Those on this board know there are a handful former R&D focused biotechs that have morphed into royalty & rights plays with little to no internal R&D, including $LGND, $PDLI and $ENZN. While $LGND is still at the start of its royalty stream, the other two are in late harvest mode and pay dividends. And yet $LGND has recently suggested they are open to new acquisitions, as they have digested the CyDex deal.
So a few weeks ago, when $ENZN put itself up for sale, we wondered if it could be a fit for $LGND.
On the surface, similarities in the model and $ENZN's $218M MCap make it within the range of possible. But after a week long deep dive, we've determined that this would be a disastrous purchase for $LGND shareholders.
Now there are some positives to $ENZN. They have more current revenues and they are valued well below the Price / Sales of $LGND. And it has a pair of partnerable platform technologies: a customized PEGylation Linker Technology (Customized Linker Technology®) and third-generation mRNA-targeting agents utilizing the Locked Nucleic Acid (LNA) technology. So it is tempting to draw a comparisons to the CyDex deal.
But understand that the $ENZN technology is not captisol.
Captisol is the same agent in all uses - it is not customized. While new drugs plus captisol does require new studies, the MDF is the same and so it has less issues for clin / reg path. After 4 decades of use, PEG comes in many flavors now and optimized for each agent. Still most of the IP in this area is gone and $ENZN's tech is no longer the leader in the area.
As for LNA, this area was once red hot with the RNAi booming. But of late there as been much made of the unhappiness among Big Pharma about their adventures in RNAi therapeutics. Plus there is the looming IP battle if this technology ever gets to market. While the $ENZN targets have some overlap with NR targets of $LGND (HIF-1a and AR, etc), they are very early and have been stalled in the clinic for over two years. At best, such would require more R&D before they could be partnerable. Neither $LGND (nor after the cuts, $ENZN) has the expertise in the area to do R&D collabs in this space ... and $LGND has yet to prove it can get superior partnership dollars.
Of late, $ENZN (with principle owner Carl Icahn and chaired by his protege Alex Denner) has done nearly all it can to squeeze value out of the husk that is now $ENZN. Revenues have been falling for the last two years, and those left are mostly from royalties from PEGINTRON (Peginterferon alfa-2b) with Merck. Even as we think the nucs for HepC will not eliminate all the market for interferon, we would rather not see $LGND increase its exposure to the counter intuitive nucs trade. Already, the shorts are targeting $LGND given perceived dependance on Promacta for HepC royalties. Adding a revenue stream from interferon to Promacta would be doubling down in front of anticipated INF for HepC market disruption. At least Promacta has uses beyond TBO due to INF. HepC itself causes some TBO, plus there are many potential uses of epog that do not depend on INF. But if nucs do get approved, use of INF will suffer and fast. Other revenues include Macugen (anti-VEGF MAb for wet AMD) which has been bested by newer agents, and CIMZIA by UCB which is a me too anti-TNFa MAb chipping off RXs from Remicade & Humira. It does have rights from the new Merck Sylatron... but it is still Peginterferon alfa-2b, with other melanoma therapies (Yervoy, etc) are seen as having similar effect with more safety and tolerablility. Back in Jan 2012, it sold out its onco portfolio to Sigma-Tau in a front loaded deal. $300 mil upfront with up to a further $27 million linked to milestones, and "eligible for royalties of 5 - 10 % on net sales to 2014". Royalties till $2014?
Now the stock price of $ENZN has been supported by a buyback program, but it is a bit of a revolving door. Last spring, $ENZN choose to lever up with debt. Then in Dec, choose to payout a massive $2 special dividend to beat the tax man. And while timing is unclear, it seems that some of this debt was recently converted into share (Steelhead) - likely to get in on the spec div? It was only after the div that $ENZN reported it was suspend all clinical development in an effort to conserve capital.
Ummm... if the issue need to conserve capital, why the special dividend? More likely the real reason is just the R&D is not getting partner interests given the data in hand.
We could go on and on, but doubt there is need.
It is my hope that Mr. Higgins agrees the last thing $LGND needs is to be pressured to bolt on another failed public biotech. Especially one for which most of the expenses have already been cut and what is already squeezing the royalties that it holds. If anything - better to seek replicate the CyDex case of buying small private co's with diverse royalties streams. (We still beleive $LGND should be split in two like $PDLI was; an R&D co, plus a div paying royalty plan.)
$LGND remains a buy for us. But if Mr. Higgins goes for $ENZN, we will have lost all faith. We would either go active to build a groundswell among fellow shareholders to stop him, or give up and join those who are already short $LGND.
Our read is that Alex Denner will get his sale, and that Carl Icahn and Baupost will get their way; $PDLI will soon be forced to buy all or part of $ENZN. If all $6/sh gets it done. And $LGND should stay on the sideline and let them. With the Queens et al IP expiring, $PDLI needs $ENZN rev stream far worse than $LGND...and they have a larger MCap, more cash and a lower WACC to allow them to outbid $LGND. And $PDLI's CEO knows the MAb space far better than $LGND and was even the founder of Eyetech, so knows Macugen well.
Thankfully, we think - and hope - that Mr. Higgins isn't so stupid or desperate to do the $ENZN deal. But as we beleive they are evaluating it, thought it best to speak up now.