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ENZN > SEC Filings for ENZN > Form 10-Q on 12-Nov-2013All Recent SEC Filings

Show all filings for ENZON PHARMACEUTICALS INC

Form 10-Q for ENZON PHARMACEUTICALS INC


12-Nov-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 receive revenues from existing licensing arrangements with other companies primarily related to sales of six marketed products, namely, PegIntron®, Sylatron®, Macugen®, CIMZIA®, Oncaspar and Adagen. The primary source of our royalty revenue is PegIntron, which is marketed by Merck. We currently have no clinical operations and limited corporate operations.

We were previously dedicated to the research and development of innovative therapeutics for patients with high unmet medical needs. In December 2012, we announced that our Board of Directors retained Lazard Frères & Co. LLC 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. In the same announcement, the Company also announced that its Board of Directors intends to distribute excess cash, expected to arise from ongoing royalty revenues, in the form of periodic dividends to stockholders.

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") for aggregate consideration of $700,000. The assets sold included (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. The Belrose APA had also provided for the sale by us of our interest in the Locked Nucleic Acid (LNA) Technology platform and related assets for $100,000 at a second closing; however, the conditions to the second closing were not satisfied. 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.

On September 26, 2013, the Company entered into an Agreement of Sublease with Axcellerate Pharma, LLC ("Axcellerate"), pursuant to which the Company will sublease to Axcellerate a portion of the Company's premises consisting of approximately 30,000 rentable square feet of the building located at 20 Kingsbridge Road, Piscataway, New Jersey and a share of related parking areas (the "Sublease"). The Company's premises located at 20 Kingsbridge Road, Piscataway, New Jersey are currently leased by the Company pursuant to an agreement of lease dated as of April 1, 1995, as amended by that certain First Amendment to Lease dated as of November 13, 2001 (the "Prime Lease"), with BDG Kingsbridge L.L.C., predecessor-in-interest to Kingsbridge 2005, LLC ("Prime Landlord"). The Sublease is subject to the Company's receipt of the Prime Landlord's consent to the Sublease. The term of the Sublease will commence on the date that the Company has received the Prime Landlord's consent to the Sublease and will expire on July 30, 2021, which is one day prior to the expiration of the Prime Lease. The rights of Axcellerate under the Sublease will be subject to the terms of the Prime Lease. The monthly fixed rent payable by Axcellerate under the Sublease will be as follows: (i) in year one, $10,417,
(ii) in year two, $15,625, (iii) in year three, $20,833, (iv) in year four, $26,042 and (v) in each of years five through eight, $35,000. The Sublease also provides for Axcellerate to pay additional rent to cover its applicable share of real estate taxes, operating expenses, sewer and gas usage, water usage, electricity usage and certain other charges incurred by Axcellerate.

On October 21, 2013, the Company terminated its License and Collaboration Agreement with Santaris whereby Enzon will return to Santaris the rights to molecules utilizing LNA technology including the mRNA antagonists targeting Hypoxia-Inducible Factor-1 alpha (HIF-1 alpha), the Androgen Receptor (AR), HER3, and Beta-catenin. The termination includes the return of certain product inventory, mutual releases, and a net cash payment to Santaris of approximately $450,000 as well as certain transition expenses to be borne by Enzon of up to $50,000.

We have no intention of resuming any clinical development activities.

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          Nine Months Ended
                        September 30,              September 30,
                             %                           %
                   2013     Change    2012     2013    Change    2012
Royalty revenue   $  8.8      (19)   $ 10.9   $ 26.4     (15)   $ 31.0

We receive income from royalties on sales of products by other companies that use our proprietary PEGylation technology, 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 September 30, 2013 decreased 19% to $8.8 million from $10.9 million for the three months ended September 30, 2012. For the nine months ended September 30, 2013, royalty revenue decreased 15% to $26.4 million from $31.0 million for the nine months ended September 30, 2012, primarily due to declining sales of PegIntron related to changes in the hepatitis market. The Company believes that the sales declines are attributable in part to patient treatment being delayed by health care providers in anticipation of new therapeutic options becoming available.

