Urges Company to Take Further Concrete Steps, in Addition to Proposed Spin-Off of Biotechnology Business, to Maximize Value
NEW YORK--(BUSINESS WIRE)--DellaCamera Capital Management, LLC, a beneficial holder of 5.9% of the shares of Enzon Pharmaceuticals, Inc. (NASDAQ: ENZN), today sent the following letter to Enzon’s Board of Directors:
May 20, 2008
The Board of Directors
Enzon Pharmaceuticals, Inc.
685 Route 202/206
Bridgewater, NJ 08807
We were initially encouraged that Enzon (the “Company”) on May 7 had announced a plan to spin-off its biotechnology business, as we viewed it as a first step towards creating value; unfortunately, however, shareholders need to see much more concrete and immediate action from the Company to increase value.
While the spin-off of the Company’s biotechnology business may ultimately serve to crystallize the value of these unique assets, it is clear to us that Enzon must take the next logical step and explore all strategic alternatives for the Company’s remaining commercial operations (its marketed products, royalties, and manufacturing businesses), including the sale of the commercial operations as a whole. As such, we demand that Enzon formally engage its advisor Goldman Sachs, or another investment banking firm, to assist in this process. As we discuss below, the significant cash-generating ability of the commercial operations makes them highly financeable and the synergies that a strategic buyer could bring to the mix are significant. Accordingly, there are a myriad of creative transactions that could be effected.
Information taken from the Company’s 10-K for the Fiscal Year Ended December 31, 2007 provides the following graphic illustration of the significant cash generating capabilities of the commercial operations in 2007:
Total Enzon Operating Income $90.5 MM
Less: Gain on Sale of Royalty Interest (88.7) MM
Add: Restructuring Charge 7.7 MM
Adjusted Operating Income 9.6 MM
Add: Depreciation and Amortization 16.9 MM
Add: Share-Based Compensation 8.3 MM
Add: Non-Commercial R & D 45.5 MM
Adjusted EBITDA of Commercial Operations $80.2 MM
Add: Overhead Reduction/Marketing Synergies 25.0 MM
Potential EBITDA of Commercial Operations to Acquiror $105.2 MM
As illustrated above, the Company’s commercial operations generated over $80 million in adjusted EBITDA in 2007. It has long been our contention, however, that Enzon’s cost structure is inordinately high. Accordingly, we believe that there are at least $25 million of excess SG&A expenses that could be eliminated should the Company pursue a rationalization of its commercial operations. We note that the Company spent $31.9 million on selling and marketing expenses alone in its marketed products segment in 2007. As an additional data point, the following information detailing the Company’s five most highly-compensated executives was taken from page 21 of the Company’s 2008 Proxy Statement:
Name Principal Position Total 2007 Compensation
Jeffrey H. Buchalter Chairman, President, and CEO $5,181,117
Craig A. Tooman EVP, Finance and Chief Financial Officer $1,673,573
Ivan D. Horak, M.D. EVP, R&D and Chief Scientific Officer $1,820,115
Ralph del Campo EVP, Technical Operations $1,354,414
Paul S. Davit EVP, Human Resources $898,516
These compensation figures seem excessive when viewed in the context of a small-cap company that has a current market value of less than $400 million. Indeed, we believe that $25 million of potential cost reductions may be a conservative estimate.
As to the biotechnology company resulting from the spin-off, details have been lacking as to which projects Mr. Buchalter intends to pursue that would require Enzon to capitalize such company with $150 million in cash. A disturbing corollary to this is Mr. Buchalter’s current lack of desire to pursue partnering transactions for any of Enzon’s LNA compounds, as he articulated in the Company’s May 7 conference call. While we understand the desire to maintain ownership of a compound for as long as possible, this desire must be balanced by the economic realities of the marketplace. As we have mentioned in the past, partnering activity has been rampant and Enzon possesses a broad platform of compounds that could attract multiple partners. It smacks of hubris to force the shareholders to assume all the risk of product development and we call upon Mr. Buchalter to re-assess this posture regarding partnering transactions.
Above all, we must question the timing of the Company’s announcement, as a spin-off of Enzon’s biotechnology business should have been effected some time ago. Accordingly, we are looking for assurances that the Company is not using and will not use this spin-off as a defense mechanism to discourage potential buyers from seeking to purchase the entire Company. If in fact there are buyers willing to purchase the entire Company, we demand that the Board bring such proposals to the shareholders to evaluate.
It should be clear that we wish to see maximum value delivered to the shareholders of Enzon, and it is our hope that the steps that we have outlined above are implemented in the immediate future.
Richard P. Mansouri
Sard Verbinnen & Co.
Dan Gagnier/Renee Soto, 212-687-8080