Enzon Pharmaceuticals Inc (OTCMKTS:ENZN): Icahn's Done His Sums

Enzon Pharmaceuticals Inc (OTCMKTS:ENZN) is an interesting one. The company just gained close to 25% on a 13G filing that revealed Carl Icahn has a close to 15% holding, and has held a position since at least July last year. The thing is, however, Enzon doesn't really have any ongoing operations, and no development pipeline to speak of, so what does Icahn see in it, and why is he adding to his position?It's all about royalties.Enzon generates all of its revenues from royalties rooted in drug development and commercialization partnerships from its legacy pipeline. All of these products are based on a technology proprietary to the company, called Customized PEGylation Linker Technology. This product underpins four primary products from which Enzon picks up royalties – PegIntron, Sylatron, Macugen, CIMZIA.The first of these products accounts for the majority of revenues generated through its royalty agreements (although this majority is declining slightly as time goes by), and – as such – it is the primary value driver for the company right now. As per the latest financial statement (third quarter 2016) the drug, which is commercialized and marketed by pharma giant Merck & Co., Inc. (NYSE:MRK), accounted for approximately 61% and 83% of Enzon's total royalty revenues for the third quarter, 2016 and 2015, respectively. For the nine-month periods ended September 30, 2016 and 2015, respectively, these numbers change to 70% and 80%, for the years ended December 31, 2015 and 2014, respectively, to 80% and 79%.So what is the product, and why is its generating revenues? The name is a commercial moniker for peginterferon alfa-2b, and it is a hepatitis C injectable, primarily used for the treatment of chronic hepatitis. It's used all over the world, and at one point, was one of the industry bestsellers. However, over time, more and better alternatives have become available. One of the leading examples of this right now is Gilead Sciences, Inc. (NASDAQ:GILD)'s Sovaldi. This said, with the latter selling for around $1000 per pill, drugs like Enzon's PegIntron, which is widely covered by insurance and subsidized in developing markets, is and – albeit substandard – viable alternative.­Anyway, none of that is really important right now, what we're looking at is a simple bit of math to determine whether – in the wake of the recent boost – there is any value buying into the company as things stand.Management stated that they expect to receive an aggregate of $21 million in royalty revenues between start 2016 and 2021. At this latter date, we expect Enzon to essentially liquidate. For the first nine months of this year, the company received $7.4 million of these revenues, and for the purposes of this calculation, let's assume this rises to $9 million for the full year. That leaves $12 million worth revenues left to collect. Operating expenses come in at anywhere between $1 million to $1.3 million annually, but we expect this to decline considerably as we head in to the later end of the period in question, so let's say $4 million operating expenses across the period. So, between now and 2021 the company should bring in $12 million and spend no more than $4 million, leaving $8 million left to be distributed as dividends. Current cash holding comes in just shy of $13 million, and there are another $13 million worth of current assets on the books. Cash plus current assets totals $26 million, and expected royalty revenues come in at $12 million. That's $38 million worth of assets over the next four or five years. Minus the $4 million in expenses, and we are looking at a valuation of somewhere in the region of $34 million. Liabilities are essentially zero (around $160,000 based on some lease termination costs) and the company delisted earlier this year, which will reduce any filing costs or associated expenses. Compare this valuation with the current market capitalization of a little over $21.2 million, and there is just short of a $13 million shortfall.The bottom line, then?Yes, there's value left over given current market cap and expected revenues, combined with liquidation asset value. The primary risk is rooted in the royalty revenues not meeting the company's expectations, but as a speculative play, this one looks reasonable, and Icahn agrees. Of course, he got in at a discount to the current price.We will be updating our subscribers as soon as we know more. For the latest updates on ENZN, sign up below!Disclosure: We have no position in ENZN and have not been compensated for this article.