Icahn Steals The Future of Enzon Pharmaceuticals

Enzon Pharmaceuticals (ENZN), on the reported urging of uber-investor Carl Icahn, will spin off a NewCo along with the majority of the company’s core technology (PEGylation), their entire published preclinical pipeline (i.e.; their RNA antagonist oncology portfolio) and $150m of funding from Enzon. Not a bad way to start a company, right?

Maybe I’m way off here but it seems to me in analyzing this deal that the NewCo gets all the goodies while Enzon is left with a manufacturing plant and a stable of marginal drugs (zero out of four therapies have over $50m a year in revenue). Now, I don’t mean to imply that I think Enzon is a bad company - hell, they’ve managed to make more profit this quarter than any pharma company I’ve ever worked for - I’m just saying they are selling their future based on the advice of a man notorious for breaking up companies and wringing every last dime out of a shakeup. Just listen to the PR speak from their CEO and tell me if it makes strategic sense:

“By separating these unique businesses into two focused companies, the opportunities for both the specialty pharmaceutical business and the biotechnology business could be substantially enhanced and greater value could be created than under the current structure,” said Jeffrey H. Buchalter, Chairman, President and CEO. “Operating separately will allow each company to benefit from greater strategic and managerial focus and appeal to their own unique shareholders. The separation will enable the two businesses to compete more effectively in their respective markets and optimize their business goals, research initiatives and capital requirements. We look forward to creating this opportunity for the shareholders,” said Mr. Buchalter.

So… 1-x= more than 2, due to focus and appeal from unique shareholders? Interesting. I guess it would be wrong to beg for a quick exit strategy via big pharma acquisition for NewCo in the initial press release. But it doesn’t stop there, the bullshit continues:

“The specialty pharmaceutical business will continue its long-standing track record in providing life saving therapies for patients. The business has strong fundamentals, including stable revenue, cash flow, and strong assets,” said Mr. Buchalter. “Upon completion of the spin-off, Enzon will have the resources to better focus its strategy and compete more effectively in the specialty pharmaceutical market.”

Yes, without all that pesky preclinical discovery and development going on, the company can focus on its stable revenue and cash flow until the patents run out and they have to begin thinking about the future!

I don’t think I’m the only one with this opinion either. Even while releasing earnings for the quarter that showed a 20% increase in revenue over 1Q07 and netting the company a ~$2m profit, the stock was penalized ~8%. Is it a shock to learn I don’t think this is enough of a drop? I don’t generally think shareholders should reward the loss of the future earnings potential of the company and the give away the core company technology. But what do I know?

——

In other Enzon related news, I just found this press release about the pay of the CEO:

DellaCamera Capital Master Fund Ltd., a 5.8% stakeholder of Enzon Pharmaceuticals Inc. (ENZN), said Thursday that it’s troubled by the compensation granted Enzon Chairman and Chief Executive Jeffrey Buchalter and calls for the resignation of three directors.

DellaCamera sent a letter to Enzon’s board on Thursday, saying that it’s also reviewing its voting alternatives with respect to the three directors up for election at the company’s May 22 annual meeting of shareholders.

DellaCamera is calling for the resignation of Goran A. Ando, Rolf A. Classon and Victor P. Micati, who are the current members of Enzon’s compensation committee.

So I did a little research and it turns out, Jeff Buchalter made $773,558 base with $1,162,500 in bonuses for a total cash compensation of ~$2m. Add to that the just over $3.1m in equity granted to Jeff and he pulled in a total of ~$5.2m in compensation last year (almost 3X any other executive at the company). It’s good to be the king.

Comments

[justa guess:]

i am no fan of Carl's but you have missed some simple facts. Enzn's was trading with a market cap that gave zero value to its pipeline. This was primarily due to the fact that originally it was considered small pharma and carried the corresponding low PE. I think it will be much cleaner(tax efficient) to sell the pharma part of their company once the split is done. You have not included the steady royalty stream with their 4(albeit minor) drugs. This part of the company could easily sell for 400 million based on the 1/4 sale of the peg stream alone. I don't know what tape u were watching yesterday but ENZN was up with the market in free fall. I think u need to do a little more work on this one.

2008 May 08 07:35 AM

[Eben Tessari:]

ENZN opened at 9.85 and closed at 9.26.... how is that up?

