Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
ENZN > SEC Filings for ENZN > Form 10-Q on 10-May-2013All Recent SEC Filings

Show all filings for ENZON PHARMACEUTICALS INC | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for ENZON PHARMACEUTICALS INC


10-May-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

Unless the context requires otherwise, references in this Quarterly Report on Form 10-Q to "Enzon," the "Company," "we," "us," or "our" and similar terms mean Enzon Pharmaceuticals, Inc. and its subsidiaries.

Overview

We are a biotechnology company that previously was dedicated to the research and development of innovative therapeutics for patients with high unmet medical needs. We currently receive royalty revenues from licensing arrangements with other companies related to sales of seven marketed products, namely PegIntron®, Sylatron®, Macugen®, CIMZIA®, OMONTYS®, Oncaspar and Adagen. The primary source of our royalty revenue is PegIntron, which is marketed by Merck.

In December 2012, we announced that our Board of Directors retained Lazard Frères & Co. LLC ("Lazard") to act as financial advisor in a review of the possible sale or disposition of one or more corporate assets or a sale of our company and that our Board of Directors established a special committee to oversee our sale review process. In connection with our sale review process, we substantially suspended all clinical development activities with a goal of conserving capital and maximizing value returned to our stockholders.

In April 2013, the Company announced that it had concluded a thorough review of the possible sale or disposition of one or more corporate assets, or a sale of the Company. The review did not result in a definitive offer to acquire the Company or all or substantially all of the Company's assets. The Company also announced that its Board of Directors approved a $1.60 special dividend per share (which would result in a distribution to stockholders of approximately $70 million) and intends to distribute excess cash, expected to arise from ongoing royalty revenues, in the form of periodic dividends to stockholders. The record date of the $1.60 special dividend will be May 7, 2013, and the payment date will be June 4, 2013.

Additionally, on April 30, 2013, pursuant to the terms of an asset purchase agreement entered into on the same date (the "Belrose APA"), we completed the sale of all of our right, title and interest in our Customized PEGylation Linker Technology platform and related assets to Belrose Pharma Inc. ("Belrose"). The assets sold include (i) intellectual property and know-how associated with the PEGylation platform (including certain patents), (ii) patents and know-how related to PEG-SN38, (iii) patents and know-how associated with certain of our internal clinical programs and (iv) certain related supplies and equipment. In addition, we assigned to Belrose our existing license agreement with Zhejiang Hisun Pharmaceutical Co., Ltd. Under the Belrose APA, we also agreed to sell all of our right, title and interest in the Locked Nucleic Acid (LNA) Technology platform and related assets to Belrose at a second closing, provided that prior to July 15, 2013, we enter into an agreement with Santaris Pharma A/S ("Santaris") to resolve any contractual obligations that the parties may have under our license agreement with Santaris and an agreement with Santaris and Belrose providing for Belrose's assumption of such license agreement.

The aggregate upfront consideration for the assets is $800,000, $700,000 of which we received at closing and $100,000 of which was placed into escrow and is to be released to us if we consummate the sale of our right, title and interest in the LNA Technology platform and related assets to Belrose. The Belrose APA also entitles us to receive from Belrose additional potential payments, including a share of net revenues that may be received from Hisun related to PEG-SN38 rights in China as well as a share of other potential partnering revenues. The achievement of any of these potential payments is uncertain.

The assets sold to Belrose did not include any of the Company's existing rights to receive royalties on PegIntron®, Sylatron®, Macugen®, CIMZIA®, OMONTYS®, Oncaspar or Adagen.

In light of our sale of assets pursuant to the Belrose APA, we have no intention of resuming any clinical development activities. Currently, our business is focused solely on the management of our existing royalties.

Throughout Management's Discussion and Analysis, the primary focus is on the results of operations, cash flows, financial condition and future outlook of our business. The percentage changes throughout the following discussion are based on amounts stated in thousands of dollars and not the rounded millions of dollars reflected in this section.

Results of Operations



Revenues:



Royalties (in millions of dollars):



                        Three Months Ended
                             March 31,
                             Percent
                  2013       Change         2012
Royalty revenue   $ 9.6           (12 )%   $ 10.9

We receive income from royalties on sales of seven marketed products, including PegIntron, marketed by Merck; Macugen, marketed by Pfizer, Inc. outside the U.S. and Valeant Pharmaceuticals International, Inc. in the U.S.; and CIMZIA, marketed by UCB Pharma. Notification from the third-party licensee of the royalties earned under the license agreement is the basis for royalty revenue recognition. This information generally is received from the licensees, and royalty revenue is recognized, in the quarter subsequent to the period in which the sales occur. Royalty revenue for the three months ended March 31, 2013 decreased 12% to $9.6 million from $10.9 million for the three months ended March 31, 2012.

