We are upgrading Enzon Pharmaceuticals Inc. (ENZN) to Neutral from Underperform, with a price target of $13.00, based on its promising future prospects.
The debt burden at Enzon has reduced significantly following the sale of its specialty pharmaceutical business. In January 2010, Enzon sold its specialty pharmaceutical business to Sigma-Tau Pharmaceuticals for $300 million and another $27 million based on the achievement of certain milestones.
Enzon is also eligible to receive royalties of 5-10% on incremental net sales above a 2009 baseline amount from its four marketed specialty pharmaceutical products through 2014. The specialty pharmaceutical business included Oncaspar, Adagen, DepoCyt and Abelcet as well as a manufacturing facility in Indianapolis, Indiana. The contract manufacturing segment was also sold.
The improved liquidity position at Enzon has enabled the company to repurchase shares. While the share repurchase program, announced in December 2009, has been completed, the Board of Directors at Enzon recently cleared another repurchase program, worth up to $200 million.
We are also encouraged by Enzon's efforts to develop its pipeline. The company's pipeline candidates include EZN-2208 (PEG-SN38), hypoxia-inducible factor1 (HIF-1) alpha, survivin antagonists and multiple messenger RNA (mRNA) antagonists based on the locked nucleic acid (LNA) technology for cancer indications; all in early or middle stages of development.
The company recently initiated two early-stage studies of its cancer candidates, EZN-2968 and EZN-2208, in conjunction with the National Cancer Institute. The successful development and subsequent commercialization of the pipeline would be a boost for the stock. The improved liquidity position coupled with the company's efforts to develop its pipeline cause us to upgrade the stock to Neutral.
Even though the efforts of the company to develop its pipeline please us, we remain concerned about the early stage status of the pipeline at Enzon. Moreover, declining royalties because of lower sales of Merck's (MRK) PegIntron, on which Enzon is highly dependent, is also a major cause for concern. We believe Enzon must deliver new products in order to offset the slowing royalty revenue.
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