2008 May 08 08:15 AM

[Eben Tessari:]

In addition, a company can be mainly valued by the NPV of it's future cash flows. I fail to see how spinning off the future revenue generators of the company (its discovery pipeline) is not devaluing.

2008 May 08 08:24 AM

[justa guess:]

He implied it was down 8% on the day. It was actually up on the day from the previous night's close.

2008 May 08 09:03 AM

[justa guess:]

moreover, I think that this split is a better( tax efficient )way of selling off the less exciting part of the company.

2008 May 08 09:08 AM

[Eben Tessari:]

that's fair.

2008 May 08 11:02 AM

[grazingbull:]

interestingly.. this type of asset valuation stuff has been done before and it didnt work out as planned..

go back in time check out ICN - Ribapharm spinout deal.... irony of ironies.. Ribapharm also had a very nice royalty streem from the same Schering Hep C drug that ENZN is tied to..

Ribapharm got some 500MM in debt and a nice royaltry stream, etc.. eventually, and when the royalties for ribavirin started to decline (as is most natural), Ribapharm crashed (say from 20 bucks to 5 bucks) and was taken private again by its parent at 4x ebitda.

so... i dont see how póst spin enzn can hold up its market cap of 400 million plus 275 MM in convertible debt which is essentially a 700 million enterprise value, and against this value you have 60 MM in clean, tax free EBITDA per annum and for the moment.. this is a 11 to 12x multiple and with no evident growth from the 4 minor drugs and 75% of royalty rights... these guys will spend then next 5 years paying down the 4% convertible (which has a maturity of 2013), and then they will probably crash and burn like any biotech supernova.

at that point, if you were a patient spinoff investor, you still might have some value left if the pipeline is successful.. at clinical pipeline r&d of 70 to 80 million, they will last about 2 years with current consttellation.. there better be something good buried within here.

if any other firm develops competing Hep C therapies, the enzn story could be over much sooner than expected.

it is extremely unlikely that someone will buy post spin enzn.

this is desperate hunting for returns. make people believe for one quarter, 1 year or 2 years that there is somethign in it..

its a wager, thats all there is. and i guess why not split the wager into two bets. its quite evident that going forward with R&D program of 70 to 80 MM pér annum will annihilated stock market value, if enzn is unsuccessful in its clinical trials. the spinoff will provide something of a value lifeboat and allows the spinoff to secure more financing from outside parties. this is essentially what they have done with the monetization of royalties.. secure outside financing. given that biotech CFOs have to be creative, this deal is better done today than in 2 years.. right now people have no way to assess if the pipeline candidates are any good or bad, so you might be able to secure 50 MM in outside financing for the spinoff itself. two years from now investors will be all focused on the results of these clinical trials. 2008 will tell us more in this regard.

spinoff is high tech is a very tricky thing to say the least.. for lack of better knowledge speculative investors might give this so called enzn pipeline a value of 100 to 200 million, merely on the basis that they dont know what the prospects of the drug candidates are.. this however is far off from making an educated investment decision. if ever i get into enzn it will be just for the play money allocation.

2008 May 09 09:41 AM

[justa guess:]

i agree iwth you on some points , but your argument on the enterprise value of the small pharma is off the mark. They just sold 1/4 of the peg royalty stream for over 100 million. Cimzia could easily add 20 mill a year and hematide has the potential to be a blockbuster as well contributing millions a year in rev. this stub will have easily 1 dollar a share in earnings after ALL expenses(20 mill in R and D included. It is definitely not a growth story but it certainly will be a clean ,sell able company. i think it should trade at 10 bucks easy with no take out premium (which i consider very likely in less than a year after the spin. Then we are left with a stub with, as u said, unproven high tech pipe. I think however that Bucky knows already that sn 38 will have some real value before his 3 years of money runs out. So in the end i think that anything up to 12 dollars a share right now is easy money. After that we are going to need to see some data this year.

2008 May 09 06:38 PM

[pharma:]

Enzon Pharmaceuticals is another good company about to be ruined by this greenmailer.

Well, during the last 10-15 years, the Wall Street Mafia has ruined America industrial base, financial institutions, good many new and most promising start-up companies and also corrupted to the core America political system.

2008 May 10 10:33 PM