as of March 31st, 2008 as compared to $258.2 million at the end of last year. The reduction in cash was due to the purchase of $59.9 million of our 2008 convertible notes as I just mentioned. As of March 31st, 2008, $14.5 million was held in a restricted account for the purpose of eliminating the remaining outstanding 2008 notes.

There has been interest in our exposure to auction rate securities in the past and I am very pleased to report that we have been successful in reducing our auction rate securities this quarter to only $7 million, minimizing our exposure.

In summary this quarter Enzon reported very solid earnings as all business segments performed well. And I will now turn the call over to Jeff who will update you on the pipeline and the various segments we reported earlier today. Jeff?

Jeff Buchalter

Good morning everyone and thank you for joining us today. 2008 has already been a productive year at Enzon. As Craig mentioned, we delivered strong product revenues on all our converted products and we're extremely successful in eliminating a large portion of the 2008 debt. We're also continuing to enroll patients aggressively in our clinical trials. And finally, also announced today, the Enzon Board of Directors has approved the spin-off of the biotech business into a separate independent company.

First let me focus on some quarterly updates and then turn to our new strategic initiative. As Craig stated, this quarter all of our business segments reported strong results. I'm particularly please that our products continue to perform well. The stabilization and identification of growth opportunities for our marketed products was one of my top priorities when I arrived at Enzon.

Let me focus on our pipeline. We continue to be very excited about all of our ongoing programs. The recombinant and [inaudible] in our NBO program continues to enroll patients in two clinical trials. One for the prevention of severe infections in MBL deficient individuals undergoing high dose chemotherapy and one from liver transplant surgery. Additional PK and PD analysis confirm that the weekly schedule results in the functional normalization of compliment pathway, an important finding. As a reminder our target enrollment is 50 patients for each of these randomized studies.

We have made great progress in accelerating enrollment in our multiple myeloma trial. An additional 10 patients have been enrolled bringing the total treated to 35 in this study. We expect to complete enrollment in this clinical trial by the end of this year. An abstract, summarizing our early clinical data from the multiple myeloma study will be published at the upcoming ASCO meeting in Chicago.

To better understand whether rhMBL therapy replacement therapy provides clinical benefit to MBL deficient patients with multiple myeloma, we have also been collecting data from a contemporary match control group of patients who do not receive MBL therapy. Patients that are not MBL deficient were matched against the current patients in our clinical trial who are MBL deficient. For those variables that are most predictive for overall complications and specifically for infections after high dose chemo therapy. This match control data will provide additional information that will allow us to compare treated patients versus untreated patients. A more complete data set from these studies will be submitted to the ICAC meeting later this year in October.

Our liver transplant study has increased enrollment with an additional five patients treated for a total of 17 to date. As you recall enrollment in this study is a function of organ donor availability and its successful transplant. We opened one new site and plan to open two additional sites shortly. To date we have not reported or seen any serious adverse events and patients continue to do well on this study. We expect to complete enrollment of the liver transplant study in the second half of next year.

Turning to Oncaspar, the clinical development program. We announced the closure of our Phase I combination trial of Oncaspar and Gemzar in patients with solid tumors and lymphoma. Based on the inability to find an adequate dose for the specific combination of Oncaspar and Gemzar, we determined that it was appropriate time to close this study. It is our management philosophy to discontinue programs that do not achieve the results we expect. This decision is not a reflection of Oncaspar’s potential nor does it imply the product may not offer patients a benefit in other forms of cancer. In fact, outside investigators continue to be interested in continuing to explore new uses for Oncaspar in solid tumors. As noted, Oncaspar continues to show solid growth and our outlook for this product continues to be very positive.

