Zacks_Analysts' Blog : Enzon Plans a 50% Workforce Cut - Analyst Blog

Enzon Pharmaceuticals (ENZN) recently announced that it will reduce its workforce by almost half to better align its resources with much tempered pipeline activities. The research and development pipeline at Enzon was reduced drastically in the last few months.

During the second quarter, Enzon announced that it will no longer develop three messenger ribonucleic acid (mRNA) antagonists utilizing the LNA technology and returned the rights to Santaris. The mRNA antagonists, all of which were in phase I trials, were hypoxia-inducible factor-1 alpha (HIF-1 a) indicated for tumors and lymphoma, survivin indicated for cancer and pediatric patients with relapse acute lymphoblastic leukemia and androgen receptor (AR) for castration-resistant prostate cancer (CRPC).

Earlier, in mid-May 2011, Enzon announced plans to halt the development of its lead pipeline candidate PEG-SN38 for the treatment of metastatic colorectal cancer (mCRC). PEG-SN38, a PEGylated version of the active metabolite of the cancer drug irinotecan, is however being studied for metastatic breast cancer (mid stage), pediatric cancer (early stage), and solid tumors (early stage in combination with Roche’s [RHHBY] Avastin).

With the discontinuation of the development of PEG-SN38 for mCRC, and the three mRNA antagonists, Enzon is left with just one clinical program in mid-stage development (PEG-SN38 for metastatic breast cancer) and other candidates in early or preclinical stages of development.

The layoff plan, which is expected to be fully implemented by the second quarter of 2012, is expected to reduce operating expenses by approximately $6 million annually. After the layoff of about 48% of employees, Enzon will have 47 employees effective from June 2012. In the third quarter of 2011, Enzon management expects to record a charge of approximately $3 million related to the workforce reduction.

Our Recommendation

We currently have a Neutral recommendation on Enzon.

We are pleased with Enzon’s improved liquidity position arising from the sale of its specialty pharmaceutical business. Moreover, the successful development and subsequent commercialization of PEG-SN38 would be a boost for the stock. However, the weak pipeline at Enzon is a matter of concern.

Moreover, a substantial portion of the company’s revenues comes from royalties from sales of Merck’s (MRK) PegIntron, which has been declining since the last few quarters. The recent launches of  Vertex Pharmaceuticals (VRTX)/Johnson & Johnson’s (JNJ) Incivek and Merck’s Victrelis will pose strong competition to PegIntron, which could further reduce royalties from PegIntron sales.