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-K on 14-Mar-2014All Recent SEC Filings

Show all filings for ENZON PHARMACEUTICALS INC

Form 10-K for ENZON PHARMACEUTICALS INC


14-Mar-2014

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion of our financial condition and results of operations should be read together with our consolidated financial statements and notes to those statements included elsewhere in this Annual Report on Form 10-K.

Forward-Looking Information and Factors That May Affect Future Results

The following discussion contains forward-looking statements within the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. All statements contained in the following discussion, 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 "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 the risks and uncertainties set forth in Item 1A. Risk Factors. These risks and uncertainties 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.

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.

Overview

We receive royalty revenues from existing licensing arrangements with other companies primarily related to sales of six marketed drug products, namely, PegIntron®, Sylatron®, Macugen®, CIMZIA®, Oncaspar and Adagen. The primary source of our royalty revenues is sales of PegIntron, which is marketed by Merck. We currently have no clinical operations and limited corporate operations. Royalty revenues from sales of PegIntron accounted for approximately 87%, 93% and 94% of our total royalty revenues in 2013, 2012 and 2011, respectively.

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 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, we announced that we had concluded a review of the sale or disposition of one or more corporate assets or a sale of our company. The review did not result in a definitive offer to acquire our company or all or substantially all of our assets. In the same announcement, we also announced that our Board of Directors intends to distribute excess cash, expected to arise from ongoing royalty revenues, in the form of periodic dividends to stockholders.

In April 2013, we entered into an asset purchase agreement with Belrose for the sale of all right, title and interest to our Customized PEGylation platform and related assets. The assets included (i) intellectual property and know-how associated with the PEGylation platform, (ii) patents and know-how related to PEG SN-38, (iii) patents and know-how associated with certain of our internal clinical programs and (iv) certain related supplies and equipment. In September 2013, we entered into a sublease agreement, which was amended and restated in November 2013, with Axcellerate, pursuant to which we sublease to Axcellerate a portion of our 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 term of the sublease commenced on November 14, 2013 and will expire on July 30, 2021. The monthly fixed rent payable by Axcellerate to us under the sublease is 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.

In October 2013, we terminated our License and Collaboration Agreement with Santaris whereby we returned 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.

We wound down our remaining research and development activities during 2013. We have no intention of resuming any clinical development activities or acquiring new sources of royalty revenues.

Results of Continuing Operations (in millions of dollars):

                                                    For the Year Ended December 31,
                                                  2013           2012           2011
Revenues:
Royalties                                      $      33.8    $      41.5    $      40.9
Sale of in-process research and development              -              -            5.0
Contract research and development                        -             .1            1.5
Miscellaneous income                                    .7            1.0            0.7
Total revenues                                        34.5           42.6           48.1
Operating expenses:
Research and development - pipeline                    2.7           20.9           40.2
Research and development - specialty and
contracted services                                      -             .1            1.0
General and administrative                             8.8           14.5           17.3
General and administrative - contracted
services                                                 -              -            0.1
Impairment of property and equipment                     -           11.3              -
Restructuring charges                                  4.8           (.2)            6.0
Operating income (loss)                               18.2          (4.0)         (16.5)
Other expense, net                                       -          (2.9)          (4.1)
Income tax (expense) benefit                             -            4.1          (0.2)
Net income (loss)                              $      18.2    $     (2.8)    $    (20.8)

Overview

The sale of our former specialty pharmaceutical business in January 2010 had numerous effects on our financial results. The sale of in-process research and development for $40.9 million in 2010 and the related $5.0 million milestone payment received in 2011 were part of the total sale of our former specialty pharmaceutical business but are reported as part of continuing operations because we had operated as a research and development organization.

Royalty Revenues (in millions of dollars):

                          For the Year Ended December 31,
                                 %                   %
                    2013       Change     2012    Change     2011

Royalty revenue   $   33.8        (18)   $ 41.5         1   $ 40.9

Most of our royalty revenues are derived from sales of PegIntron. Royalty revenues from sales of PegIntron accounted for approximately 87%, 93% and 94% of our total royalty revenues in 2013, 2012 and 2011, respectively. The following table summarizes our PegIntron royalties earned in 2013, 2012 and 2011:

PegIntron royalties from (in millions of dollars):

                              For the Year Ended December 31,
                                    %                 %
                          2013    Change    2012    Change    2011