PEG-SN38. Investigators for our two Phase I clinical trials evaluated patients with solid tumors and lymphomas continues to be very enthusiastic and enroll patients as quickly as the protocol allows. In the first study, PEG-SN38 is administered once every three weeks. In this study we have completed five cohorts and treated 24 patients. At the highest dose we have now reached dose limiting toxicity in two patients. In contrast to Camptosar where GI toxicity is the most frequently dose limiting factor, in this every three week schedule febrile neutropenia was dose limiting. This toxicity can be managed very effectively with available growth factors which could allow for more dosing flexibility with this schedule of PEG-SN38. We are excited to report that within this heavily pretreated patient population, several patients have received five up to six cycles of PEG-SN38. One patient has been on the study for 148 days or seven cycles. We are expanding the number of patients at the maximum tolerated dose to gain more experience and data from the Phase I study will be presented at ASCO.

In the second study, PEG-SN38 is administered weekly for three weeks every four weeks. We have completed enrollment in the fourth cohort and will start enrolling for the next cohort this month. We have treated a total of 14 patients on this weekly schedule. The weekly schedule has been well tolerated and several patients have received multiple cycles of PEG-SN38. We have seen patients with prolonged stable disease. One patient in the study has been on for over 200 days. We have been able to give more cumulative PEG-SN38 to patients in this schedule and still have not observed dose limiting toxicities. Remember, native SN-38 was originally insoluble and too toxic to safely administer to patients. Our results thus far, even though it is too early to assess efficacy demonstrates that our customized PEGylation technology is working with the small molecule.

Between these two studies we have treated 38 patients with a variety of cancers such colon cancer, gastric, breast cancer, ovarian cancer and a number of others. We expect to complete the Phase I program in the second half of this year and initiate a Phase II program later this year.

Now I will turn to the RNA targeting agent HIF-1 alpha and it is our first clinical target using a third generation of oligonucleotides or locked nucleic acid. We initiated two Phase I studies using a weekly and daily schedule and continue to see good biology and safety on both of these studies. We have completed four dose escalations and enrolled in 13 patients in the weekly study. In this study, four patients have been on HIF-1 alpha antagonist for an extended period of time. Some patients actually had growing cancers at the prime of enrollment and have since had stable disease. It is important to note that some patients who have progressed through other approved therapies have been now treated with HIF-1 alpha therapy for a longer period of time. We continue to have one patient on the study for more than 400 days without a serious adverse event.

In the second study with the daily schedule we have completed three dose escalations and enrolled 9 patients. One patient has been on this study for seven cycles or 187 days. HIF-1 alpha therapy has been well tolerated with no related drug serious adverse events reported with either the weekly or the daily administration. And approximately one-third of the patients enrolled on the study are still on the study. Based on the safety profile of the compound, the FD has released its enrollment constraints and enrollment should speed up once approved the ROBs. These data while early are extremely encouraging. We will submit an abstract from the first study at the EORTC meeting in October of this year.

As we progress in all of our clinical programs, as I have promised and that we have done you will continue see updates throughout this year and at major medical meetings such as ASCO and EORTC.

Now let me turn to the strategic initiative we announced this morning. The Enzon Board of Directors approved the plan to spinoff the bio-technology portion of the business into its own independent company. This plan enables the unique businesses to strategically focus their efforts on optimizing their respective business goals, compete effectively in their respective markets and appeal to their unique own shareholder base. Each company will have its own independent board of directors and management. Upon completion of the spin-off, I will transition to the new biotech company and lead the efforts of that new organization as the Chairman, President and CEO, and Craig Tooman will assume the role of President and CEO of Enzon Pharmaceuticals.

I would like to take a minute to acknowledge Craig’s tremendous contribution to Enzon over the past three plus years as Chief Financial Officer. He has brought significant value to shareholders and employees during this period. And has been a loyal and trusted colleague. I am pleased that Enzon’s Board of Directors have also recognized Craig’s effort and named him to replace me as the next President and CEO of Enzon. Under Craig’s I am confident Enzon will continue to deliver value to all of its stakeholders.

Now turning back to the details related to our strategic initiative. The new biotech company will include the customized PEGlinker technology, the locked nucleic acid technology, PEG-SN38, DL, HIF-1 alpha as well as all of the LNA targets we have been talking about. The company will also be capitalized with about a 115 million in cash, which would last two to three years of burn.

