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Enzon Pharmaceuticals’ second quarter 2011 net loss of 12 cents per share (excluding restructuring charge) was wider than the loss of 8 cents suffered in the year-ago quarter as the decline in royalty revenue neutralized the savings from cost-cutting initiatives. The Zacks Consensus Estimate indicated a break-even for the company.

Total revenue at Enzon was $9.6 million, sharply down 30% year over year due to the decline in royalty revenue. Revenue was also much below the Zacks Consensus Estimate of $15 million. Royalty revenue in the quarter dropped around 13% to $9.2 million. Enzon earns the majority of its royalty revenue from the sale of PegIntron, marketed by Merck & Co. (MRK - Analyst Report), for treating patients suffering from hepatitis C virus (HCV). The decline in royalty revenue in the reported quarter was attributable to reduced sales of the drug.

General and administrative costs in the reported quarter came down by approximately 20% to $4.6 million. The reduction was due to cost-cutting initiatives undertaken by the company. Enzon’s restructuring activities implemented in the fourth quarter of 2010 and efforts to consolidate facilities at its Piscataway location are expected to generate more savings through 2011.

Pipeline Update

In mid-May 2011, Enzon announced plans to halt the development of PEG-SN38 (EZN-2208), a PEGylated version of the active metabolite of the cancer drug, irinotecan, for the treatment of metastatic colorectal cancer (mCRC). Enzon decided to halt development as the company intends to focus its resources on other areas with nearer-term commercial potential. Nonetheless, Enzon continues to evaluate PEG-SN38 for metastatic breast cancer (phase II), pediatric cancer (phase I), and solid tumors (phase I in combination with Roche’s (RHHBY - Analyst Report) Avastin.

Our Recommendation

Currently, we have a Neutral recommendation on Enzon. The stock carries a Zacks #3 Rank (short “Hold” rating).

We are pleased with Enzon’s improved liquidity position arising from the sale of its specialty pharmaceutical business and its efforts to develop the pipeline. The successful development and subsequent commercialization of the pipeline would be a boost for the stock.

However, with the discontinuation of the development of PEG-SN38 for mCRC, Enzon is left with just one clinical program in mid-stage development (PEG-SN38 for metastatic breast cancer) and all other candidates in early stages of development.

We are concerned about the early stage nature of Enzon’s pipeline as these candidates are several years away from approval and commercialization. Moreover, a substantial portion of the company’s revenues comes from royalties from sales of Merck’s PegIntron, which has shown a declining trend since the last few quarters. Recent launches of Vertex (VRTX - Analyst Report)/Johnson & Johnson’s (JNJ - Analyst Report) Incivek and Merck’s Victrelis will pose strong competition to PegIntron, which could further reduce royalties from PegIntron sales.

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