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EXCEL - IDEA: XBRL DOCUMENT - ENZON PHARMACEUTICALS, INC.Financial_Report.xls
EX-32.1 - EXHIBIT 32.1 - ENZON PHARMACEUTICALS, INC.v324822_ex32-1.htm
EX-10.5 - EXHIBIT 10.5 - ENZON PHARMACEUTICALS, INC.v324822_ex10-5.htm
EX-10.1 - EXHIBIT 10.1 - ENZON PHARMACEUTICALS, INC.v324822_ex10-1.htm
EX-31.1 - EXHIBIT 31.1 - ENZON PHARMACEUTICALS, INC.v324822_ex31-1.htm
EX-32.2 - EXHIBIT 32.2 - ENZON PHARMACEUTICALS, INC.v324822_ex32-2.htm
EX-10.4 - EXHIBIT 10.4 - ENZON PHARMACEUTICALS, INC.v324822_ex10-4.htm
EX-10.2 - EXHIBIT 10.2 - ENZON PHARMACEUTICALS, INC.v324822_ex10-2.htm
EX-10.3 - EXHIBIT 10.3 - ENZON PHARMACEUTICALS, INC.v324822_ex10-3.htm
EX-31.2 - EXHIBIT 31.2 - ENZON PHARMACEUTICALS, INC.v324822_ex31-2.htm
EX-10.6 - EXHIBIT 10.6 - ENZON PHARMACEUTICALS, INC.v324822_ex10-6.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

x     QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2012

 

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ___ to ___

 

Commission file number 0-12957

 

Enzon Pharmaceuticals, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware 22-2372868
(State of incorporation) (I.R.S. Employer Identification No.)
   
20 Kingsbridge Road, Piscataway, New Jersey  08854
(Address of principal executive offices) (Zip Code)

 

(732) 980-4500

(Registrant’s telephone number, including area code)

 

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

__________

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer ¨ Accelerated filer x Non-accelerated filer ¨ Smaller reporting company ¨

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

 

 

Shares of Common Stock outstanding as of October 24, 2012: 44,417,684

 

 
 

 

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements.

 

ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

(Unaudited)

 

   September 30,
2012
   December 31,
2011
 
         
ASSETS          
           
Current assets:          
  Cash and cash equivalents  $140,946   $104,324 
  Marketable securities – available-for-sale   137,492    58,188 
  Other current assets   2,236    2,749 
      Total current assets   280,674    165,261 
Property and equipment, net of accumulated
depreciation of $43,992 at September 30, 2012 and
$40,573 at December 31, 2011
   13,323    16,802 
Marketable securities – available-for-sale   10,299    160,779 
Other assets   172    367 
      Total assets  $304,468   $343,209 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
           
Current liabilities:          
  Accounts payable  $1,058   $1,572 
  Accrued expenses and other current liabilities   7,394    13,692 
  Notes payable   115,849    - 
      Total current liabilities   124,301    15,264 
           
Notes payable   -    129,499 
Other liabilities   452    1,265 
      Total liabilities   124,753    146,028 
           
Commitments and contingencies          
           
Stockholders’ equity:          
Preferred stock - $.01 par value, authorized 3,000,000 shares;
no shares issued and outstanding at September 30, 2012 and
December 31, 2011
   -    - 
Common stock - $.01 par value, authorized 170,000,000 shares;
issued and outstanding 45,207,688 shares at September
          
    30, 2012 and 48,292,702 shares at December 31, 2011   452    483 
  Additional paid-in capital   321,840    341,760 
  Accumulated other comprehensive income   113    3 
  Accumulated deficit   (142,690)   (145,065)
      Total stockholders’ equity   179,715    197,181 
      Total liabilities and stockholders’ equity  $304,468   $343,209 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

2
 

 

ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands, except per share amounts)

(Unaudited)

    Three months ended     Nine months ended  
    September 30,     September 30,  
    2012     2011     2012     2011  
Revenues:                                
   Royalties   $ 10,919     $ 10,207     $ 31,011     $ 31,141  
   Sale of in-process research and development     -       -       -       5,000  
   Contract research and development     -       54       136       1,379  
   Miscellaneous income     202       179       806       541  
      Total revenues     11,121       10,440       31,953       38,061  
                                 
Operating expenses:                                
  Research and development – pipeline     3,954       10,436       16,541       31,045  
  Research and development – specialty and contracted services     10       47       123       878  
  General and administrative     3,209       4,102       11,242       13,815  
  General and administrative – contracted services     -       2       -       114  
  Restructuring charges     (113 )     3,616       (220 )     4,649  
      Total operating expenses     7,060       18,203       27,686       50,501  
                                 
Operating income (loss)     4,061       (7,763 )     4,267       (12,440 )
                                 
Other income (expense):                                
  Investment income, net     1,386       407       2,387       1,252  
  Interest expense     (1,274 )     (1,480 )     (4,055 )     (4,439 )
  Other, net     2       (69 )     (191 )     90  
       Total other income (expense)     114       (1,142 )     (1,859 )     (3,097 )
                                 
Income (loss) before income tax expense     4,175       (8,905 )     2,408       (15,537 )
Income tax expense     -       200       33       205  
       Net income (loss)   $ 4,175     $ (9,105 )   $ 2,375     $ (15,742 )
                                 
Earnings (loss) per common share:                                
Basic   $ 0.09     $ (0.19 )   $ 0.05     $ (0.30 )
Diluted   $ 0.08     $ (0.19 )   $ 0.05     $ (0.30 )
                                 
Weighted-average shares outstanding  – basic     46,387       48,729       47,614       53,131  
Weighted-average shares outstanding – diluted     58,563       48,729       47,671       53,131  
                                 
Other comprehensive income (loss):                                
  Available-for-sale marketable securities:                                
Unrealized holding gains (losses) arising during period     590       (323 )     1,070       (601 )
Reclassification adjustment for realized gains on sales included in net income (loss)     (979 )     (139 )     (960 )     (219 )
Total other comprehensive income (loss)     (389 )     (462 )     110       (820 )
                                 
    Comprehensive income (loss)   $ 3,786     $ (9,567 )   $ 2,485     $ (16,562 )

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

3
 

 

ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

   Nine months ended 
   September 30, 
   2012   2011 
         
Cash flows from operating activities:          
Net income (loss)  $2,375   $(15,742)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:          
            Depreciation   3,500    4,002 
            Amortization and write-off of debt issuance costs   425    404 
            Stock-based compensation and employee purchase plan discount   1,550    2,726 
            (Gains) on sales of marketable securities   (960)   (219)
            Losses on early retirement of notes payable   212    - 
            Amortization of purchase premium on marketable securities   2,345    971 
            Other   (8)   61 
     Changes in operating assets and liabilities   (7,378)   (905)
           Net cash provided by (used in) operating activities   2,061    (8,702)
           
Cash flows from investing activities:          
     Purchases of property and equipment   (23)   (557)
     Proceeds from sales of fixed assets   9    4 
     Proceeds from sales and maturities of marketable securities   265,314    34,073 
     Purchases of marketable securities   (195,413)   (1,074)
            Net cash provided by investing activities   69,887    32,446 
           