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

                               Three Months Ended                               Nine Months Ended
                                 September 30,          Dollar    Percent         September 30,        Dollar    Percent
PEGINTRON royalties from:     2013          2012        Change    Change         2013        2012      Change    Change
US sales                     $   0.90     $     1.78   $ (0.88)       -49 %    $    2.87    $  5.75   $ (2.88)       -50 %
Foreign sales - Europe           2.74           3.48     (0.74)       -21 %         7.20       8.84     (1.64)       -19 %
Foreign sales - Japan            1.22           2.23     (1.01)       -45 %         4.73       5.97     (1.24)       -21 %
Foreign sales - Other            2.98           2.87       0.11         4 %         8.63       8.68     (0.05)         0 %
Total                        $   7.84     $    10.36   $ (2.52)       -24 %    $   23.43    $ 29.24   $ (5.81)       -20 %

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 were 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 and nine months ended September 30, 2013, and we will not generate any such revenue in the future. This compares to minimal revenue reported for the three and nine months ended September 30, 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 Revenue

Miscellaneous revenue was $0.6 million for the nine months ended September 30, 2013. In the three months ended March 31, 2013, the Company recorded miscellaneous revenue of $0.55 million representing a milestone event related to the licensing of PEG-SN38 as part of the Collaboration Agreement with Hisun. Hisun has not paid this milestone payment and the Company has determined that there is substantial doubt as to whether it will be paid, resulting in the $0.55 million provision for bad debts. The Company is continuing to negotiate with Hisun to reach a resolution to this matter.

In addition, miscellaneous revenue 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 September 30,              Nine Months Ended September 30,
                                           %
                          2013           Change          2012          2013           % Change          2012
Research and
development -
pipeline               $       0.6            (84)    $       3.9   $       2.5              (85)    $      16.5
Research and
development -
specialty and
contracted services    $       0.0            n.m.    $       0.0   $       0.0              n.m.    $       0.1

n.m. - not meaningful

Research and development - pipeline

During the third quarter of 2013, total spending on our research and development programs decreased by $3.3 million, or 84%, to $0.6 million compared to $3.9 million for the third quarter of 2012. Research and development expense in the third quarter primarily comprised the $0.5 million charge related to the Santaris termination. Clinical development expenses declined by $0.5 million and salaries and benefits expenses declined by $1.5 million as a result of the restructuring implemented in the first half of 2013. Clinical development expenses have declined for the three months ended September 30, 2013 compared to the same three month period of 2012 due to the Company substantially suspending all clinical development activities.

During the first nine months of 2013, total spending on our research and development programs decreased by $14.0 million, or 85%, to $2.5 million compared to $16.5 million for the first nine months of 2012. Salaries and benefits expenses declined by $3.5 million as a result of the restructuring implemented in the fourth quarter of 2011 and the first half of 2013. Clinical development expenses have declined for the nine months ended September 30, 2013 compared to the same nine 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 nine months of 2013.

General and Administrative (in millions of dollars):

                             Three Months Ended September 30,               Nine Months Ended September 30,
                                          %                                               %
                         2013            Change             2012          2013          Change          2012
General and
administrative        $       2.3             (30)       $       3.2   $       7.6           (32)    $      11.2

General and administrative expenses declined by $1.0 million, or 30%, to $2.3 million for the third quarter of 2013 from $3.2 million for the third quarter of 2012. Salaries and benefits expenses declined by $0.4 million as a result of the restructuring implemented in the first half of 2013. The remainder of the decrease in general and administrative expenses was primarily attributable to reduced legal costs and depreciation.

For the nine months ended September 30, 2013, general and administrative expenses declined by $3.6 million, or 32%, to $7.6 million from $11.2 million for the first nine months of 2012. Salaries and benefits expenses declined by $1.8 million as a result of the restructuring implemented in the first half of 2013. The remainder of the decrease in general and administrative expenses was primarily attributable to reduced legal costs 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. The Company continued to reduce its workforce during the second quarter of 2013 from 12 to 5 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. During the second quarter of 2013, the Company incurred restructuring charges of $0.6 million for one-time employee termination benefits and associated costs. During the third quarter of 2013, the Company incurred restructuring charges of $0.8 million, primarily related to the sublease of a portion of its headquarters.

