Enzon Pharmaceuticals Still Has a Few Puffs Left

I recently opened a small position in Enzon Pharmaceuticals (Ticker: ENZN). Where I normally would disregard a nano-cap penny stock, I was intrigued when I noticed that Carl Icahn is invested in it. The guy is a billionaire. What is he doing fiddling with a $16m market cap company? Additionally, he has already shaken down this very same company multiple times… why take a big stake in November?

Here’s a pretty good Seeking Alpha post which lays it all out, but I’ll recap some points here. Enzon Pharmaceuticals, Inc receives royalty revenues from existing licensing arrangements with other companies primarily related to sales of four marketed drug products: PegIntron, Sylatron, Macugen and CIMZIA. Enzon conducts no R&D and has no operating business at this point, it simply collects royalties on 4 existing drugs The company has no employees, only contractors at this point, and has not even updated its own website in some time apparently.

The company is slowly self-liquidating via dividend distributions over the coming years, and the stock traded down to $0.35/share after distributing a 15 cent dividend in December on a stock price of 45 cents per share. I expect the 2017 distribution will be in the 10 cents range, accounting for a 27.7% yield at the current share price. The stock is a cigar butt investment for Icahn from which he is clipping the dividend, with optionality to the upside from increased royalties from pending FDA approval of SC Oncaspar by Shire and a potential legal win against Nektar. The FDA approval in particular should yield another $5m in royalties.

Currently the company is sitting on $0.14/share in cash, and the stock is currently priced at $0.36. Management disclosed that they expect to receive approximately $29m in royalty revenues from the beginning of 2016 thru 2021 when they will likely liquidate the remaining assets. This estimate does not appear to include either of the two scenarios mentioned above.

I estimate that the company will receive $1.5m in royalties for 4Q16, approximating $9m this year, with the remaining $20m  coming through 2017-2021. I would expect operating expenses to decline to about $1.5m per year. So the company has good line-of-sight to pull in another $20m in cash over the next 5 years, minus $7.5m in expenses ($1.5 x 5), yielding an additional $14.5m in cash flow. Added to the current balance sheet assets of $21.74 million and subtracting the December dividend payment of $6.63 million, I get a fair value of $29.61m, or $0.67/share vs the closing price today of $0.36/share. Getting more conservative and only adding in the cash on the balance sheet (ignoring $8.61m in tax deferred assets) gives me a fair value of $21m or $0.48 /share. This is not including the Shire and Nektar optionality mentioned above.

Normally I stay away from penny stocks, but this is a legitimate business, and investors appear to be mispricing the future royalty streams. Additionally, when the company was delisted from the NASDAQ this likely forced several institutional investors to sell their positions due to internal investment policies. They typically can’t invest in over-the-counter stocks, or stocks trading under $5/share, or nano-caps.

On top of that, liquidating trusts (which Enzon will eventually become) currently have very odd tax penalties associated with them. This actually makes the most tax-appropriate investment in ENZN a tax-protected account in an amount small enough that it does not risk hitting the $1,000/year UBTI taxable threshold. We have to be careful about sizing so that the liquidated value returned to shareholders in any year do not exceed $1,000. For small investors like me, this is an attractive stock to open a small position in, and will remain highly unattractive to institutional investors as a nano-cap penny stock with taxable liquidation distributions. But we aren’t buying it on the expectation of share price appreciation we’re buying it for cash flow.

If the existing royalties do not collapse, and no additional royalties or immunity fees pan out, investors are conservatively looking at a cash return over the next 5 years of between  130-180% at the current price of $0.36 per share.

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Author: secondhandstocks

The genesis for this blog stems from a Marine buddy and I came back from Afghanistan with more money than knowledge, and heedlessly tossed our hats into the stock market ring. A few months later, I remember discovering the classic book The Intelligent Investor by Graham and Dodd, and ravenously devouring my first introduction to value investing. That framework - with some generous additions by Seth Klarman, and Joel Greenblatt among others - guides my investment philosophy. I spent five years working in the intelligence field, both in the Marine Corps and then for a government agency after that. I speak Arabic and Pashto, have programming and analysis experience, and enjoy investing in technology companies as a hobby. I also spent a year on Wall Street working on a #1 Ranked Institutional Investor team, before deciding that that the Sell-Side was not for me.

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