Cash flows from financing activities:          
Repurchases of common stock   (21,439)   (120,793)
     Repurchases of notes payable   (13,862)   - 
     Proceeds from issuance of common stock   62    5,668 
     Withholding taxes – stock-based compensation   (102)   (1,155)
     Proceeds from employee stock purchase plan, net   15    1 
              Net cash used in financing activities   (35,326)   (116,279)
           
Net increase (decrease) in cash and cash equivalents   36,622    (92,535)
           
Cash and cash equivalents at beginning of period   104,324    397,530 
           
Cash and cash equivalents at end of period  $140,946   $304,995 

  

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

4
 

 

ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

(1)Description of Business

 

Enzon Pharmaceuticals, Inc. and subsidiaries (Enzon or the Company) is a biotechnology company dedicated to the research and development of innovative therapeutics for patients with high unmet medical needs. Operations are funded in part by the receipt of royalty revenues from licensing arrangements with other companies related to sales of products developed using the Company’s proprietary Customized PEGylation Linker Technology (Customized Linker Technology®) – primarily PEGINTRON, marketed by Merck & Co., Inc. The Company operates in one business segment. The Company’s Principal Executive Officer (chief operating decision maker) reviews the Company’s operating results on an aggregate basis and manages the Company’s operations as a single operating unit. The Company’s operations and assets reside exclusively in the United States.

 

The Company’s pipeline drug development programs utilize two platforms – Customized Linker Technology and third-generation messenger ribonucleic acid (mRNA)-targeting agents utilizing the Locked Nucleic Acid (LNA) technology. The Company currently has four compounds in clinical development: PEG-SN38 and the mRNA antagonists targeting Androgen Receptor (AR), Hypoxia-Inducible Factor-1α (HIF-1α) and Survivin. In addition, the Company has other novel LNA targets in various stages of preclinical research.

 

(2)Basis of Presentation

 

Interim Financial Statements

The accompanying unaudited condensed consolidated financial statements have been prepared from the books and records of the Company in accordance with United States generally accepted accounting principles (U.S. GAAP) for interim financial information and Rule 10-01 of Regulation S-X promulgated by the U.S. Securities and Exchange Commission. Accordingly, these financial statements do not include all of the information and footnotes required for complete annual financial statements. Interim results are not necessarily indicative of the results that may be expected for the full year. Interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.

 

Principles of Consolidation

The condensed consolidated financial statements include the accounts of Enzon Pharmaceuticals, Inc. and its subsidiaries. All intercompany balances and transactions have been eliminated as part of the consolidation.

 

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. These estimates include the valuation of investments, legal and contractual contingencies, stock-based compensation, and income taxes. Although management bases its estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances, actual results could differ from these estimates.

 

Reclassification

Certain prior-period amounts have been reclassified to conform to the current period presentation.

 

5
 

 

ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

 

(3)Financial Instruments and Fair Value

 

The carrying values of cash, cash equivalents, other current assets, accounts payable, accrued expenses and other current liabilities in the Company’s condensed consolidated balance sheets approximated their fair values at September 30, 2012 and December 31, 2011 due to their short-term nature. Marketable securities are carried on the condensed consolidated balance sheets at fair value. The fair values and carrying amounts of the Company’s financial instruments at September 30, 2012 are indicated below (in thousands):

 

 

Description

  Fair Value   Carrying Amount 
Marketable Securities (Note 4)  $147,791   $147,791 
           
4% Convertible Notes Payable (Note 5)  $118,166   $115,849 

 

(4)Marketable Securities

 

The amortized cost, gross unrealized holding gains or losses, and fair value of the Company’s marketable securities by major security type at September 30, 2012 were as follows (in thousands):

   Amortized
Cost
   Gross
Unrealized
Holding Gains
   Gross
Unrealized
Holding Losses
   Fair
Value*
 
                 
Corporate bonds  $93,969   $130   $(27)  $94,072 
Commercial paper   51,631    8    (2)   51,637 
U.S. government-sponsored agency   2,078    4    -    2,082 
   $147,678   $142   $(29)  $147,791 

 

* Included in current marketable securities of $137,492 and long-term marketable securities of $10,299 at September 30, 2012.

 

The amortized cost, gross unrealized holding gains or losses, and fair value of the Company’s marketable securities by major security type at December 31, 2011 were as follows (in thousands):

 

   Amortized
Cost
   Gross
Unrealized
Holding Gains
   Gross
Unrealized
Holding Losses
   Fair
Value*
 
                 
Corporate bonds  $130,201   $175   $(168)  $130,208 
Commercial paper   30,979    5    (3)   30,981 
U.S. government-sponsored agency   26,531    30    (19)   26,542 
Variable rate demand notes   19,295    -    -    19,295 
Municipal bonds   5,000    -    -    5,000 
Non-U.S. government bonds   2,411    2    -    2,413 
Certificates of deposit   2,000    -    -    2,000 
Other   2,550    -    (22)   2,528 
   $218,967   $212   $(212)  $218,967 

 

*Included in current marketable securities of $58,188 and long-term marketable securities of $160,779 at December 31, 2011.

 

Money market funds and marketable securities purchased with remaining maturities of three months or less of $115.2 million and $98.1 million at September 30, 2012 and December 31, 2011, respectively, were recorded at cost, which approximates fair value and are included in cash and cash equivalents. All marketable debt securities are classified as available-for-sale. Other marketable securities in the above table as of December 31, 2011 were predominantly mutual fund shares in the Company’s Executive Deferred Compensation Plan with a fair value totaling $2.5 million. In September 2011, the Company’s Board of Directors terminated this deferred compensation plan. Internal Revenue Service (IRS) rules require a minimum twelve month waiting period to distribute the plan assets to the participants. As of September 30, 2012, all marketable securities in the plan have been sold and the plan holds only cash. The funds will be distributed to the participants during the fourth quarter of 2012. There is a current liability that offsets the aggregate deferred compensation plan current assets as of September 30, 2012 and December 31, 2011.

 

6
 

 

ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

 

With the exception of money market funds valued based on Level 1 inputs, fair value is determined based on Level 2 inputs utilizing observable quoted prices for similar assets and liabilities in active markets and observable quoted prices for identical or similar assets in markets that are not very active.

 

Maturities of marketable debt securities, excluding securities related to the Company’s Executive Deferred Compensation Plan, at September 30, 2012 were as follows (in thousands):

 

   Amortized
Cost
   Fair
Value
 
         
       Due in one year or less  $137,396   $137,492 
       Due after one year through two years   10,282    10,299 
   $147,678   $147,791 

 

Impairment assessments are made at the individual security level each reporting period. When the fair value of an investment is less than its amortized cost at the balance sheet date, a determination is made as to whether the impairment is other-than-temporary and, if it is other-than-temporary, an impairment loss is recognized in earnings equal to the difference between the investment’s amortized cost and fair value at such date. The cost of securities is based on the specific-identification method. As of September 30, 2012 and December 31, 2011, some of the Company’s investments in marketable debt securities were in an unrealized loss position. None of the underlying investments has been in a continuous loss position longer than twelve months, and no other-than-temporary impairment is deemed to have occurred.