Sales of PegIntron by Merck continue to constitute the most significant source of our royalty revenues. The following table summarizes our PegIntron royalties earned (in millions of dollars):

                              Three Months Ended
                                   March 31,            Dollar       Percent
PegIntron royalties from:     2013           2012       Change       Change
US sales                    $    1.07       $  2.09     $ (1.02 )         (49 )%
Foreign sales - Europe           1.98          2.75        (.77 )         (28 )%
Foreign sales - Japan            2.17          1.87          .3            16 %
Foreign sales - Other            3.06          3.11        (.05 )          (2 )%
Total                       $    8.28       $  9.82

Contract Research and Development

Pursuant to a transition services agreement entered into at the time of the sale of our former specialty pharmaceutical business, we began performing product-support research and development, consulting and technology transfer functions for the purchaser effective with the close of the sale transaction on January 29, 2010. The transition services associated with product-support research and development are being reported in continuing operations due to our ongoing involvement in the research and development related to the divested products. No revenue was generated from these services for the three months ended March 31, 2013, and we will not generate any such revenue in the future. This compares to $0.1 million reported for the first quarter of 2012. Our contractual obligation was to assist with these transition services for a period of up to three years subsequent to the date of the sale, although the level of such activity declined significantly during 2012. The transition services agreement was terminated by the purchaser on September 30, 2012.

Miscellaneous Income

Miscellaneous income was $0.55 million for the three months ended March 31, 2013 representing a milestone event related to the licensing of PEG-SN38 as part of the Collaboration Agreement with Hisun. In addition, miscellaneous income consists of rental receipts from the sublease of unused manufacturing and excess office space for which we no longer have lease commitments. The underlying lease expense is reflected in general and administrative expenses.

Operating Expenses:



Research and Development(in millions of dollars):



                                                    Three Months Ended March 31,
                                                               Percent
                                          2013                 Change                  2012
Research and development -
pipeline                             $           1.7                   (75 )%     $          6.9
Research and development -
specialty and contracted services    $           0.0                  (100 )%     $          0.1

Research and development - pipeline

During the first quarter of 2013, total spending on our research and development programs decreased by $5.2 million, or 75%, to $1.7 million compared to $6.9 million for the first quarter of 2012. Clinical development expenses declined by $4.3 million and salaries and benefits expenses declined by $0.9 million as a result of the restructuring implemented in the first quarter of 2013. Clinical development expenses have declined for the three months ended March 31, 2013 compared to the same three month period of 2012 due to the Company substantially suspending all clinical development activities.

Research and development - specialty and contracted services

There were no expenses associated with generating contract research and development revenue during the first three months of 2013.

General and Administrative(in millions of dollars):



                                 Three Months Ended March 31,
                                            Percent
                               2013          Change          2012
General and administrative   $    2.9            (22 )%      $ 3.7

General and administrative expenses declined by $0.8 million, or 22%, to $2.9 million for the first quarter of 2013 from $3.7 million for the first quarter of 2012. Salaries and benefits expenses declined by $0.4 million as a result of the restructuring implemented in the first quarter of 2013. The remainder of the decrease in general and administrative expenses was attributable to reduced costs for insurance and depreciation.

Restructurings

In December 2012, we announced a plan to reduce our workforce by approximately 15-20 employees. In March 2013, in an effort to continue to cut ongoing operating expenses, the Company committed to a plan to reduce its workforce from 19 employees to 12 employees. During the first quarter of 2013, we incurred restructuring charges of $2.5 million, of which $1.6 million resulted in cash expenditures paid and expensed during the quarter and $0.9 million remained to be paid for one-time employee termination benefits and associated costs.

Other Income (Expense)(in millions of dollars):

                                   Three Months Ended March 31,
                                               Percent
                                2013            Change         2012
Other income (expense):
  Investment income, net      $     0.4              (20 )%   $  0.5
  Interest expense                 (1.3 )             (7 )%     (1.4 )
  Other, net                        0.2             n.m.        (0.1 )
Total other income(expense)   $    (0.7 )            (30 )%   $ (1.0 )

n.m. - not meaningful

Net investment income was $0.4 million for the first quarter of 2013, as compared to $0.5 million for the first quarter of 2012. The short-term marketable securities continue to mature in our portfolio to provide liquidity for the upcoming special dividend payment.