U.S. sales               $  3.4     (52)   $  7.1       34   $  5.3

Foreign sales - Europe      8.9     (18)     10.9      (2)     11.1

Foreign sales - Japan       5.8     (31)      8.4     (24)     11.0

Foreign sales - Other      11.2      (7)     12.1        9     11.1

Total                    $ 29.3            $ 38.5            $ 38.5

Other royalty revenues and certain licensing revenues relate to the application of our technology to third-party products including those under a cross-license agreement with Nektar Therapeutics, Inc. (Nektar) under which we receive a share of the royalties and licensing income received by Nektar. There are currently three third-party products for which Nektar has granted sublicenses to our PEGylation technology and for which we are participating in royalty and licensing income revenues: UCB's CIMZIA for the treatment of Crohn's disease and rheumatoid arthritis in the European Union and Valeant and Pfizer's Macugen for the treatment of neovascular (wet) age-related macular degeneration. As part of the January 2010 sale of our former specialty pharmaceutical business, we are also entitled to royalties from the purchaser of such business of 5 to 10 percent on incremental net sales above a 2009 baseline amount through 2014 from the four marketed drug products we sold to them, namely, Adagen®, Oncaspar®, Abelcet®, and DepoCyt®.

Royalty revenues decreased approximately 18% in 2013 compared to 2012. This was driven by a 24% decrease in royalties on PegIntron, partially offset by an increase in royalties from Nektar and Sigma Tau. Merck reported that worldwide sales of PegIntron declined 24% to $496 million in 2013 compared with 2012 reflecting declines in all regions and that it believes the sales declines are attributable in part to patient treatment being delayed by health care providers in anticipation of new therapeutic options becoming available.

Royalty revenues increased approximately 1% in 2012 compared to 2011. This was driven almost entirely by a 65% increase in royalties on CIMZIA compared to 2011. Royalties on PegIntron in 2012 were flat versus 2011. MACUGEN royalties in 2012 declined 28.7% compared to 2011. Royalty revenues for OMONTYS in the amount of $0.3 million was recorded for the first time in 2012.

Our future revenues are heavily weighted towards royalties and revenues to be received from the use of our technology and are dependent upon numerous factors outside of our control. We derive most of our royalty revenues from sales of PegIntron, which have been in decline since 2008. Merck's obligation to pay us royalties on sales of PegIntron terminates, on a country-by-country basis, upon the later of the date on which the last patent to contain a claim covering PegIntron expires in the country or 15 years after the date on which PegIntron was first approved for commercial marketing in such country. Currently, expirations of our right to receive royalties are expected to occur in 2016 in the U.S., 2018 in Europe and 2019 in Japan.

Other factors potentially affecting our royalty revenues include new or increased competition from products that may compete with the products for which we receive royalties, the effectiveness of marketing by our licensees, and new uses and geographies for PegIntron, CIMZIA and Macugen. Our rights to receive royalties on CIMZIA, Macugen, and OMONTYS will terminate in 2014. After the expiration of the patents and royalties, we are entitled to immunity fees on a country-by-country and product-by-product basis for up to twelve years from the date of first sale of these drugs.

Sale of In-Process Research and Development

When we sold our former specialty pharmaceutical business in January 2010, we had retained our research and development organization. We had been engaged in studies oriented towards the next-generation formulations of Oncaspar and Adagen, two products that were among those sold as part of our former specialty pharmaceutical business. No revenue was recognized in 2013 or 2012. During the first quarter of 2011, we earned and recognized a $5.0 million milestone payment related to divested in-process research and development. The selling price of the in-process research and development represented management's best estimate of its standalone fair value based on the stage of development and future milestone payment consideration.

Contract Research and Development Revenue

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. We were being compensated for this work at actual cost plus a mark-up per the terms of the transition services agreement. Revenue was generated from these services in the amount of $0, $0.1 million and $1.5 million for the years ended December 31, 2013, 2012, and 2011, respectively. 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 2011 and 2012. The transition services agreement was terminated by the purchaser on September 30, 2012.

Other Revenue

Under the terms of the asset purchase agreement for the sale of our former specialty pharmaceutical business (which was completed in January 2010), we were entitled to receive up to an additional $27.0 million in milestone payments if certain conditions are met. Of this amount, we earned and received a $5.0 million milestone payment in the first quarter of 2011, and another $5.0 million is no longer considered likely to be received. There can be no assurance that we will receive any of the remaining $17.0 million in milestone payments. In addition, we may receive royalties of 5 to 10 percent on incremental net sales above a 2009 baseline amount of our former four marketed specialty pharmaceutical products through 2014.

Miscellaneous Income

Miscellaneous income includes rental receipts totaling approximately $0.1 million, $0.6 million and $0.6 million in 2013, 2012 and 2011, respectively, in connection with the sublease of unused manufacturing and excess office facilities for which we have ongoing lease commitments. The underlying rental expense is reflected in general and administrative expense. On September 26, 2013 and as restated and amended on November 13, 2013, we entered into an Agreement of Sublease with Axcellerate pursuant to which we sublet to Axcellerate a portion of our 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 underlying rental payments are reflected in miscellaneous income.