 

(5)Notes Payable

 

The Company’s 4% convertible notes mature on June 1, 2013 unless earlier redeemed, repurchased or converted. The notes are senior unsecured obligations and rank equal to all future senior unsecured debt of the Company. The notes are convertible at the option of the holders into the Company’s common stock at a conversion price of $9.55 per share (104.712 shares per $1,000 of principal amount). If the closing price of the Company’s common stock for at least 20 trading days in the 30-consecutive-trading-day period ending on the date one day prior to the date of a notice of redemption is greater than 140% of the applicable conversion price on the date of such notice, the Company, at its option, may redeem the notes in whole or in part, at a redemption price in cash equal to 100% of the principal amount of the notes to be redeemed, plus accrued and unpaid interest, if any, to the redemption date. Upon occurrence of a “fundamental change,” as defined in the indenture governing the notes, holders of the notes may require the Company to redeem the notes at a price equal to 100% of the principal amount plus accrued and unpaid interest or, in certain cases, to convert the notes at an increased conversion rate based on the price paid per share of the Company’s common stock in the transaction constituting the fundamental change.

 

During the first three quarters of 2012, notes totaling $13.65 million principal amount were repurchased above par, resulting in a loss on early retirement of debt of approximately $212,000 (included in other, net expense) and a write-off of deferred debt issuance costs of approximately $62,000 (included in interest expense).

 

Interest on the notes is payable on June 1 and December 1 of each year. Accrued interest amounted to $1.5 million and $0.4 million as of September 30, 2012 and December 31, 2011, respectively.

 

7
 

 

ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

 

(6)Stockholders’ Equity

 

On December 21, 2010, the Company announced that its Board of Directors had authorized a share repurchase program, under which the Company is authorized to repurchase up to $200.0 million of the Company’s outstanding common stock. This program was suspended during the third quarter of 2011. During the first quarter of 2012, the Company announced its plans to resume repurchasing its outstanding common stock under this program, but no shares were actually repurchased during the first quarter. During the second and third quarters of 2012, the Company repurchased and retired 3,160,326 shares at a cost of $21.5 million, or an average cost of approximately $6.81 per share, under this program. Since the inception of this program, the cumulative number of shares repurchased and retired through September 30, 2012 amounted to 14,621,775 shares at a total cost of $143.0 million, or an average cost of approximately $9.78 per share. This program continues to be in effect.

 

(7)Supplemental Cash Flow Information

 

The Company considers all highly liquid investment securities with original maturities of three months or less to be cash equivalents. During the nine months ended September 30, 2012 and 2011, there were interest payments of $2.5 million and $2.7 million, respectively, related to the Company’s notes payable. Income tax payments of $33,000 and $39,000 were made during the nine months ended September 30, 2012 and 2011, respectively.

 

(8)Sale of In-Process Research and Development

 

When the Company sold its specialty pharmaceutical business in January 2010, it retained its research and development organization. Prior to the sale, the Company’s research and development function was engaged in, among other things, studies oriented towards the next-generation formulations of Oncaspar and Adagen, two products that were among those sold as part of the specialty pharmaceuticals business. The in-process research and development related to those two products was included in the sale. The selling price was management’s best estimate of its stand-alone fair value based on the stage of development and consideration of future milestone payments. During the first quarter of 2011, the Company earned the first $5.0 million milestone payment from the purchaser of the specialty pharmaceutical business resulting from FDA approval for SS Oncaspar.

 

(9)Earnings Per Common Share

 

Basic earnings and loss per common share is computed by dividing the income or loss available to common stockholders by the weighted-average number of shares of common stock outstanding during the period. Restricted stock units (nonvested shares) are not considered to be outstanding shares until the vesting criteria (service and/or performance) have been satisfied.

 

For purposes of calculating diluted earnings per common share, the denominator includes both the weighted-average number of shares of common stock outstanding and the number of common stock equivalents if the inclusion of such common stock equivalents is dilutive. Dilutive common stock equivalents potentially include stock options and nonvested shares using the treasury stock method, shares issuable under the employee stock purchase plan (ESPP) and the number of shares issuable upon conversion of the Company’s convertible notes payable. In the case of notes payable, the diluted earnings per share calculation is further affected by an add-back of interest expense, net of tax, to the numerator under the assumption that the interest would not have been incurred if the notes payable were converted into common stock.

 

8
 

 

ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

 

   Three months ended
September 30,
   Nine months ended
September 30,
 
   2012   2011   2012   2011 
Earnings (Loss) Per Common Share – Basic:                    
  Net income (loss)  $4,175   $(9,105)  $2,375   $(15,742)
                     
  Weighted-average common shares outstanding   46,387    48,729    47,614    53,131 
                     
  Basic earnings (loss) per share  $0.09   $(0.19)  $0.05   $(0.30)
                     
Earnings (Loss) Per Common Share – Diluted:                    
  Net income (loss)  $4,175   $(9,105)  $2,375   $(15,742)
   Add-back interest expense on outstanding convertible notes payable, net of tax   753    -(1)   -(2)   -(1)
  Adjusted net income (loss)  $4,928   $(9,105)  $2,375   $(15,742)
                     
  Weighted-average common shares outstanding   46,387    48,729    47,614    53,131 
   Weighted-average incremental shares related to assumed  exercise of stock options, vesting of nonvested shares, and ESPP   45    -(1)   57    -(1)
   Weighted-average incremental shares assuming conversion of outstanding notes payable   12,131    -(1)   -(2)   -(1)
   Weighted-average common shares outstanding and common share equivalents   58,563    48,729    47,671    53,131 
                     
  Diluted earnings (loss) per share  $0.08   $(0.19)  $0.05   $(0.30)
                     

 

(1)For the three and nine months ended September 30, 2011, the Company recorded a net loss which cannot be diluted. As of September 30, 2011, shares issuable which could potentially dilute future earnings included 14.1 million shares for conversion of notes payable, 3.0 million shares for stock options exercised and 0.6 million shares for vesting of nonvested shares.
(2)For the nine months ended September 30, 2012, the assumed conversion of notes payable is antidilutive due to the fact that the add-back of interest expense, net of tax, to the numerator has a greater effect on the result of the calculation than does the incremental 12.1 million shares added to the denominator upon assumed conversion.

 

(10)Restructurings

 

The Company has incurred costs from restructuring activities undertaken during 2010 and 2011 as part of the transition from a fully integrated biopharmaceutical company with research, manufacturing, and marketing operations to a biotechnology company focused primarily on research and development. During the second half of 2011, the Company incurred additional restructuring costs as part of a plan to more closely align its resources and capital with on-going research and development activities. Restructuring costs are charged to earnings and accrued as a liability at the time they are considered probable and reasonably estimable. Restructuring costs include employee separation benefits and lease termination costs for facilities that have been vacated.