The existing specialty business will retain the current four marketed products Oncaspar, Abelcet, DepoCyt, and Adagen as well as the manufacturing facility in Indianapolis and the current royalties to include the newly approved Cimzia and future royalties to Hematide.

The completion of this spin-off is subject to a number of conditions including the filing of a registration statement with the Securities and Exchange Commission, final approval from the Board of Directors, and final evaluation of the taxable status of the transaction. We look forward to creating and optimizing this opportunity for all of our shareholders.

In conclusion we are off to a great start in 2008. We continue to make good progress on advancing our pipeline and our products are growing and stable as we had given guidance early in the year. We look forward to updating you as the year progresses. We continue to be strategic and proactive in managing our business and further capitalize on the value of our assets. With that operator we will now take questions.

Question-and-Answer Session

Operator

Thank you sir. (Operator Instructions). And our first question will come Ian Sanderson of Cowen. Please go ahead.

Ian Sanderson – SG Cowen Securities

Good morning Jeff and Craig. Thanks for taking the question. Just in looking at the remaining Enzon what is the level of ongoing R&D spend that we should figure there? And it sounds like there will be a heavier level behind Oncaspar and Adagen in the near term but maybe if you could give some guidance on what we should be looking for there.

Craig A. Tooman

You are absolutely right. So if you will look at constant R&D spending just for the quarter and compare that to our notion of our guidance of 70 to 80 million plus standard milestones, those two programs will comprise approximately a third of the R&D spending for the year. That will give you some general estimate as to what we will spend in the latter half.

Ian Sanderson – SG Cowen Securities

And that level of R&D spend presumably should decline once you get the transfer, the manufacturing over, right?

Craig A. Tooman

That is right. It is essentially a two year R&D commitment on Oncaspar and Adagen on our behalf.

Ian Sanderson – SG Cowen Securities

Okay. And then for Jeff, what is the cash burn forecast for this spin out company assume regarding partnering if anything?

Jeff H. Buchalter

Too early and we decided 150 million would be approximately two to three years of cash but certainly we have not included all these financials yet in estimates.

Ian Sanderson – SG Cowen Securities

Okay. Then and finally just on the quarter, Oncaspar, the level of price increase if you could remind us of that again and what was behind the international shipment?

Jeff H. Buchalter

The international shipments are just partner arrangements that we have on an ongoing basis. It is just that we did not have them for the same period for the first quarter last year so that 1.2 million delta there. And in terms of the price increase as has been reported that price increase was high double digits and the reason we did that is in two years a row really to offset some of this investment that we are going to have to make as it is very significant. Both in raw material costs into us and the extra work we are going to have to do in CMC and R&D.

Ian Sanderson – SG Cowen Securities

Do you have any guidance on what the unit growth was for the quarter?

Jeff H. Buchalter

Single digits.

Ian Sanderson – SG Cowen Securities

Single digits, okay. Thank you.

Operator

Thank you. Our next question will now come from Matt Renna of Soleil. Please go ahead.

Matt Renna – Soleil-Neponset Equity Research, Inc.

Hi good morning guys. Just a quick follow up question on the Oncaspar number. It sounds like you did not really see any negative reaction in terms of volume to your price increase. Do you really see any continued price influxability in other words for the next year or two can we expect similar levels of price increases going forward?

Jeff H. Buchalter

Yes Matt, it is Jeff. Good morning. There has been some elasticity with respect to Oncaspar but it is, as we have reported, the price increase was a requirement as a result of increasing costs associated with the next generation of product. I am not a proponent of pricing as a strategy. This was done to offset initial expenses. The market was not unfavorable with respect to that but you also have to also recognize this is a life saving drug for children.

Matt Renna – Soleil-Neponset Equity Research, Inc.

