ENZN - Enzon Pharmaceuticals

[ingalsbe.parekh]

Hello everyone, this is our first post. Here are some key points on the company- please help us try to shoot down this idea, we would love any feedback or analysis.

 

-Enzon Pharmaceuticals Inc is related to sales of drugs by various companies. It generates revenues from the sales of products namely, PegIntron, Sylatron, Macugen and CIMZIA.

-14MM Market Cap, currently trading at $0.30/share

-12.9 million in cash, no debt.

-Valuation ratios: Price/NCAV=1.07, Price/Tangible Book=0.63, Price/Graham Number=0.16, Earnings Yield=1050.20

-Carl Icahn owns about 6.5 million shares (approx. 15% of the business); we assume that his activist role may be a catalyst for either liquidation or some other interesting situation (M&A, perhaps).

-Jim Simons (Renaissance Technologies) has also disclosed a large position recently

[mjohn707]

Looks like they plan on returning cash to the shareholders for a while then liquidating.  Have you read the 10-K yet, any idea how long they're going to continue to receive revenues?

[ingalsbe.parekh]

We have researched the 10k, and it looks like their primary drug (approx 72% of total revenues) expired in 2016 in the US, and will expire in 2018 in Europe and 2019 in Japan.

[writser]

Your cash estimate seems a little bit high. I assume you know they paid out a $0.15 dividend last year so you should substract ~$6.6m from cash? My analysis is not up to date but you can do a quick calculation based on projections in the 2015 10K:

 

- "Projected income of approximately $29.4 million related to receipt of royalty revenue. The Company believes that its expenses will be minimal and the receipt of such revenue is likely."

- "Our future royalty revenues are forecasted to aggregate approximately $29 million from the beginning of 2016 through the end of 2021."

 

So far they received $7.5m in 2016 so ~$22m left. Smear that out over 5 years, mostly front loaded. Substract $1.5m in annual overhead (or whatever number you like). Discount the whole bunch. Add back cash on balance sheet. They have deferred tax assets so no worries about paying taxes at the corporate level but maybe you have to pay withholding taxes on distributions. Doing all that I arrive at roughly $0.35 - $0.40 per share, depending on assumptions.

 

I bought a little bit in Q3 2016 because it was trading around $0.21 (adjusting for dividend) and there was still a lot of cash on the balance sheet that they were going to pay out at some point. Stock quickly shot up to $0.35 after a dividend was announced. I sold and never looked back. I see it has been trending down a little bit the past few weeks. At current price I think it is probably a decent investment but not more than that.

[writser]

2016 AR is out. Looks bad at first glance.

 

2015 AR: "Our future royalty revenues are forecasted to aggregate approximately $29 million from the beginning of 2016 through the end of 2021."

2016 Revenue: 8.3m

2016 AR: "Our future royalty revenues are forecasted to aggregate approximately $10.1 million from the beginning of 2017 through the end of 2021."

 

"The decrease in projected revenues is significantly attributable to the steep decline in worldwide sales of PegIntron noted in 2016, as reported by Merck, due to increased competition from new therapies and, consequently, a loss of market share. Similar market factors have negatively impacted the Company’s other licensed products."

 

Forecast is cut in half and afaik this is the first time this is mentioned. Also:

 

"In March 2017, Merck notified us that it had overpaid us approximately $1.02 million in royalties during the second and third quarters of 2016. This was due to a previous misunderstanding regarding the date on which our right to receive royalties from U. S. sales of PegIntron expired, which Merck now advises had occurred in February 2016. Merck has notified us that it intends to recover such overpayment from us by reducing future royalties to which we would otherwise be entitled from Merck until the full amount of the overpayment has been recouped. Consequently, it is expected that we will receive no payment from Merck during the first quarter of 2017."

 

Might try to short a little bit tomorrow depending on where it opens.

[clutch]

Thanks for the heads up, wrister.

[writser]

Shorting stuff like this is frustrating. At the open bid is .2822 or something. I jam sell orders in the market like it's black monday but they take like 10 minutes to (partially) execute. Obviously at a worse price. My broker is going crazy because the initial margin requirements for placing an order are 10x (!!!) order value. Couple of hours later this is still only down 8%. No wonder - it is impossible to short this. Even though ENZN is still trading too high and the stock will probably drift down the next few days I closed my position - can't justify using up a second-hand Tesla in margin space to make a few hundred dollar. Transaction costs take up ~15% of the total profit.

 

But hey, I probably should be glad that markets are sometimes a bit inefficient. And I can eat at mcDonalds the next few weeks, enjoying the spoils from my victory over the efficient market hypothesis.