 

The following table summarizes the changes in the Company’s accrued restructuring liabilities during the first three quarters of 2012 (in thousands):

 

   Balance at   Expense or       Balance at   Cumulative 
   12/31/11   (Adjustment)   (Payments)   9/30/12   Payments 
Employee separation benefits  $4,484   $(220)  $(3,078)  $1,186   $6,525 
Lease termination costs  $366   $-   $(327)  $39   $1,387 
Total restructuring liability  $4,850   $(220)  $(3,405)  $1,225   $7,912 

 

9
 

 

ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

 

There were no restructuring charges incurred during the first three quarters of 2012. During the third quarter of 2011, the Company incurred restructuring charges of $2.9 million for employee separation benefits as a result of a 48% reduction in force and $0.7 million for lease termination costs associated with the first and third floors of the Company’s former Bridgewater, NJ headquarters facility. During the second quarter of 2011, the Company incurred restructuring charges of $674,000 for employee separation benefits primarily related to the departure of the Company’s Executive Vice President, Human Resources and Administration pursuant to the terms of the Severance and Release Agreement. During the first quarter of 2011, the Company incurred restructuring charges of $359,000 related to lease termination costs for the former Bridgewater, NJ headquarters facility. Future cash payments related to restructuring activities are estimated to be approximately $0.5 million over the remainder of 2012 and $0.7 million in 2013.

 

(11)Stock-Based Compensation

 

Stock Options and Restricted Stock Units (RSUs or Nonvested Shares)

 

During the quarter ended September 30, 2012, the Company recognized stock-based compensation expense of $0.6 million. Shares were withheld to pay $0.1 million of taxes on behalf of employees, resulting in a net incremental credit to additional paid-in capital of $0.5 million. During the quarter ended September 30, 2011, the Company recognized stock-based compensation expense of $0.7 million. Shares were withheld to pay $0.3 million of taxes on behalf of employees, resulting in a net incremental credit to additional paid-in capital of $0.4 million.

 

During the nine months ended September 30, 2012, the Company recognized stock-based compensation expense of $1.5 million. Shares were withheld to pay $0.1 million of taxes on behalf of employees, resulting in a net incremental credit to additional paid-in capital of $1.4 million. During the nine months ended September 30, 2011, the Company recognized stock-based compensation expense of $2.6 million. Shares were withheld to pay $1.1 million of taxes on behalf of employees, resulting in a net incremental credit to additional paid-in capital of $1.5 million.

 

As of September 30, 2012, there was $0.3 million of total unrecognized compensation cost related to unvested stock options that the Company expects to recognize over a weighted-average period of 23 months and $3.5 million of total unrecognized compensation cost related to nonvested shares to be recognized over a weighted-average period of 22 months.

 

The weighted-average exercise price of stock options granted during the nine months ended September 30, 2012 was $6.80 per share and the fair value was $2.29 per share. The aggregate fair value of stock options granted during the nine months ended September 30, 2012 was $0.4 million. The nonvested shares granted during the nine months ended September 30, 2012 had a weighted-average grant date fair value of $6.98 per share for an aggregate fair value of $1.7 million. The Company uses historical data to estimate forfeiture rates.

 

Activity related to stock options and nonvested shares during the nine months ended September 30, 2012 and related balances outstanding as of that date are reflected below (in thousands):

 

 

   Stock   Nonvested 
   Options   Shares 
Outstanding at January 1, 2012   3,121    674 
  Granted   185    238 
  Exercised and vested   -    (83)
  Expired and forfeited   (389)   (210)
Outstanding at September 30, 2012   2,917    619 
           
Options vested and expected to vest at September 30, 2012   2,881      
           
Options exercisable at September 30, 2012   2,712      

 

10
 

 

ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

 

(12)Income Taxes

 

During the three months ended September 30, 2012, the Company recorded no income tax expense. During the three months ended September 30, 2011, the Company recorded $200,000 of income tax expense primarily related to foreign withholding taxes. During the nine months ended September 30, 2012 and 2011, the Company recorded $33,000 and $205,000, respectively, of income tax expense primarily related to foreign withholding taxes. The Company did not recognize a U.S. federal income tax provision for the first three quarters of 2012 or 2011 because the estimated annual effective tax rate was zero. As of September 30, 2012, the Company continues to provide a valuation allowance against its net deferred tax assets since the Company believes it is more likely than not its deferred tax assets will not be realized.

 

(13)Commitments and Contingent Liabilities

 

The Company has employment and separation agreements with certain members of its management that provide for severance and other payments following a termination of employment occurring for various reasons, including a change in control of the Company.

 

The Company has been involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material effect on the Company’s consolidated financial position, results of operations or liquidity.

 

The Company has non-cancelable lease obligations for certain office and production facilities that have been vacated and sublet.

 

11
 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

Unless the context requires otherwise, references in this Quarterly Report on Form 10-Q to “Enzon,” the “Company,” “we,” “us,” or “our” and similar terms mean Enzon Pharmaceuticals, Inc. and its subsidiaries.

 

Overview

 

We are a biotechnology company dedicated to the research and development of innovative therapeutics for patients with high unmet medical needs. We are managed as a single operating unit. Our drug development programs utilize two platforms – Customized PEGylation Linker Technology (Customized Linker Technology®) and third-generation messenger ribonucleic acid (mRNA) antagonists utilizing the Locked Nucleic Acid (LNA) technology. We currently have four compounds in human clinical development: PEG-SN38, a PEGylated version of the active metabolite of the cancer drug irinotecan, and mRNA antagonists targeting Androgen Receptor (AR), Hypoxia-Inducible Factor-1α (HIF-1α) and Survivin. In addition, we have other novel LNA targets in various stages of preclinical research. We receive royalty revenues from licensing arrangements with other companies related to sales of products developed using our proprietary Customized Linker Technology – primarily PEGINTRON, marketed by Merck & Co., Inc. (Merck).

 

We have completed enrollment in both of our Phase II PEG-SN38 trials in metastatic colorectal and metastatic breast cancer, our Phase I PEG-SN38 trial in pediatric patients, and our Phase I clinical trials for HIF-1α and Survivin. At this time, we do not intend to proceed with the clinical development of Survivin. We are currently enrolling for our Androgen Receptor mRNA antagonist Phase I trial in patients with castration-resistant prostate cancer. The enrollment of patients for clinical trials is an inherently uncertain process and there can be no assurance we will be able to complete the enrollment of patients for our clinical trials within the timeframe anticipated. During the second quarter of 2012, we licensed PEG-SN38 to Zhejiang Hisun Pharmaceutical Co., Ltd. (Hisun) for development and commercialization in China. We are currently seeking strategic partners to further develop and commercialize PEG-SN38 in other territories. Absent such partnerships, we do not intend to fund further development of PEG-SN38.

 

Throughout Management’s Discussion and Analysis, the primary focus is on the results of operations, cash flows, financial condition and future outlook of our business. The percentage changes throughout the following discussion are based on amounts stated in thousands of dollars and not the rounded millions of dollars reflected in this section.

 

Results of Operations

 

Revenues:

 

Royalties (in millions of dollars):

 

   Three Months Ended
September 30,
  Nine Months Ended
September 30,
   2012 

Percent

Change

  2011  2012 

Percent

Change

  2011
Royalty revenue  $10.9  7%  $10.2  $31.0  0%  $31.1
                   

 

We receive income from royalties on sales of products by other companies that use our proprietary PEGylation technology, including PEGINTRON, marketed by Merck; Macugen, marketed by Pfizer, Inc. outside the U.S. and Valeant Pharmaceuticals International, Inc. in the U.S.; and CIMZIA, marketed by UCB Pharma. Notification from the third-party licensee of the royalties earned under the license agreement is the basis for royalty revenue recognition. This information generally is received from the licensees, and royalty revenue is recognized, in the quarter subsequent to the period in which the sales occur. Royalty revenue for the three months ended September 30, 2012 increased 7% to $10.9 million from $10.2 million for the three months ended September 30, 2011. For the nine months ended September 30, 2012, royalty revenue remained flat compared to the same period in 2011.