In addition, during the second quarter of 2012, we received a non-refundable, non-creditable upfront payment of $0.2 million related to the licensing of PEG-SN38 as part of the Collaboration Agreement with Hisun. Also, as part of the transition services agreement referred to above, we were compensated for various general and administrative services provided to the purchaser of our former specialty pharmaceutical business. The compensation for this work includes reimbursement of costs incurred plus a mark-up defined in the agreement. Miscellaneous revenue was $0.6 million for the year ended December 31, 2013, representing a milestone event as part of the 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 $0.6 million provision for bad debts. The Company is continuing to negotiate with Hisun to reach a resolution to this matter. Approximately $0.1 million has been earned for the transition services in each of the years ended December 31, 2012 and 2011. The expenses incurred in relation to these services are reported as general and administrative - contracted services. Our involvement in the transitioning of general and administrative activities was essentially concluded during 2011.

Research and Development Expenses - Pipeline (in millions of dollars)

The Company was previously dedicated to the research and development of
innovative therapeutics for patients with high unmet medical needs.
Substantially all of our research and development activities were halted in
2012, and we wound down our remaining research and development activities during
2013. We have no intention of resuming any clinical development activities.

                                           For the Year Ended December 31,
                                                  %                  %
                                     2013      Change     2012    Change     2011

Research and development expenses   $   2.7       (87)   $ 20.9      (48)   $ 40.2

The following table summarizes our major pipeline research and development projects, the costs incurred for the years ended December 31, 2013, 2012 and 2011 and the latest phases of development (millions of dollars):

                                     For the Years Ended
                                         December 31,
Category                         2013         2012       2011     Latest Phase of Development
PEG-SN38                                                          Phase I and Phase II,
                               $     0.8    $    4.4   $   15.0   Transferred to Belrose
                                                                  Phase I, Returned to
HIF - 1a antagonist                    -         0.6        2.6   Santaris
                                                                  Phase I, Returned to
Survivin antagonist                    -         0.3        1.0   Santaris
                                                                  Phase I, Returned to
Androgen Receptor antagonist         0.1         4.8        4.8   Santaris
Depreciation                           -         3.1        3.4
                                                                  Pre-clinical, Returned to
Additional LNA targets                 -         0.2        0.9   Santaris
                                                                  Pre-clinical, Transferred
PEGylation technology (1)              -         1.9          -   to Belrose
Other R&D costs - pipeline           1.8         5.6       12.5
Total R&D - pipeline           $     2.7    $   20.9   $   40.2

(1) In 2012, expenses for PEGylation technology were allocated separately, while in 2011 they were included in other R&D costs.

Research and development expenses consist primarily of contractor fees principally related to clinical projects; costs related to research and development collaborations or licenses; drug supplies for preclinical and clinical activities; salaries, stock-based compensation and benefits; other research supplies and facilities charges. Program costs are those research and development costs which are directly related to specific programs that are tracked and managed at the individual program level. Other research and development costs are those costs incurred related to the Company's on-going research and development activities, such as some personnel and facilities-related expenses, which are not allocated to specific programs given their general nature.

For the year ended December 31, 2013, research and development expenses decreased 87% to $2.7 million. The Company was primarily engaged in winding down its research and development activities in 2013.

For the year ended December 31, 2012, research and development expenses decreased 48 percent to $20.9 million. We invested in the following programs during 2012:

· PEG-SN38 - Spending on PEG-SN38 decreased in 2012 as clinical activity decreased. Spending on PEG-SN38 increased in 2011 as clinical activity increased in the Phase II metastatic colorectal cancer study, the Phase II metastatic breast cancer study, and the Phase I pediatric study. Enrollment stopped in 2012 in the Phase I pediatric study, and stopped in the two Phase II studies in 2011.

· HIF-1? antagonist - Spending on the HIF-1? antagonist program decreased in 2012 versus 2011. Spending for 2012 was substantially lower than 2011 due to having completed enrollment in the two Phase I studies. In late 2013, Enzon returned this project to Santaris.

· Survivin antagonist - Spending on the Survivin mRNA antagonist program decreased in 2012 versus 2011 due to having completed enrollment in the Phase I study. In late 2012, Enzon returned this project to Santaris.

· Androgen Receptor (AR) antagonist - Spending on the AR mRNA antagonist program remained stable in 2012 versus 2011 as the Phase I study in patients with castrate resistant prostate cancer continued to accrue patients. In December 2012, Enzon decided to suspend clinical development of this program. In late 2013, Enzon returned this project to Santaris.