[benhacker]

Shorting stuff like this is frustrating.

 

Not to mention the borrow rate is calc'd on a basis of $1.00 increments, rounded up!  so any borrow rate on a $0.25 stock, is calc'd as if the stock is $1.00.... !!!!

 

I don't think you play in this space as a short unless you are a market maker, or you have a death wish... ;-)

[writser]

Didn't know that, thanks. And yeah, I agree. Shorting stuff like this for miniscule amounts is more like a sport than a suitable way to make money.

[benhacker]

Shorting stuff like this for miniscule amounts is more like a sport than a suitable way to make money.

 

Agree.  I do enjoy finding things where you can directly point to an "inefficiency" even if hard to exploit.

[Jurgis]

Agree.  I do enjoy finding things where you can directly point to an "inefficiency" even if hard to exploit.

 

Well, the reason the inefficiency exists is that it's hard to exploit or yields minuscule profits. In some sense that makes it not a real inefficiency. I.e. an economist will probably tell you that if inefficiency gain < frictional+labor costs, then it's not a real inefficiency.

 

I can get 100%++ returns per week in online games in in-game currency. This does not prove that market is inefficient, since (1) you can't convert in-game currency into USD; (2) even if you could, you'd be earning $5 per week or something like that.

 

Have fun playing though  8)

[Maple Fun]

Price jumped nearly 30%

 

$7 millions settlement confirmed today, $3.5 millions received, the remaining to be received in 6 months

 

Target price here?

[hillfronter83]

Is anyone still looking at this tiny microcap? They'll receive another $7m in Q3, resulting about $0.33/share in cash. There is also $10m potential payment ($0.22/share) in the future. They also announced $0.06/share special dividend.

[wabuffo]

Is anyone still looking at this tiny microcap? They'll receive another $7m in Q3, resulting about $0.33/share in cash

 

I've got them at ~$0.30/share in cash based on latest financials from 9/30.  29-cents if you subtract their small amount of accrued liabilities...

 

There is also $10m potential payment ($0.22/share) in the future

 

What potential payment are you referring to?

 

Thanks,

 

wabuffo

[hillfronter83]

Is anyone still looking at this tiny microcap? They'll receive another $7m in Q3, resulting about $0.33/share in cash

 

I've got them at ~$0.30/share in cash based on latest financials from 9/30.  29-cents if you subtract their small amount of accrued liabilities...

 

There is also $10m potential payment ($0.22/share) in the future

 

What potential payment are you referring to?

 

Thanks,

 

wabuffo

 

I meant to say book value per share. You are right, cash is about $0.3/share. The $10m is for potential (no idea the probability of this) EMA approval of SC Oncaspar.

[wabuffo]

I meant to say book value per share. You are right, cash is about $0.3/share. The $10m is for potential (no idea the probability of this) EMA approval of SC Oncaspar.

 

ok - thanks. 

 

I'm not entirely sure that one can book the entire $7m to the cash balance for net asset per share calculations. They have some AMT tax credit assets - no idea if they can be used against the milestone income.

 

There is some optionality in their magic bag of pharma IP licensing arrangements.  Probably wise to assume a zero, until proven otherwise.

 

wabuffo

[spartansaver]

Enzon is my largest position. I don't believe that Enzon's possible royalty stream of Sesen Bio (U.S. biotech) revenue flows is represented in the current share price. Sesen Bio is developing a bladder cancer drug (Vicinium) that is in its phase 3 trial. Enzon and Micromet AG share a 50/50 royalty stream on any product which was developed using IP related to single chain antibody products. Vicinium was developed using the Enzon/Micromet IP. The royalty stream earns 2.5% of sales below $100mn, 3.0% on sales between $100mn-$300mn, and 3.5% on sales above $300mn. I am no expert on this drug and have largely used management guidance and sell side estimates in the possible sales of Vicinium. If successful, Vicinium sales could be anywhere from a little to a lot. I believe that at current prices, if Vicinium is not approved, my downside is the current share price (assuming management liquidates if Vicinium fails). Currently Sesen Bio is ~170mn market cap company and its primary product is its phase 3 Vicinium. Sesen Bio share prices are rising as it has received positive results from Vicinium. The company is meeting with the FDA on June 6 for a pre-BLA submission meeting, and if all goes well will, submit its BLA. This submission is also a near term catalyst, as according to management, once a company submits a BLA, it has an 82% of chance of receiving approval. 

