It feels like 2007 has seen more hedge-fund involvement in the biotech sector than at any other time. Last week, Enzon Pharmaceuticals (Nasdaq: ENZN ) became the latest drugmaker to receive interest from a hedge fund.
In a letter attached to a 13D filing, hedge fund DellaCamera Capital Management (DCM) makes a compelling case that shares of Enzon are undervalued and that a negative value has been ascribed to its pipeline.
Much like PDL BioPharma (Nasdaq: PDLI ) , Enzon supports its drug pipeline with royalties paid by drug companies that have licensed its platform technology. In Enzon's case, its PEGylation technology is what brings in the royalty checks. It receives royalties from drugmakers that have developed PEGylated drugs, such as Schering-Plough's (NYSE: SGP ) hepatitis C treatment PEG-INTRON and OSI Pharmaceuticals' (Nasdaq: OSIP ) macular degeneration drug Macugen.
The heart of DCM's case for why Enzon is undervalued is this royalty income. In August, Enzon sold a 25% stake in its PEG-INTRON royalty rights for $92.5 million. By logical extension, this puts the value of the remaining 75% at $277.5 million. This accounts for more than half of Enzon's $520 million enterprise value, and we haven't even gotten to the rest of Enzon's assets yet.
DCM estimates a value of $400 million for all of Enzon's realized and potential royalty streams from drug candidates like Affymax's (Nasdaq: AFFY ) Hematide. For those keeping track at home, this estimate amounts to 77% of Enzon's enterprise value.
If the royalty streams were Enzon's only asset of value, then the value case wouldn't be so interesting, but Enzon also has four marketed drugs that brought in sales of $73 million in the first nine months of 2007, and also a modest in-house pipeline.
Based on an estimated multiple of 3.5 times sales and a $100 million full-year 2007 sales forecast, DCM places a $350 million valuation on Enzon's marketed drugs and counts $40 million for its contract manufacturing business.
Add it all together as DCM does in the 13D:
Enzon Business
|
Estimated Value (in millions)
|
|
Marketed drugs
|
$350
|
|
Royalty streams
|
$400
|
|
Contract manufacturing business
|
$40
|
|
Total value of operations
|
$790
|
At its current enterprise value of $520 million, investors are ascribing a value 34% below DCM's value estimate, and this doesn't even include the value of Enzon's pipeline candidates.
The most sensitive component in DCM's valuation model is the 3.5 times annual sales multiple it is applying to Enzon's marketed drugs. Even applying a much more conservative price-to-sales multiple of 2, shares are still nearly 20% below the calculated value, and that still gives the pipeline an ultra-conservative value of zero. This is why DCM's valuation case for Enzon is so compelling.
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