 

12
 

 

Sales of PEGINTRON by Merck continue to constitute the most significant source of our royalty revenues. The following table summarizes our PEGINTRON royalties earned:

 

  Three Months Ended           Nine Months Ended         
(in millions of dollars)  September 30,    Dollar   Percent   September 30,    Dollar   Percent 
PEGINTRON royalties from:  2012   2011   Change   Change   2012   2011   Change   Change 
US sales  $1.78   $1.26   $0.52    41%  $5.75   $3.92   $1.83    47%
Foreign sales - Europe   3.48    2.50    0.98    39%   8.84    8.14    0.70    9%
Foreign sales - Japan   2.23    2.54    (0.31)   -12%   5.97    8.73    (2.76)   -32%
Foreign sales - Other   2.87    3.05    (0.18)   -6%   8.68    8.40    0.28    3%
Total  $10.36   $9.35   $1.01    11%  $29.24   $29.19   $0.05    0%

 

Sale of In-process Research and Development

 

When we sold our specialty pharmaceutical business in January 2010, we retained our research and development organization. We had been engaged in studies oriented towards the next-generation formulations of Oncaspar and Adagen, two products that were among those sold as part of the specialty pharmaceutical business. The in-process research and development related to Oncaspar and Adagen was sold to the purchaser of the specialty pharmaceutical business, and the selling price represented management’s best estimate of its standalone fair value based on the stage of development and consideration of future milestone payments at that time potentially amounting to $27.0 million. All necessary technology and know-how was transferred to the purchaser at the time of the sale, and the purchaser could resell the in-process research and development asset. At the time of the sale, the activities necessary to complete the work on Oncaspar and Adagen next-generation formulas could have been performed by the purchaser or others.

 

During the first quarter of 2011, the Company earned a $5.0 million milestone payment from the purchaser of the specialty pharmaceutical business resulting from FDA approval for SS Oncaspar. This milestone payment relates to our transfer of technology that was included in the 2010 sale of in-process research and development. In late 2010, circumstances emerged that made it unlikely that the $5.0 million due for accelerated EMA approval for SC Oncaspar would be achieved. The following are the remaining potential milestone payments:

 

·$7.0 million due for FDA approval for SC Oncaspar; and

 

·$10.0 million due for non-accelerated EMA approval for SC Oncaspar.

 

Of the remaining $17.0 million of potential milestone payments, it is very unlikely that any will be received in 2012 and there can be no assurance that we will receive any such payments in the future.

 

Contract Research and Development

 

There was no contract research and development revenue for the third quarter of 2012 and minimal revenue for the nine months ended September 30, 2012. Pursuant to a transition services agreement entered into at the time of the sale of the specialty pharmaceutical business, we began performing product-support research and development, consulting, and technology transfer functions for the purchaser effective with the close of the sale transaction on January 29, 2010. The transition services associated with product-support research and development are being reported in continuing operations since they are consistent with our on-going research and development activities. We are being compensated at actual cost plus a mark-up per the terms of the transition services agreement. Our contractual obligation is to assist with these transition services for a period of up to three years subsequent to the date of the sale, although we do not anticipate any such activity over the remainder of 2012.

 

Miscellaneous Income

 

Miscellaneous income was $0.2 million for the third quarter of 2012 and $0.8 million for the nine months ended September 30, 2012. Miscellaneous income consists of rental receipts from the sublease of unused manufacturing and excess office space for which we have on-going lease commitments. The underlying lease expense is reflected in general and administrative expenses. In addition, during the second quarter of 2012, we received a non-refundable, non-creditable upfront payment specifically related to the licensing of PEG-SN38 as part of the Collaboration Agreement with Hisun.

 

13
 

 

Operating Expenses:

 

Research and Development (in millions of dollars):

 

   Three Months Ended September 30,  Nine Months Ended September 30,
   2012  Percent
Change
  2011  2012  Percent
Change
  2011
Research and development –
pipeline
  $4.0  (62%)  $10.4  $16.5  (47%)  $31.0
Research and development –
specialty and contracted services
  $0.0   
 
n.m.
  $0.0  $0.1   
 
n.m.
  $0.9

 

n.m. – not meaningful

 

Research and development – pipeline

 

During the third quarter of 2012, total spending on our research and development programs decreased by $6.4 million, or 62%, to $4.0 million compared to $10.4 million for the third quarter of 2011. Clinical development expenses declined by $4.2 million, and salaries and benefits expenses declined by $1.7 million as a result of the restructuring implemented in the fourth quarter of 2011. During the first three quarters of 2012, total spending on our research and development programs decreased by $14.5 million, or 47%, to $16.5 million compared to $31.0 million for the first three quarters of 2011. Clinical development expenses declined by $7.5 million, and salaries and benefits expenses declined by $6.0 million as a result of the restructuring implemented in the fourth quarter of 2011. Clinical development expenses have declined for the three and nine months ended September 30, 2012 compared to the same three and nine month periods of 2011 due to the completion of enrollment in both of our PEG-SN38 Phase II clinical trials, as well as our Phase I clinical trials for the HIF-1α and Survivin mRNA antagonists.

 

Research and development – specialty and contracted services

 

As a result of the sale of our specialty pharmaceutical business in January 2010, the programs related to the next-generation Oncaspar and Adagen formulations became the responsibility of the purchaser.  We continue to assist in the development of these programs through a transition services arrangement.  During 2011 and through the first three quarters of 2012, our efforts and spending related to these products decreased substantially, as expected, as the purchaser assumed greater control. These costs were minimal during the first three quarters of 2012 and are not expected to be significant during the remainder of 2012. Our assistance is provided only on an as-needed basis.

 

General and Administrative (in millions of dollars):

 

   Three Months Ended September 30,  Nine Months Ended September 30,
   2012  Percent
Change
  2011  2012  Percent
Change
  2011
General and administrative  $3.2  (22%)  $4.1  $11.2  (19%)  $13.8

 

General and administrative expenses declined by $0.9 million, or 22%, to $3.2 million for the third quarter of 2012 from $4.1 million for the third quarter of 2011. For the nine months ended September 30, 2012, general and administrative expenses declined by $2.6 million, or 19%, to $11.2 million from $13.8 million for the first three quarters of 2011. Several factors have contributed to this decline in costs. By the second quarter of 2011, we completed the reduction in force announced in the fourth quarter of 2010. During the third and fourth quarters of 2011, we eliminated two executives included in general and administrative expenses. The compensation costs for these positions included in the third quarter and first three quarters of 2011 results are no longer incurred. At the end of the first quarter of 2011, we relocated our corporate headquarters from the former Bridgewater, New Jersey facility and consolidated our operations into our Piscataway, New Jersey research facility. The rent and related operating costs for the Bridgewater facility included in the first quarter of 2011 results are no longer incurred. The remainder of the period-to-period decrease in general and administrative expenses was attributable to our on-going efforts to reduce costs such as contracted services and consulting fees, accounting fees, and legal fees.

