We are downgrading Enzon Pharmaceuticals (ENZN) to Underperform from Neutral because of concerns regarding the disappointing third quarter results, declining royalty revenues, the principal source of revenues at Enzon and the early stage pipeline.
Based in Bridgewater, New Jersey, Enzon is a biopharmaceutical company dedicated to the discovery, development, and commercialization of therapeutics to treat cancer and other life-threatening diseases.
There are a number of reasons for the negative sentiment regarding Enzon. Following the sale of the specialty pharmaceutical business earlier in the year, Enzon has no marketed product and its revenues consist primarily of royalties. For example, approximately 82% of third quarter 2010 revenues came from royalties.
However, royalty revenues, the majority of which comes from the sale of Merck & Co. Inc.’s (MRK) PegIntron, declined 16% in the most recent quarter due to reduced sales of the drug. This has the potential to hurt the company’s top line if sales continue to decline.
Declining royalty revenues was the primary reason for Enzon missing the Zacks Consensus Revenue Estimate and for reporting a wider loss. We believe Enzon must deliver new products in order to offset the slowing royalty revenues.
We are also concerned about the early stage status of the pipeline at Enzon. It has faced its share of pipeline setbacks as well. The company was carrying out the development of rhMBL for chemotherapy related infections.
However, in February 2009, Enzon had a major setback as it had to discontinue the rhMBL clinical program on being unable to meet certain criteria for development. Any similar hiccups regarding pipeline development will weigh heavily on the stock.
Even though the debt burden at Enzon is down significantly following the sale of its specialty pharmaceutical business, we believe that the company is not totally immune to financial pressures. With Enzon actively focusing on developing its pipeline, operating expenses should increase in the coming quarters, which will add to the financial pressure.
These headwinds cause us to believe that there exists little reason for investors to own the stock at current levels. Consequently, we downgrade Enzon to Underperform with a price target of $9.75.
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