 

The second, but less exciting option is if the European Medicines Agency ("EMA") approves Calaspargase Pegol ("CP"). Enzon has a contract with Servier (French Pharma/Biotech) to receive a 1-time payment between $10mn-$15mn, if the EMA approves CP. CP was approved by the FDA in Dec. 2018 and Enzon received a 1 time payment of $7mn from Servier. Part of the agreement for the $7mn payment was that Enzon no longer required Servier to immediately seek approval for CP in the EMA. I believe this may hint at Servier being less likely to attempt to approve CP in the EMA.

 

I believe that this situation represents a situation as Pabrai describes, "heads I win, tails I don't lose much." 

[bskptkl]

Sesen Bio news: https://finance.yahoo.com/news/sesen-bio-announces-successful-pre-110000860.html

 

It's a large position for me too.

[writser]

Today seems like a good day to sell some of your shares.

[spartansaver]

Today seems like a good day to sell some of your shares.

 

Sold my position in ENZN today. Went ex-divi today with a 12 cent divi. Share price is 24 cents, implying a $10.6mn market cap. After paying out divi, ENZN should have a BV of roughly $6.65mn. This implies a value of ~$4mn for SESN royalty stream ($10.6mn-$6.65mn/also ignores any cash burn). I'm happy selling my option at that price. I could be completely wrong, but with SESN trading at a market cap of ~$120mn and the royalty stream getting 75bps of future sales (plus a few small one-time payments), seems like the option is more optimistic than an outright purchase of SESN.   

[writser]

Yes, I think some people are confused about the ex-date? Shares traded as high as $0.30 today. It's a very strange situation. As far as I know this should be a special dividend (far more than 25% of the share price is distributed) which should imply an ex-date the day after the pay-date - as happened with previous ENZN distributions. However, this divvie has ex-date today but pay date October 15. Strange. Maybe I'm wrong about the ex-div date but it is listed on the FINRA daily list as ex-div today and I guess that is the end of it. Sadly there wasn't much of a borrow.

[spartansaver]

Yes, I think some people are confused about the ex-date? Shares traded as high as $0.30 today. It's a very strange situation. As far as I know this should be a special dividend (far more than 25% of the share price is distributed) which should imply an ex-date the day after the pay-date - as happened with previous ENZN distributions. However, this divvie has ex-date today but pay date October 15. Strange. Maybe I'm wrong about the ex-div date but it is listed on the FINRA daily list as ex-div today and I guess that is the end of it. Sadly there wasn't much of a borrow.

 

I checked multiple sources, and I'm 99% sure you are correct, the ex-date is today. Wild stuff, wish I had been that 30 cent sale.

[sbalsam]

Just an FYI - for those who are still holding and thinking about selling and for those who sold to plan for taxes ahead of time:

 

Based on my conversations with the company, it is anticipated that both distributions paid this year (the 6 cent distribution and the current 12 cent distribution) will be treated as returns of capital (non-taxable) rather than dividends (taxable).* (See note at bottom of this post.) The flip-side of this is that you have to reduce your cost for the shares by distributions received to find your tax basis. So, if you bought at .24 in December 2018 and sold September 30 at .24 and will ultimately have received both distributions (assuming you are all right about the ex-date and that this won't trade on a due bill basis), then you will have no dividends but an 18 cent per share capital gain. If you are holding this in a taxable account, then that gain will be taxed at ordinary income rates since you have not held the shares for a full year. If you hold this in a retirement account, then this issue does not apply to you at all.

 

If you are still holding the shares, I am certainly not telling you to hold just to get to the 1-year period but if you are on the fence because your estimate of value is petty close to the current price (or are scared that you might be wrong about the distribution dates), then you might want to keep the tax issue in mind and consider the difference in after-tax profit based on your marginal tax rates.

 

One proviso - the analysis above would change if the Company were to end up selling the Sesen Bio royalty this year in that the Company would have an annual profit and the amount of the distribution that is equal to the year's profits would be deemed a taxable dividend (even though there are cumulative past losses greater than the current year profit). Of course, that would still likely be a good thing despite the current tax hit for the distribution. 

 

*Note that this is different than the prior 2017 distribution that was treated as a taxable dividend (even though the company had cumulative losses to date) because the rule is that a distribution is taxable to the extent of current year profits (which the Company had that year) even if there are cumulative losses. 

 

Feel free to send me a message if you have any questions on this.

 

Steve

[fishwithwings]

Any idea why the company is trading at a premium to its net assets?

[writser]

That is discussed in the thread .. Potential Vicinium royalties and milestone payments.