Sure. And then if, I know it may be a bit premature to talk about this but would you guys be willing to talk about any sort of big picture type strategy for each component of the business? So Craig can you maybe comment on Abelcet and how you see that product going forward in terms of your willingness to spend behind that and do you see any leverage in the existing sales force and would you consider maybe layering in another product? And then Jeff can you maybe comment on anticipated direction for the company in terms of R&D development?

Jeff H. Buchalter

Those are very appropriate and good questions. Unfortunately at this point we cannot answer that. As you know the process for this is a formal filing with SEC Form 10. A lot of these things have to be worked out and certainly we will, over the course of time talk about the strategic direction and plan for each of the respected companies but we just cannot do that right now.

Matt Renna – Soleil-Neponset Equity Research, Inc.

Understandable. And last question. Just gross margins in the quarter ticked down sequentially quite a bit. What was the main trigger there and is the Q1 run rate fairly accurate going forward?

Craig A. Tooman

Fairly consistent going forward.

Matt Renna – Soleil-Neponset Equity Research, Inc.

Great. Thanks for answering the question Craig.

Operator

Thank you. (Operator Instructions). And our next question will come from Richard Manceri of the DCM Funds [ph]. Please go ahead.

[Richard Manceri – DCM Funds]

Hi, yes, thank you. This is an encouraging first step. I wanted to ask given the number of deals that have taken place in the R&A interference phase especially these early stage pre clinical compounds. Would you consider pursuing partnering transactions for either HIF-1 alpha or any other of your LNA compounds?

Jeff H. Buchalter

We are not currently looking for partnerships in those programs. We are continuing to develop them ourselves at this point.

[Richard Manceri – DCM Funds]

Thanks.

Operator

Did you have any further questions sir?

[Richard Manceri – DCM Funds]

No that will do it.

Operator

Thank you. And our next question will now come from Mark Kronenfeld from Ridgemark Capital. Please go ahead.

Mark Kronenfeld – Ridgemark Capital

Hi guys. Thank you. Could you articulate why you decided to do this now and explain why you think this is in the best interest of shareholders please?

Craig A. Tooman

In looking at the business, I think that we saw that there were disparate assets between the smaller products which require different investment versus an already staged pipeline. We think that by separating the organizations each of them can act more rationally and more independently and make the corporate choices for those businesses. They are very different businesses and I think that was a very appropriate thing to do at this point.

Mark Kronenfeld – Ridgemark Capital

But again what, that was true a year or two ago as well. Why now? And why not just sell assets as opposed to breaking the company up?

Jeff H. Buchalter

I actually think we have carefully looked at all our strategic options and we came to the conclusion this was the best things for shareholders and the best thing for the future of the employees in the respective companies as well as the assets in the companies.

Mark Kronenfeld – Ridgemark Capital

Right. The market does not seem to think that. And that is all I have to say. Thank you.

Operator

Thank you. And at this time sir, I am sorry. We do have one question from Brad Gold. Please go ahead.

[Brad Gold]

Good morning Jeff. Good morning Craig. I was just wondering could you speak to the possibility with I guess the existing Enzon with the products. Obviously there is going to decent amount of free cash flow. Do you anticipate paying a dividend to shareholders?

Craig A. Tooman

Again all of the aspects Brad, and thanks for the question, and the details regarding this will still have to be hashed out and ironed out. And really as you can respect, so little that we can say beyond the press release this morning. But we will look forward to future dialogue.

[Brad Gold]

Okay. Thank you.

Operator

Thank you. At this time sir I would like to turn the meeting back over to you.

Jeff H. Buchalter

Thank you everyone. Thank you for everyone joining the call. We look forward to updating you on our continued progress. Thanks and have a good day.

Operator

Thank you. Ladies and gentlemen, this does conclude your conference call for today. Once again thank you for participating. And at this time we ask that you please disconnect your line. Have yourselves a great day.

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Source: Enzon Pharmaceuticals Inc., Q1 2008 Earnings Call Transcript
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