Interest expense was $1.3 million for the first quarter of 2013, as compared to $1.4 million for the first quarter of 2012. From November 2011 to May 2012, we repurchased $18.7 million in principal amount of our 4% convertible notes, and the declining interest costs are reflective of the lower principal amounts outstanding.

Liquidity and Capital Resources

Cash, cash equivalents and marketable securities, were $199.3 million as of March 31, 2013, as compared to $196.7 million as of December 31, 2012. The increase was primarily attributable to net cash provided by operating activities.

Net cash provided by investing activities was $41.8 million for the first quarter of 2013 as we sold marketable debt securities with a view toward shortening the duration of our portfolio. In the first quarter of 2012, the net cash used in investing activities was $53.8 million as we continued to invest excess cash in marketable securities, a process which began in the fourth quarter of 2011.

Net cash used in financing activities was $0.1 million for the first quarter of 2013 versus $3.8 million used in the first quarter of 2012. During the first quarter of 2012, we utilized $3.9 million to repurchase $3.7 million in principal amount of our 4% convertible notes.

As of March 31, 2013, we had outstanding $115.8 million of 4% convertible notes. Accrued interest on these notes was $1.5 million and $0.4 million as of March 31, 2013 and December 31, 2012, respectively. After giving effect to a required adjustment to the conversion price of our 4% convertible notes resulting from the December 2012 special cash dividend, our 4% convertible notes are currently convertible until maturity at the option of the holder into shares of our common stock at a conversion price of $6.76 per share (or a conversion rate of 147.8211 shares per $1,000 principal amount). At March 31, 2013, the potential dilutive effect of conversion of the 4% convertible notes was 17.1 million shares using the conversion price of $6.76 per share. On June 1, 2013, our 4% convertible notes will become due and payable, and on June 4, 2013, we will pay a special dividend aggregating approximately $70 million. We will be required to use our cash, cash equivalents and/or marketable securities to repay the notes at maturity and pay the special dividend, which will reduce our liquidity and capital resources.

Our current sources of liquidity are our (i) cash, (ii) our cash equivalents,
(iii) marketable securities, (iv) interest earned on such cash, cash equivalents and marketable securities and (v) royalties (primarily those related to sales of PegIntron).

Based upon our current sources of liquidity and our planned use of $115.8 million of cash, cash equivalents and/or marketable securities to repay our 4% convertible notes on June 1, 2013 and pay the special dividend on June 4, 2013, we anticipate our cash, cash equivalents and marketable securities will be sufficient to meet our capital and operational requirements for the near future.

Off-Balance Sheet Arrangements

As part of our ongoing business, we do not participate in transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities (SPEs), which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually limited purposes. As of March 31, 2013, we were not involved in any SPE transactions.

Contractual Obligations

Our major outstanding contractual obligations relate to our operating leases, convertible debt, and license agreements with collaborative partners. There have been no material changes since December 31, 2012 with respect to our contractual obligations.

Critical Accounting Policies and Estimates

A critical accounting policy is one that is both important to the portrayal of a company's financial condition and results of operations and requires management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.

Our consolidated financial statements are presented in accordance with accounting principles that are generally accepted in the U.S. All applicable U.S. GAAP accounting standards effective as of March 31, 2013 have been taken into consideration in preparing the consolidated financial statements. The preparation of the consolidated financial statements requires estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures. Some of those estimates are subjective and complex, and, consequently, actual results could differ from those estimates. The following accounting policies and estimates have been highlighted as significant because changes to certain judgments and assumptions inherent in these policies could affect our consolidated financial statements.

We base our estimates, to the extent possible, on historical experience. Historical information is modified as appropriate based on current business factors and various assumptions that we believe are necessary to form a basis for making judgments about the carrying value of assets and liabilities. We evaluate our estimates on an ongoing basis and make changes when necessary. Actual results could differ from our estimates.

Revenues

Royalties under our license agreements with third-parties and pursuant to the sale of our former specialty pharmaceutical business are recognized when reasonably determinable and earned through the sale of the product by the third-party and collection is reasonably assured. Notification from the third-party licensee of the royalties earned under the license agreement is the basis for royalty revenue recognition. This information generally is received from the licensees in the quarter subsequent to the period in which the sales occur.

Contingent payments due under the asset purchase agreement related to the sale of our former specialty pharmaceutical business are recognized as income when the milestone has been achieved and collection is assured. Such payments are non-refundable, and no further effort is required on the part of the Company or the other party to complete the earning process. Non-refundable payments received upon entering into license and other collaborative agreements where we have continuing involvement are recorded as deferred revenue and recognized ratably over the estimated service period.

