Wednesday, December 19, 2007

Large Enzon (ENZN) Holder DellaCamera Capital Wants Company To Unlock Value

In a 13D filing on Enzon Pharmaceuticals Inc. (Nasdaq: ENZN), DellaCamera Capital disclosed a 5.2% stake (2,278,339 shares) in the company. The firm disclosed a letter to the company saying there is a troubling value disconnect in the stock. The firm requested the company hire an advisor to analyze various financial and structural options and implement a cohesive financial plan of action that would deliver increased value to the shareholders.

The firm said these options may include the rationalization of the Company's marketed products segment, including the sale of the Abelcet product line, along with the possible monetization of additional Company royalty interests. The firm said Enzon should also consider structural methods to unlock the value of the Company's LNA development platform.

A Copy of the Letter:

Dear Jeff:

We have enjoyed our recent dialogue and correspondence with you. As you are aware, entities advised by DellaCamera Capital Management, LLC (“DCM”) are significant shareholders of Enzon Pharmaceuticals, Inc. (“Enzon” or the “Company”) and currently own in excess of 5% of the Company. DCM’s sizeable investment reflects our steadfast belief in the attractiveness of the Company’s numerous assets. In our opinion, Enzon’s current stock price of $9.75 represents a significant discount to the intrinsic value of the Company and in no way reflects the tremendous embedded optionality associated with Enzon’s R&D pipeline and technology platform. Based upon our recent communications, our sentiments are likely of no surprise to you.

While we are encouraged by your recent efforts to highlight the exciting compounds in development and the extensive intellectual property associated with the Company’s PEGylation platform, it is our opinion that Enzon’s commercial operations alone (its marketed products, royalty streams, and contract manufacturing business) may be worth significantly more than the Company’s current share price. To put it another way, the market seems to be currently ascribing negative value to the Company’s R&D pipeline and technology platform. By our calculations, the recent share price of $9.75 implies a shocking negative value of ($263.5 million) for the Company’s R&D operations, as follows:

(1) Enzon has four products on the market that we estimate will generate approximately $100 million of revenue in 2007. Assigning a reasonable pharmaceutical sales multiple of 3.5x yields a value of $350 million for the marketed products.

(2) Enzon recently sold a 25% interest in its royalty from PEG-Intron for $92.5 million, and may potentially receive an additional one-time milestone payment of $15 million. Assuming this $15 million has a present value of $7.5 million, Enzon effectively received $100 million in value for its 25% interest, implying a $400 million value for the entire PEG-Intron stake, or $300 million for Enzon’s remaining 75% interest. Enzon also receives royalties associated with the sale of Pegasys and Macugen and will derive royalty revenue upon the successful approval and launch of Cimzia and Hematide. We approximate the value of the Pegasys, Macugen, Cimzia, and Hematide royalty streams at $100 million, implying (together with the $300 million of value for Enzon’s PEG-Intron stake) a $400 million total value for Enzon’s royalty segment

(3) We estimate that Enzon will derive $16 million in revenue from its contract manufacturing business in 2007. Applying a 2.5x revenue multiple, which is an approximate 1.0x multiple discount to Lonza Group AG, yields an incremental $40 million of value for the Company’s contract manufacturing business.

This is a troubling value disconnect, especially when one considers the array of compounds that Enzon has in clinical trials and the Company’s extensive PEGylation expertise, in addition to Enzon’s locked nucleic acid (LNA) efforts. Indeed, there are publicly-traded biotechnology companies with multi-hundred-million dollar market values that do not possess as broad a pipeline as Enzon. While drug development is inherently unpredictable, in today’s environment there are certain overarching factors that heighten the value that may be ascribed to development-stage compounds. Consider the well-publicized dearth of product that is plaguing many pharmaceutical and biotech companies; one need only note the significant control premium afforded companies such as Medimmune, Pharmion, and MGI Pharma to understand the desire of pharmaceutical companies to replenish their existing pipelines. Given this current favorable environment, Enzon can no longer allow its pipeline and R&D efforts to be afforded negative value by the marketplace.

It is our belief that the corporate structure and operational complexity of Enzon have made it difficult for the investment community to accurately assess the inherent value of the Company. Enzon in its current form is an amalgam of two distinct businesses: (1) a commercial business comprised of marketed products, royalties, and contract manufacturing; and (2) an R&D organization and technology platform. The profitability of the commercial operations is being completely obscured by the expenses associated with advancing the Company’s clinical and pre-clinical programs. As such, the Company does not appeal to any distinct investor constituency. Furthermore, we believe that the pursuit of activities across multiple business segments has led to substantial operational inefficiencies, resulting in expenses far in excess of acceptable levels. For example, Enzon has only four marketed products yet has to shoulder the expenses associated with two completely distinct sales forces, with one sales force devoted entirely to the marketing of one single product, Abelcet.

It is clear to us that there may be many ways for Enzon to narrow the significant discount to intrinsic value at which the Company is currently trading. Given the array of alternatives available, we believe that the Board of Directors (the “Board”) must engage the services of a reputable, nationally-recognized financial advisor to provide impartial assistance in analyzing various financial and structural options and implement a cohesive financial plan of action that would deliver increased value to the shareholders. These options may include the rationalization of the Company’s marketed products segment, including the sale of the Abelcet product line, along with the possible monetization of additional Company royalty interests. Furthermore, Enzon should consider structural methods to unlock the value of the Company’s LNA development platform. Indeed, a number of publicly-traded biotechnology companies have attempted to creatively highlight the value of their own RNA-interference efforts, an area which has generated great enthusiasm from the scientific and investment community.

Though we reserve all of our rights to protect the value of our investment, it is our preference to work constructively with management and the Board to ensure that maximum value is delivered to the shareholders of Enzon. As such, we wish to continue our discussions with you and hope to expand upon this dialogue to include the Board. We look forward to speaking with you in the very near future.

Richard P. Mansouri

Portfolio Manager

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