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Enzon Pharmaceutical (ENZN) – a borrowed idea

September 20, 2010

Mostly I’m an armchair investor. You might even say I’m a “Lazy-boy” investor if you weren’t so concerned with trademarks. I’m always looking for ways to maximize my investment but minimize my efforts. I know I have some advantages and many disadvantages, so I try to play to my advantages. Size and funding source are my main advantages; I’m only investing for myself so I don’t have to worry about redemptions, and unfortunately my funds available to invest are small enough not to move the market, even for relatively illiquid securities. ‘Firepower’ is my main disadvantage; I’m competing with shops that have significantly more brainpower – quantity and probably quality – than I could ever muster. This means I have to focus more, restricting my investing universe to areas where I may just have some advantage; equities only, market caps under $1 billion, low price to book and special situations like spinoffs.

I know you’ve heard this before so why am I repeating it? Well, its kind of an excuse, you see. Despite the generally accepted adage that ‘copying is the sincerest form of flattery’ and notwithstanding Joel Greenblatt’s endorsement of borrowing (I hate to use the word ‘stealing’) ideas from those in the investment community that you respect, I feel kind of ‘skanky’ every time I do it. So I’m painting myself as an underdog to assuage my feelings of guilt as I ‘borrow’ an investment idea from my favorite value investor, Seth Klarman. Oh, yeah, I do have to mention, though, that last time I borrowed an idea from him, the stock went right down the toilet; he finally got out of the position for a nice tax loss and I followed sheepishly thereafter.

So here I am again borrowing one of his investment ideas, I hope this time in a more timely fashion. The problem, here, is that I am flush off my successful investment in Sycamore Networks, and the time to be most wary of your own ideas is right after you’ve been unexpectedly successful; it tends to give you a bit of that ‘I’m invincible’ rush that you might have felt as an adolescent. And remember the stupid things you did as an adolescent? I do!

Here goes anyway. My newest investment position is in Enzon Pharmaceutical (ENZN). I’m not an expert in biopharma so I can’t really add much to any of the analyses I have seen on the value of ENZN’s products. Below is a quote from Mack885’s analysis of ENZN on the Value Investor’s Club site dated 5/4/10. (Mack885, I hope you don’t mind my quoting you.)

“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.“

The share price at the time was $10.50, about where it is today.

So why is it timely to purchase ENZN now? Several things have happened in the past 6 months which may indicate that asset monetization is getting closer. Key points in my thesis are:

  • Over 45% of the ENZN shares are held by independent investment funds (Baupost, Iridium, Perry, Renaissance, New Mountain, della Camera, etc.),
  • There does not seem to be an entrenched Board; shareholders approved an ammendment in the company bylaws last summer whereby Directors will now be elected on an annual basis,
  • The CEO and CFO left the company last summer (were they getting in the way of the asset monetization process?)
  • The company is repurchasing shares at current levels.

The share price has not really changed over the past year, and probably won’t until more of the asset conversion process is complete. The next step should be the monetization of the  royalty stream from PEGINTRON, which I expect before the end of the year.

  1. Great post and I love the the idea (I’m going to look into it).

    Have you taken a look at FURX by chance? If not, take a look (I think you will find it compelling). It’s a another biotech net/net with an interesting spin dynamic and an entrenched activist shareholder base.

    Currently has a negative EV and investors are essentially getting a potentially 50m+ annual royalty stream for free. I assume that if they burn through their 100m in cash and they have nothing to show for it, the activist’s will then step in and force management to shut down R&D and milk the royalty (similar to CPEX if your familiar).

    • Hi aboveaverageodds,

      Yes, I have been following FURX. I find it interesting as well, but I don’t see the immediate catalyst. I’m waiting to see whether, as they spend down their cash balance, and perhaps the market hits a rough stretch, the share price might not dip; I’m hoping to I might be able to get in around $8 a share.

      Thanks for the comment.

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