 

14
 

 

Restructurings

 

During the first, second and third quarters of 2012, we adjusted previously estimated 2011 restructuring charges as more accurate information became available. During the third quarter of 2011, we incurred $3.6 million total of restructuring charges, made up of $2.9 million of employee separation benefits and $0.7 million of lease termination costs. During the second quarter of 2011, we recorded a restructuring charge of $0.6 million primarily related to the severance payments and benefits due to the former Executive Vice President, Human Resources & Administration. During the first quarter of 2011, we completed the planned relocation of our corporate offices from Bridgewater, New Jersey to our Piscataway, New Jersey research facility. As a result of having vacated the excess office space in Bridgewater, we incurred a charge of approximately $0.4 million during the first quarter of 2011, which represented the excess of committed lease costs over potential sublease income.

 

Other Income (Expense) (in millions of dollars):

   Three Months Ended September 30,  Nine Months Ended September 30,
   2012  Percent
Change
  2011  2012  Percent
Change
  2011
Other income (expense):                  
  Investment income, net  $1.4  241%  $0.4  $2.4  91%  $1.2
  Interest expense  (1.3)  (14%)  (1.5)  (4.1)  (9%)  (4.4)
  Other, net  -   n.m.  -  (0.2)     n.m.  0.1
   $0.1  n.m.  $(1.1)  $(1.9)     n.m.  $(3.1)

 

n.m. – not meaningful

 

Net investment income was $1.4 million for the third quarter of 2012, as compared to $0.4 million for the third quarter of 2011. For the nine months ended September 30, 2012, net investment income was $2.4 million, as compared to $1.2 million for the first three quarters of 2011. During the third quarter of 2012, we sold long-term marketable securities in our portfolio and realized $0.9 million of gains. During the fourth quarter of 2011, we began investing our excess cash on hand in marketable securities, although at much lower yields than we were previously earning due to the current historically low interest rate environment. While the invested balance has increased substantially compared to the third quarter of 2011, the interest income generated has remained relatively flat.

 

Interest expense was $1.3 million for the third quarter of 2012, as compared to $1.5 million for the third quarter of 2011. Interest expense was $4.1 million for the first three quarters of 2012, as compared to $4.4 million for the first three quarters of 2011. From November 2011 to May 2012, we repurchased $18.7 million principal amount of our outstanding notes payable, and the declining interest costs are reflective of the lower principal amounts outstanding.

 

Liquidity and Capital Resources

 

Total cash reserves, which consist of cash, cash equivalents and marketable securities, were $288.7 million as of September 30, 2012, as compared to $323.3 million as of December 31, 2011. The decrease was primarily attributable to the resumption of the share repurchase program and the repurchase of outstanding notes payable.

 

For the nine months ended September 30, 2012, net cash provided by operating activities was $2.1 million compared to $8.7 million of cash used in the same period of 2011. We earned net income of $2.4 million through the first three quarters of 2012. Adjustments for non-cash expenses and changes in various working capital accounts comprised the offsetting $0.3 million.

 

Net cash provided by investing activities was $69.9 million for the first three quarters of 2012 as we sold marketable debt securities with a view toward shortening the duration of our portfolio. This compares to $32.4 million of cash provided by investing activities during the first three quarters of 2011, which was primarily attributable to proceeds from maturities of marketable debt securities we chose to allow to mature without reinvesting the proceeds.

 

15
 

 

Net cash used in financing activities was $35.3 million for the first three quarters of 2012 versus $116.3 million used in the first three quarters of 2011. During the first three quarters of 2012, we utilized $21.5 million to repurchase 3.2 million shares of our outstanding common stock under a $200.0 million share repurchase program initiated in December 2010, suspended during the third quarter of 2011, and resumed during the second quarter of 2012. In addition, we utilized $13.9 million to repurchase $13.7 million principal amount of our outstanding notes payable during the first three quarters of 2012. During the first three quarters of 2011, we utilized $121.1 million to repurchase 11.4 million shares of our outstanding common stock under the aforementioned share repurchase program. Fees incurred to purchase shares are included in cash flows from operating activities. Share repurchases under this program may be made through open market or privately negotiated transactions at such times and in such amounts as we deem appropriate, based on a variety of factors such as price, corporate and regulatory requirements and overall market conditions. There can be no assurance as to the number of shares we will repurchase, if any. The share repurchase program may be modified, suspended or terminated at any time without prior notice.

 

As of September 30, 2012, we had outstanding $115.8 million of convertible senior notes that mature on June 1, 2013 and bear interest at an annual rate of 4%. Interest on these notes is payable on June 1 and December 1 of each year. Accrued interest on these notes was $1.5 and $0.4 million as of September 30, 2012 and December 31, 2011, respectively.

 

Our current sources of liquidity are our cash reserves, interest earned on such cash reserves and royalties - primarily those related to sales of PEGINTRON. In January 2011, we earned and received a $5.0 million milestone payment in connection with the sale of the specialty pharmaceutical business in January 2010. No further milestones related to the sale of the specialty pharmaceutical business are expected in 2012, and there can be no assurance that any of these milestones will be received in the future.

 

Based upon our current planned research and development activities and related costs, our current sources of liquidity, the expected cash outflows from operations and the repurchase of up to $57.0 million of our outstanding common stock remaining from the previously announced $200.0 million share repurchase program, we anticipate our current cash reserves, which were $288.7 million as of September 30, 2012, will be sufficient to meet our capital and operational requirements for the near future. We intend to continually evaluate potential uses of our cash reserves. As part of this on-going evaluation, we may decide to use a portion of our cash reserves to return cash to our stockholders through additional repurchases under our share repurchase program or, subject to the discretion of our board of directors and applicable law, the declaration and payment of a dividend. Although we may decide to use our cash reserves to return cash to our stockholders, there can be no assurance that we will do so, and any such decision would depend on our actual and anticipated liquidity requirements, prevailing market conditions and other relevant factors. In addition, as part of this on-going evaluation, we intend to continually consider options to address the June 1, 2013 maturity of our 4% convertible notes, of which $115.8 million in principal amount was outstanding at September 30, 2012. We may decide to use our available cash and cash equivalents, of which we currently have $140.9 million, to repay all or a portion of the notes, or we may decide to seek to refinance these notes prior to their maturity or pursue other options. Our ability to refinance these notes or our ability to pursue other options cannot be predicted and will depend on future economic conditions and financial, business, market and other factors that may be beyond our control. While we believe that our current sources of liquidity will be adequate to satisfy our capital and operational needs for the near future, it is likely that we will need to obtain additional financing or enter into a collaborative arrangement to sustain our research and development efforts prior to the time we are able to commercialize any of our product candidates. There can be no assurance, however, that we will be able to obtain additional funds or engage a collaborator on acceptable terms, if at all. If we are unable to obtain adequate financing or collaborative support, we may be required to curtail our research and development activities and/or license our product candidates to third parties.