The sale of our former specialty pharmaceutical business involved the application of guidance regarding multiple deliverables in separating the revenues associated with the sale of in-process research and development from the other elements of the transaction, namely the assets sold as part of discontinued operations and our continuing involvement in contract research activities. We determined that the in-process research and development had value to the buyer of our former specialty pharmaceutical business on a stand-alone basis and that there was objective and reliable evidence available to support the allocation of the total purchase price to the respective units of accounting.

Research and Development Expenses

We accrued expenses for the cost of work performed by contract research organizations, contract manufacturing organizations and others based upon the estimated amount of the total effort completed on each order, study or project using factors such as the number of lots produced, the number of patients enrolled, the number of active clinical sites and the duration for which the patients are enrolled in the study. We base the estimates on the information available at the time. Additional information may become available at a later date that would enable us to develop a more accurate estimate. Such changes in estimate are generally recognized in the period when the information is first known.

Income Taxes

Under the asset and liability method of accounting for income taxes, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. A valuation allowance on net deferred tax assets is provided for when it is more likely than not some portion or all of the deferred tax assets will not be realized. As of March 31, 2013, we believe, based on our projections, that it is more likely than not that our net deferred tax assets, including our net operating losses from operating activities and stock option exercises, will not be realized. We recognize the benefit of an uncertain tax position that we have taken or expect to take on the income tax returns we file if it is more likely than not we will be able to sustain our position.

Stock-Based Compensation

The Company recognizes the cost of all share-based payment transactions at fair value. Compensation cost, measured by the fair value of the equity instruments issued, adjusted for estimated forfeitures, is recognized in the financial statements as the respective awards are earned.

The impact that share-based payment awards will have on the Company's results of operations is a function of the number of shares awarded, the trading price of the Company's stock at date of grant or modification and vesting, including the likelihood of achieving performance goals. Furthermore, the application of the Black-Scholes valuation model employs weighted average assumptions for expected volatility of the Company's stock, expected term until exercise of the options, the risk free interest rate, and dividends, if any to determine fair value. Expected volatility is based on historical volatility of the Company's common stock; the expected term until exercise represents the weighted average period of time that options granted are expected to be outstanding giving consideration to vesting schedules and the Company's historical exercise patterns; and the risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods corresponding with the expected life of the option.

Forward-Looking Information and Factors That May Affect Future Results

This Quarterly Report on Form 10-Q contains forward-looking statements within the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. All statements contained in the Quarterly Report on Form 10-Q, other than statements that are purely historical, are forward-looking statements. Forward-looking statements can be identified by the use of forward-looking terminology such as the words "believes," "expects," "may," "will," "should," "potential," "anticipates," "plans" or "intends" or the negative thereof, or other variations thereof, or comparable terminology, or by discussions of strategy. Forward-looking statements are based upon management's present expectations, objectives, anticipations, plans, hopes, beliefs, intentions or strategies regarding the future and are subject to known and unknown risks and uncertainties that could cause actual results, events or developments to be materially different from those indicated in such forward-looking statements, including, but not limited to, the following risks and uncertainties:

· We have limited sources of revenue and there can be no assurance that we will be able to sustain profitability in the future.

· Our financial results are heavily dependent on continued sales of PegIntron and if revenues from these royalties or royalties from the sales of other products materially decline, our results of operations and financial position could be materially harmed.

· The discretion of our Board of Directors to declare dividends and uncertainty regarding the amount and/or timing of excess cash, if any, that will actually be distributed to stockholders.

· Costs associated with workforce reductions and the risk that we may not be able to realize the expected benefits from our recent reductions in our workforce.

· We may outsource certain corporate functions, which could make us more dependent on third-parties to perform these corporate functions.

A more detailed discussion of these risks and uncertainties and other factors that could affect results is contained in our filings with the U.S. Securities and Exchange Commission, including our Annual Report on Form 10-K for the year ended December 31, 2012, as updated in "Item 1A. Risk Factors" of this Quarterly Report on Form 10-Q. These risks and uncertainties and other factors should be considered carefully and readers are cautioned not to place undue reliance on such forward-looking statements. As such, no assurance can be given that the future results covered by the forward-looking statements will be achieved. All information in this Quarterly Report on Form 10-Q is as of the date of this report, unless otherwise indicated, and we undertake no duty to update this information.

  Add ENZN to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for ENZN - All Recent SEC Filings
Sign Up for a Free Trial to the NEW EDGAR Online Pro
Detailed SEC, Financial, Ownership and Offering Data on over 12,000 U.S. Public Companies.
Actionable and easy-to-use with searching, alerting, downloading and more.
Request a Trial      Sign Up Now


Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.