Enzon Beats, Announces Sell-off

Enzon (ENZN - Analyst Report) achieved break-even earnings during the third quarter of 2009, better than the Zacks Consensus Estimate of loss of 7 cents but below the year-ago earnings of 1 cent. The company reported revenues of $44.6 million, a decline of 9% compared to $48.8 million reported in the third quarter of 2008.

Enzon records revenues from three sources -- products, royalties and contract manufacturing. The three segments recorded a decline of 1%, 6% and 56%, respectively, compared to the year-ago period.

Enzon has four marketed products -- Oncaspar for the treatment of acute lymphoblastic leukemia (ALL); DepoCyt for lymphomatous meningitis; Abelcet for antifungal infection related to cancer and Adagen used to treat severe combined immunodeficiency disease (SCID), commonly known as the "bubble boy" disease. Apart from Oncaspar, whose sales remained unchanged from the year-ago period, the other three recorded a decline of 4%, 15% and 10%, respectively.

Enzon earns royalties from several products, which have been manufactured using its proprietary PEGylation technology -- Pegintron, marketed by Merck (MRK - Analyst Report); Macugen, marketed by OSI Pharmaceuticals (OSIP) and Pfizer (PFE - Analyst Report); Pegasys, marketed by Hoffmann-La Roche; and Cimzia, marketed by UCB Pharma. The company earns a majority of royalty revenue from sales of Pegintron, which is approved for the treatment of hepatitis C. Unfavorable movement of the foreign exchange brought down royalty revenues during the quarter.

Additionally, cancelled shipments and discontinuation of customer schedules were responsible for lower contract manufacturing revenues. We expect contract manufacturing revenues to suffer going forward since many of the current contracts are to expire in the next two years.

R&D expenses during the quarter were $15.8 million, unchanged from the year-ago period. The company has several pipeline candidates: PEG-SN38, the HIF-1 alpha antagonist, Survivin (antagonist) and other LNA- and PEGylation- based programs.

The company’s financial position continues to worry us. At the end of the reported quarter, total cash reserves including investments were $201.3 million, down compared to $206.9 million at the end of December 2008, primarily due to the repurchase of $20.4 million of notes in 2009 offset by the cash provided by operating activities.

Shortly after announcing its third quarter results, Enzon announced that it has decided to sell its specialty pharmaceutical business to the Sigma-Tau group of Italy for $300 million. In addition, the company is eligible to receive another $27 million based on success milestones and royalties of 5% - 10% on incremental net sales above a 2009 baseline amount from its four marketed products through 2014.

The specialty pharmaceutical business includes the company’s four marketed products as well as the manufacturing facility in Indianapolis, Indiana which will be purchased by a US subsidiary of Sigma-Tau Pharmaceuticals, Inc. (Maryland). Sigma-Tau Pharmaceuticals will distribute the products in the US market.

Following the deal, Enzon’s business will consist of its royalties and its pipeline. We believe declining sales of the products in the recent past forced the company to take such decision. Currently, company’s aim will be to focus on its developmental candidates.

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