Description

Enzon is a net-net (assuming monetization of royalty streams) with considerable upside and little risk of dissipating assets.  A margin of safety is created by:  (i) approximately $6.50 of cash (net of convertible notes outstanding); (ii) a royalty stream from PEGINTRON, a drug used to treat hepatitis C marketed by Merck, with an after-tax present value of approximately $3.50, which Enzon is currently attempting to sell; and (iii) a royalty stream from CIMZIA, a drug approved to treat arthritis and Crohn's disease marketed by UCB Pharma, with an after-tax present value of approximately $1.50.  These three assets are worth approximately $11.50 per share, 10% more than the current price.  Investors are, in effect, being paid to own Enzon's remaining assets, which could be worth another $5 - $15 or more per share.  I believe market participants might not be aware of Enzon's substantial cash position because approximately $5.45 results from the company's sale of its specialty pharmaceuticals business, which closed in January and has not been reflected in audited financial statements.  Consequently, investors who screen for opportunities with algorithms will not find Enzon.

Enzon's primary technology is PEGylation, a method by which polyethylene glycol (PEG) is attached to a pharmaceutical compound to make it more therapeutically effective.  For some compounds, PEGylation can be crucial to the development of an effective medication.  Enzon's most profitable asset, PEGINTRON, is a PEGylated version of interferon.  Enzon is also working to develop a PEGylated version of active Camptosar (irinotecan), a chemotherapeutic used in the treatment of colorectal cancer.  PEGylated active Camptosar, called PEG-SN38, is currently in Phase II clinical trials for the treatment of metastatic colorectal and breast cancer.  We can only guess the likelihood of PEG-SN38's ultimate approval or the magnitude of its ultimate success; there is no need for precision, however, because we are not paying anything for PEG-SN38 (note that research and development costs for it in 2009 were only approximately $0.26 per share).  If PEG-SN38 were successful, it would not be unreasonable to believe it could add as much as $15 or more in value to Enzon.

Enzon has licensed a technology called Locked Nucleic Acid (LNA), which is used to develop messenger ribonucleic acid (mRNA) antagonists against oncology targets, from Santaris Pharma A/S.  The first two of eight total antagonists to be developed under this license are currently in Phase I studies; the rights to six additional mRNA targets are being evaluated in early preclinical studies.  We are encouraging the Board to monetize its LNA license rather than to invest additional money in such early-stage projects, and we believe a sale could be worth several dollars per share to Enzon based on comparable licenses.

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.

Catalyst