 

Off-Balance Sheet Arrangements

 

As part of our ongoing business, we do not participate in transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities (SPEs), which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually limited purposes. As of September 30, 2012, we were not involved in any SPE transactions.

 

Our 4% notes payable are convertible into shares of our common stock at a conversion price of $9.55 per share and pose a reasonable likelihood of potential significant dilution. As of September 30, 2012, the maximum potential dilutive effect of conversion of the 4% notes is approximately 12.1 million shares using the conversion rate of 104.712 shares per $1,000 principal amount currently in effect. If we were to experience a fundamental change (as defined in the indenture agreement), the conversion rate could be enhanced for the benefit of the note holders which would yield greater dilution. Notes payable are discussed in greater detail in Liquidity and Capital Resources above and in the notes to our condensed consolidated financial statements.

 

16
 

 

In addition, stock options to purchase 2.9 million shares of our common stock at a weighted-average exercise price of $10.90 per share and 0.6 million restricted stock units (nonvested shares) were outstanding at September 30, 2012, which represent additional potential dilution.

 

Contractual Obligations

 

Our major outstanding contractual obligations relate to our operating leases, convertible debt, and license agreements with collaborative partners. There have been no material changes since December 31, 2011 with respect to our contractual obligations.

 

Critical Accounting Policies and Estimates

 

A critical accounting policy is one that is both important to the portrayal of a company’s financial condition and results of operations and requires management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.

 

Our condensed consolidated financial statements are presented in accordance with accounting principles that are generally accepted in the U.S. All applicable U.S. GAAP accounting standards effective as of September 30, 2012 have been taken into consideration in preparing the condensed consolidated financial statements. The preparation of condensed consolidated financial statements requires estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures. Some of those estimates are subjective and complex, and, consequently, actual results could differ from those estimates. The following accounting policies and estimates have been highlighted as significant because changes to certain judgments and assumptions inherent in these policies could affect our condensed consolidated financial statements.

 

We base our estimates, to the extent possible, on historical experience. Historical information is modified as appropriate based on current business factors and various assumptions that we believe are necessary to form a basis for making judgments about the carrying value of assets and liabilities. We evaluate our estimates on an on-going basis and make changes when necessary. Actual results could differ from our estimates.

 

Revenues

 

Royalties under our license agreements with third-parties and pursuant to the sale of our specialty pharmaceutical business are recognized when reasonably determinable and earned through the sale of the product by the third-party and collection is reasonably assured. Notification from the third-party licensee of the royalties earned under the license agreement is the basis for royalty revenue recognition. This information generally is received from the licensees, and royalty revenue is recognized, in the quarter subsequent to the period in which the sales occur.

 

Contingent payments due under the asset purchase agreement related to the sale of the specialty pharmaceutical business are recognized as income when the milestone has been achieved and collection is assured. Such payments are non-refundable, and no further effort is required on the part of the Company or the other party to complete the earning process. Non-refundable payments received upon entering into license and other collaborative agreements where we have continuing involvement are recorded as deferred revenue and recognized ratably over the estimated service period.

 

The sale of the specialty pharmaceutical business involved the application of guidance regarding multiple deliverables in separating the revenues associated with the sale of in-process research and development from the other elements of the transaction, namely the assets sold as part of discontinued operations and our continuing involvement in contract research activities. We determined that the in-process research and development had value to the buyer of the specialty pharmaceutical business on a stand-alone basis and that there was objective and reliable evidence available to support the allocation of the total purchase price to the respective units of accounting.

 

17
 

 

Research and Development Expenses

 

We accrue expenses for the cost of work performed by contract research organizations, contract manufacturing organizations and others based upon the estimated amount of the total effort completed on each order, study or project using factors such as the number of lots produced, the number of patients enrolled, the number of active clinical sites and the duration for which the patients will be enrolled in the study. We base the estimates on the information available at the time. Additional information may become available at a later date that would enable us to develop a more accurate estimate. Such changes in estimate are generally recognized in the period when the information is first known.

 

Income Taxes

 

Under the asset and liability method of accounting for income taxes, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. A valuation allowance on net deferred tax assets is provided for when it is more likely than not that some portion or all of the deferred tax assets will not be realized. As of September 30, 2012, we believe, based on our projections, that it is more likely than not that our net deferred tax assets will not be realized. We recognize the benefit of an uncertain tax position that we have taken or expect to take on the income tax returns we file if it is more likely than not we will be able to sustain our position.

 

Stock-Based Compensation

 

Compensation cost, measured by the fair value of the equity instruments issued, adjusted for estimated forfeitures, is recognized in the financial statements as the respective awards are earned. The impact that stock-based compensation awards will have on our results of operations is a function of the number of shares awarded, vesting and the trading price and fair value of our stock at the date of grant or modification. Fair value of stock-based compensation is determined using the Black-Scholes valuation model, which employs weighted-average assumptions for the expected volatility of our stock, the expected term until exercise of the stock options, the risk-free interest rate, and dividends, if any. Expected volatility is based on our historical stock price information.

 

18
 

 

Forward-Looking Information and Factors That May Affect Future Results

 

This Quarterly Report on Form 10-Q contains forward-looking statements within the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. All statements contained in the Quarterly Report on Form 10-Q, other than statements that are purely historical, are forward-looking statements. Forward-looking statements can be identified by the use of forward-looking terminology such as the words “believes,” “expects,” “may,” “will,” “should,” “potential,” “anticipates,” “plans” or “intends” or the negative thereof, or other variations thereof, or comparable terminology, or by discussions of strategy. Forward-looking statements are based upon management’s present expectations, objectives, anticipations, plans, hopes, beliefs, intentions or strategies regarding the future and are subject to known and unknown risks and uncertainties that could cause actual results, events or developments to be materially different from those indicated in such forward-looking statements, including the following risks and uncertainties:

 

  • The uncertainty concerning our liquidity and capital resources, including our ability to address the pending June 1, 2013 maturity of our 4% convertible notes.

 

  • The risk that we will not achieve success in our research and development efforts, including clinical trials conducted by us or our collaborative partners.

 

  • The risk that we may be unable to recruit and qualify a sufficient number of patients for our trials and/or there may be the need to delay, suspend or terminate trials for various reasons.

 

  • The risk that we will experience operating losses for the next several years.

 

  • The risk that there will be a decline in sales of one or more of the products sold by others from which we derive royalty revenues.

 

  • Decisions by regulatory authorities regarding whether and when to approve our regulatory applications.

 

  • The risk that we will fail to obtain adequate financing to meet our future capital and financing needs.

 

  • The risk that key personnel will leave our company.

 

A more detailed discussion of these risks and uncertainties and other factors that could affect results is contained in our filings with the U.S. Securities and Exchange Commission, including our Annual Report on Form 10-K for the year ended December 31, 2011. These risks and uncertainties and other factors should be considered carefully and readers are cautioned not to place undue reliance on such forward-looking statements. As such, no assurance can be given that the future results covered by the forward-looking statements will be achieved. All information in this Quarterly Report on Form 10-Q is as of the date of this report, unless otherwise indicated, and we undertake no duty to update this information.