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

                               Three Months Ended September 30,            Nine Months Ended September 30,
                                             %                                             %
                             2013          Change           2012          2013           Change         2012
Other income (expense):
Investment income, net    $       0.0          (100)    $        1.4   $       0.5           (79)    $      2.4
Interest expense                  0.0          (100)           (1.3)         (2.1)           (48)         (4.1)
Other, net                        0.2           n.m.             0.0           1.1           n.m.         (0.2)
                          $       0.2            100    $        0.1   $     (0.5)           (74)    $    (1.9)

n.m. - not meaningful

We had no net investment income for the third quarter of 2013, as compared to $1.4 million for the third quarter of 2012. For the nine months ended September 30, 2013, net investment income was $0.5 million versus $2.4 million for the first nine months of 2012. Substantially all short-term marketable securities matured or were sold to provide liquidity for the special dividend payment and retirement of the notes payable during the second quarter of 2013.

There was no interest expense for the third quarter of 2013, as compared to $1.3 million for the third quarter of 2012. Interest expense was $2.1 million for the first nine months of 2013 versus $4.1 million for the first nine months 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. Additionally, the Company retired the 4% convertible notes during the second quarter of 2013.

Liquidity and Capital Resources

We had cash and cash equivalents of $21.7 million and no marketable securities as of September 30, 2013, as compared to cash, cash equivalents and marketable securities of $196.7 million as of December 31, 2012. The decrease in cash, cash equivalents and marketable securities was primarily attributable to net cash used in financing activities of $186 million, which was attributable to $70.0 million used to pay the June 2013 special cash dividend and $115.8 million used to retire the outstanding principal amount of our 4% convertible notes which matured during June 2013.

For the nine months ended September 30, 2013, net cash provided by operating activities was $10.1 million compared to $2.0 million of net cash provided by operating activities for the nine months ended September 30, 2012.

In the first nine months of 2013, the net cash provided by investing activities was $120.3 million. We sold marketable debt securities to generate cash to pay the June 2013 special cash dividend and to retire the outstanding principal amount of our 4% convertible notes during the second quarter of 2013.

Net cash provided in investing activities was $69.9 million in the first nine months of 2012 as we sold marketable debt securities with a view toward shortening the duration of our portfolio.

Net cash used in financing activities was $186.0 million for the first nine months of 2013 versus $35.3 million net cash used in financing activities for the first nine months of 2012. During the first nine months of 2013, we utilized $70.0 million to pay the special cash dividend in June 2013 and $115.8 million to retire the principal amount of our outstanding 4% convertible notes which matured during June 2013.

In December 21, 2010, our Board of Directors had authorized a share repurchase program under which we are authorized to repurchase up to $200.0 million of our outstanding common stock. Since the inception of this share repurchase program, the cumulative number of shares repurchased and retired through September 30, 2013 amounts to 16,174,568 shares at a total cost of $153.4 million, or an average cost per share of approximately $9.48. We have suspended repurchases under the share repurchase program.

Our current sources of liquidity are (i) cash, (ii) cash equivalents and (iii) royalties (primarily those related to sales of PegIntron).

Based upon our current sources of liquidity, we anticipate our cash and cash equivalents 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 September 30, 2013, we were not involved in any SPE transactions.

Contractual Obligations

Our major outstanding contractual obligations relate to our operating leases and license agreements with collaborative partners. The Company retired its 4% convertible notes during the second quarter of 2013.

On October 21, 2013, the Company terminated its License and Collaboration Agreement with Santaris whereby Enzon will return to Santaris the rights to molecules utilizing LNA technology including the mRNA antagonists targeting Hypoxia-Inducible Factor-1 alpha (HIF-1 alpha), the Androgen Receptor (AR), HER3, and Beta-catenin. The termination includes the return of certain product inventory, mutual releases, and a net cash payment to Santaris of approximately $450,000 as well as certain transition expenses to be borne by Enzon of up to $50,000.

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 September 30, 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.

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 September 30, 2013, we believe 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 within the next twelve months. 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.

. . .

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