· Additional LNA targets - Under our agreement with Santaris, we had the right to develop and commercialize RNA antagonists directed against additional novel oncology gene targets selected by us, which were HER3 and ß-catenin. This agreement provided that any one of the compounds licensed by us could be returned to Santaris if the findings of our preclinical or clinical work did not support our continued investment. We returned three of the targets to Santaris during 2011 and one target to Santaris during 2012 and our remaining targets to Santaris during 2013. In 2013, 2012 and 2011, there were no milestone payments made to Santaris on our remaining targets.

Research and Development Expenses - Specialty and Contracted Services

Expenses associated with generating contract research and development revenue amounted to $0.1 million and $1.0 million in 2012 and 2011, respectively.

General and Administrative Expenses (in millions of dollars):

                                             For the Year Ended December 31,
                                                %                   %
                                      2013    Change      2012    Change      2011

General and administrative expenses   $ 8.8     (39)     $ 14.5     (17)     $ 17.3

General and administrative expenses consist primarily of salaries and benefits for support functions; outside professional services for accounting, audit, tax, legal, and financing activities; depreciation; patent filing fees and facilities costs.

For the year ended December 31, 2013, general and administrative expenses were $8.8 million, down 39% from the prior year. The change in 2013 from 2012 was largely the result of a continued restructuring program. Other factors included a reduction in force and lower contractor services, insurance, rent, stock compensation expense, depreciation, and auditing/accounting fees.

For the year ended December 31, 2012, general and administrative expenses were $14.5 million, down 17% from the prior year. The decline in 2012 from 2011 was largely the result of a continued restructuring program. Others factors included a reduction in force and lower contractor services, insurance, rent, stock compensation expense, depreciation, and auditing/accounting fees. In addition, during the second quarter of 2012, we recognized $0.8 million for severance payments and benefits related to the departure of our former Principal Executive Officer, Chief Operating Officer, Executive Vice President and Chief Financial Officer that were payable under the terms of her Severance and Release Agreement.

For the year ended December 31, 2011, general and administrative expenses were $17.3 million, down 32% from the prior year. The decline from the preceding year was largely the result of a restructuring program implemented in the fourth quarter of 2010, which reduced the number of employees and therefore the associated payroll costs, as well as the effects of our on-going cost containment efforts, including consolidation of facilities into the Piscataway, New Jersey location from our former Bridgewater, New Jersey headquarters facility.

General and Administrative Expenses - Contracted Services

As part of the transition services agreement with the purchaser of our former specialty pharmaceutical business, we provided certain general, administrative, financial, legal, human resource and information technology services for a period of up to one year. We were compensated for these services based upon costs incurred plus a mark-up defined in the transition services agreement. This administrative support activity effectively concluded in 2011, during which we received approximately $2 million.

Impairment of Property and Equipment

We continually evaluate property and equipment, including leasehold improvements, to determine whether events or changes in circumstances have occurred that may warrant revision of the estimated useful life or whether the remaining balance should be evaluated for possible impairment. We use an estimate of the related undiscounted cash flows over the remaining life of the property and equipment in assessing whether an asset has been impaired. We measure impairment losses based upon the amount by which the carrying amount of the asset exceeds the fair value. See Note 2 of the Notes to Consolidated Financial Statements for information about our fair value of property and equipment. For the year ended December 31, 2012, we recorded $11.3 million of non-cash impairment charges related to our property and equipment to reduce the carrying value of these assets to fair market value. These charges mostly relate to leasehold improvements representing the Company's process development laboratory and related equipment and were considered necessary in view of the Company's announcement of plans to suspend all clinical development activities.

Restructuring

In December 2012, we made an announcement that contemplated a reduction in our workforce of approximately 15-20 employees and in March 2013, we announced a plan to further reduce our workforce from 19 employees to 12 employees.

As a result of our transition from a fully integrated biopharmaceutical company with research, manufacturing and marketing operations to a biotechnology company dedicated to oncology research and development, we undertook reductions in our workforce during 2011. In connection with our decision to exit our former headquarters facility in Bridgewater, New Jersey, we also incurred lease-related charges and wrote-off certain furnishings and leasehold improvements in 2011.

We incurred the following costs in connection with our restructuring programs during the years ended December 31, 2013, 2012 and 2011 (in thousands of dollars):

                                   For the Year Ended December 31,
                                   2013           2012          2011
Employee separation benefits:
Fourth-quarter 2013             $     1,018    $         -    $      -
Third-quarter 2013                       25              -           -
Second-quarter 2013                     596              -           -
First-quarter 2013                    2,394              -           -
Fourth-quarter 2011                       -           (19)       1,485
Third-quarter 2011                     (32)          (200)       2,835
Second-quarter 2011                       -              -         734
. . .
  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
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.