 

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Item 3. Quantitative and Qualitative Disclosures About Market Risk.

 

Our financial instruments are principally comprised of money market funds and marketable debt securities classified as available-for-sale. Apart from custodial accounts related to the Executive Deferred Compensation Plan, we do not invest in portfolio equity securities. We do not invest in commodities or use financial derivatives for trading purposes. We seek reasonable assuredness of the safety of principal and market liquidity by investing in rated fixed income securities while at the same time seeking to achieve a favorable rate of return. Our market risk exposure consists principally of exposure to changes in interest rates. Our holdings also are exposed to the risks of changes in the credit quality of issuers. All issuers are rated A1 or better at the time of purchase. We typically invest the majority of our investments in the shorter-end of the maturity spectrum. Cash equivalents are primarily held in a number of triple-A rated institutional money market funds as well as corporate and municipal entities’ debt securities.

 

The table below presents the amortized cost, fair value and related weighted-average coupon rates by year of maturity for our available-for-sale marketable debt securities as of September 30, 2012 (twelve-month intervals ending September 30 of the year indicated; in thousands):

 

   Amortized Cost   
   9/30/13  9/30/14  Total  Fair Value
Fixed Rate Securities  $142,395  $10,282  $152,677  $152,790
Weighted-Average Coupon Rate  2.13%  3.34%      
         $152,677  $152,790

 

Our convertible senior notes in the principal amount outstanding of $115.8 million at September 30, 2012 are due June 1, 2013 and have a fair value of $118.2 million at September 30, 2012. Our outstanding convertible notes have a fixed interest rate of 4%. The fair value of the convertible notes is affected by changes in market rates of interest and the price of our common stock.

 

Item 4. Controls and Procedures.

 

Evaluation of Disclosure Controls and Procedures

 

Our management, under the direction of our Principal Executive Officer and our Principal Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, (the Exchange Act)) as of September 30, 2012. Based on the evaluation, our Principal Executive Officer and our Principal Financial Officer have concluded that our disclosure controls and procedures were effective as of September 30, 2012.

 

Changes in Internal Control Over Financial Reporting

 

There were no changes in our internal control over financial reporting as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, during the quarter ended September 30, 2012 that have materially affected, or are reasonably likely to materially affect our internal control over financial reporting.

 

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Part II – OTHER INFORMATION

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

 

Common Stock Repurchases

 

On December 21, 2010, we announced that our Board of Directors had authorized a share repurchase program under which we are authorized to repurchase up to $200.0 million of our outstanding common stock. During the third quarter of 2011, we suspended this share repurchase program. During the first quarter of 2012, we announced our intention to resume repurchasing shares of outstanding common stock under this program; however, no shares were repurchased during the first quarter of 2012. Since the inception of this share repurchase program, the cumulative number of shares repurchased and retired through September 30, 2012 amounts to 14,621,775 shares at a total cost of $143.0 million, or an average cost per share of approximately $9.78.

 

During the third quarter of 2012, we repurchased shares of our Common Stock as set forth in the following table:

 

 

ISSUER PURCHASES OF EQUITY SECURITIES
Period  (a) Total Number of Shares Purchased   (b) Average Price Paid per Share    (c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs   (d) Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs 
July 1 – July 31, 2012   741,731   $6.85    741,731   $68,070,420 
August 1 – August 31, 2012   936,170   $6.73    936,170   $61,773,920 
September 1 – September 30, 2012   694,125   $6.92    694,125   $56,972,434 
Total   2,372,026   $6.82    2,372,026   $56,972,434 

 

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Item 6. Exhibits.

 

(a) Exhibits required by Item 601 of Regulation S-K.

 

 

Exhibit
Number

 

 

Description

 

Reference
No.

10.1 License and Collaboration Agreement dated July 26, 2006 by and between Santaris Pharma A/S and Enzon Pharmaceuticals, Inc. *
10.2 Amendment No. 1 to License and Collaboration Agreement, dated June 13, 2007 by and between Santaris Pharma A/S and Enzon Pharmaceuticals, Inc. *
10.3 Amendment No. 2 to License and Collaboration Agreement, dated June 25, 2007 by and between Santaris Pharma A/S and Enzon Pharmaceuticals, Inc. *
10.4 Amendment No. 3 to License and Collaboration Agreement, dated December 21, 2007 by and between Santaris Pharma A/S and Enzon Pharmaceuticals, Inc. *
10.5 Amendment No. 4 to License and Collaboration Agreement, dated July 8, 2009 by and between Santaris Pharma A/S and Enzon Pharmaceuticals, Inc. *
10.6 Amendment No. 5 to License and Collaboration Agreement, dated October 2, 2009 by and between Santaris Pharma A/S and Enzon Pharmaceuticals, Inc. *
31.1 Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 *
31.2 Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 *
32.1 Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 *
32.2 Certification of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

*

101 The following materials from Enzon Pharmaceuticals, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2012, formatted in XBRL (Extensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Comprehensive Income (Loss), (iii) Condensed Consolidated Statements of Cash Flows, and (iv) Notes to Condensed Consolidated Financial Statements. (1)

 

 

 

*

 

 

* Filed herewith.

 

(1)Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

 

22
 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

  ENZON PHARMACEUTICALS, INC.
   (Registrant)
   
Date: November 9, 2012 /s/George W. Hebard III          
  George W. Hebard III
  Interim Principal Executive Officer and
  Interim Chief Operating Officer
  (Principal Executive Officer)
   
Date: November 9, 2012 /s/Timothy G. Daly               
  Timothy G. Daly
  Vice President, Controller and
  Chief Accounting Officer
  (Principal Financial Officer and
  Principal Accounting Officer)

 

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EXHIBIT INDEX

 

 

 

Exhibit
Number

 

 

Description

 

Reference
No.

10.1 License and Collaboration Agreement dated July 26, 2006 by and between Santaris Pharma A/S and Enzon Pharmaceuticals, Inc. *
10.2 Amendment No. 1 to License and Collaboration Agreement, dated June 13, 2007 by and between Santaris Pharma A/S and Enzon Pharmaceuticals, Inc. *
10.3 Amendment No. 2 to License and Collaboration Agreement, dated June 25, 2007 by and between Santaris Pharma A/S and Enzon Pharmaceuticals, Inc. *
10.4 Amendment No. 3 to License and Collaboration Agreement, dated December 21, 2007 by and between Santaris Pharma A/S and Enzon Pharmaceuticals, Inc. *
10.5 Amendment No. 4 to License and Collaboration Agreement, dated July 8, 2009 by and between Santaris Pharma A/S and Enzon Pharmaceuticals, Inc. *
10.6 Amendment No. 5 to License and Collaboration Agreement, dated October 2, 2009 by and between Santaris Pharma A/S and Enzon Pharmaceuticals, Inc. *
31.1 Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 *
31.2 Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 *
32.1 Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 *
32.2 Certification of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

*

101 The following materials from Enzon Pharmaceuticals, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2012, formatted in XBRL (Extensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Comprehensive Income (Loss), (iii) Condensed Consolidated Statements of Cash Flows, and (iv) Notes to Condensed Consolidated Financial Statements. (1)

 

 

 

*

 

 

* Filed herewith.

 

(1)Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

 

24