Legendary Investor Icahn Still Slugging Away With Enzon Pharma

Submitted by Scott Matusow as part of our contributors program.

Carl C. Icahn has been the principal beneficial shareholder of Icahn Enterprises L.P. (NYSE: IEP) and has served as Chairman of the board, a director, and an owner of the company’s general partner since 1990. Mr. Icahn heads the investment management segment, serving as Chief Executive Officer of Icahn Capital LP and its subsidiaries. Today I will get into a bit of Icahn’s history his current activities.

Icahn’s history involves aggressively purchasing a significant position in a corporation and calling for the election of an entirely new board of directors or the divestiture of assets in order to deliver more value to shareholders. The compensation of CEOs is a subject on which Icahn focuses publicly, as he believes that many are grossly overpaid and that their pay has little correlation to stock performance. He is a real world Gordon Gecko from the movie, “Wall Street.” This is evident in one of Icahn’s famous quotes, “CEOs are paid for doing a terrible job. If the system wasn’t so messed up, guys like me wouldn’t make this kind of money.”

Many times investors follow the lead of Icahn, buying into the businesses he sets his focus upon. The increase in stock price caused by the anticipation that Icahn would uncover shareholder value has become known as the “Icahn lift.”

One company I like going forward is currently being influenced by Mr. Icahn and his 13% ownership stake. It is Enzon Pharmaceuticals (NASDAQ: ENZN).

Enzon Pharma is a biotechnology company dedicated to the research and development of innovative therapeutics for cancer patients with high unmet medical needs. Enzon’s drug-development programs utilize two platforms, Customized PEGylation Linker Technology and third-generation messenger RNA (mRNA) targeting agents utilizing the Locked Nucleic Acid technology. Enzon currently has four compounds in human clinical development and multiple novel mRNA antagonists in preclinical research. Enzon receives royalty revenues from licensing arrangements with other companies related to sales of products developed using its proprietary Customized Linker Technology.

Enzon receives income from royalties on sales of products by other companies that use the company’s proprietary PEGylation technology. These products include pegintron, marketed by Merck (NYSE: MRK); and macugen, marketed by Pfizer (NYSE: PFE) outside the U.S. and Valeant (NYSE: VRX) inside the U.S. Royalty revenue for the three months ended September 30, 2012 increased 7% to $10.9 million from $10.2 million in 2011. For the nine months ended September 30, 2012, royalty revenue remained flat compared to the same period in 2011. The pace of these royalties equates to approximately $40 million per year and is the main reason Enzon has been profitable in recent quarters.

Enzon combines two things I typically will appreciate with a pharmaceutical company, revenue coming in the door to supplement a diverse pipeline. This gives me the confidence that the company will not be simply diluting in order to raise money. It was the same reason I invested in Antares (NASDAQ: ATRS) for approximately a year and a half. Antares is a company with $0 long-term debt and $88M in cash reserves (Q3 2012) in addition to a growing revenue stream that is right around break-even.

Despite the royalties and potential with Enzon’s products, the past three years have witnessed a series of setbacks for the company. In early 2011, CEO Jeffrey Buchalter left the company. Icahn has been steadily pushing Enzon along the way, with longtime colleague Alex Denner at the helm. Denner, who left Icahn’s organization late in 2011, orchestrated a series of Icahn’s campaigns to push companies to the bargaining table. This worked well and created big returns from several investments such Genzyme who was purchased by pharmaceutical giant Sanofi (NYSE: SNY).

Alexander Denner has served as a director since May 2009 and chairman of Enzon’s Board of Directors since July of 2009. Dr. Denner served as Managing Director of entities affiliated with Carl C. Icahn from 2006 to 2011. From April 2005 to May 2006, Dr. Denner served
as a portfolio manager specializing in healthcare investments for Viking Global Investors. Previously Dr. Denner served in a variety of roles at Morgan Stanley, including portfolio manager of healthcare and biotechnology mutual funds. Dr. Denner was chairman of the Executive Committee of ImClone Systems Incorporated, and served as a director from 2006 until 2008 when ImClone was purchased. He has also served as a director of Biogen Idec (NASDAQ: BIIB) since 2009.

In December, Enzon announced it was exploring the sale of some or all of the company. The company’s board of directors retained Lazard to act as financial advisor in a review of the possible sale or disposition of these assets. A special committee of Enzon’s board of directors was established to oversee the review.

Denner commented:

The Board of Directors, following a review of the Company’s assets and strategic direction, has determined that it is in the best interest of Enzon’s shareholders to pursue a sale, in whole or in part, of the Company. In addition to a strong balance sheet and royalty revenues, Enzon’s drug candidates and technologies offer the potential for a variety of transactions.

Balance Sheet

Total Cash (mrq): $278.44M

Total Cash Per Share (mrq): $6.27

Total Debt (mrq): $115.85M

Total Debt/Equity (mrq): $64.46

Current Ratio (mrq): $2.26

Book Value Per Share (mrq): $3.98

Cash Flow Statement

Operating Cash Flow (TTM): -$1.96M

Levered Free Cash Flow : -$926.63K

The stock has been in an extended down channel, but has recently shown signs of reversal. A break over $5 would be a key pivot point and over $5.15 would be very bullish as there would be a break of the trend-line resistance. The MACD has recently crossed bullish and the RSI is bullish as well, still showing plenty of room to run.

Icahn is one of Wall Street’s most successful figures and thusly, not someone I estimate Enzon is worth $325M to $350M, or roughly $7 a share, so this one might be a very good swing trade as the stock is currently near its 52 week low of $4.27.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in ENZN over the next 72 hours.