by Travis Johnson, Stock Gumshoe | January 5, 2010 12:43 pm
That’s a compelling headline, right? That’s the subject line of one of the most popular teaser emails I’ve seen recently — at least, as measured by the number of eager Gumshoe readers who’ve forwarded it on to me.
The teaser is for George Huang’s FDA Report, a newsletter that hasn’t been around that long (we have only one subscriber review so far, you can see it here). From teasers I’ve seen over the past year or so, it seems that the newsletter is mostly focused on fairly short-term trades around FDA approvals and other events in the biotech space, including short and options trades.
So what are they teasing as “what could be the single best investment opportunity of 2010…?”
Let’s find out, shall we?
The core of the argument here is that this is a biotech company that’s selling off a large part of its business for cash, and Huang believes they’ll be using this cash to issue a large special dividend to shareholders. Here’s how they describe it:
“In short, a very small New Jersey company has indicated to the SEC its intent to offer what could go down as the LARGEST stock dividend in U.S. market history….
“So you could get 100% of your investment back in a single day… and you’d still own your shares, essentially free of charge.
“On the low end, we estimate you could receive a 60% dividend… and of course, would still retain ownership of your shares.
“Overall, we believe this could be the absolute best and safest investment opportunity of 2010. It’s a situation in which you have the potential to safely earn 60% to 100% in total… with very little risk.
“And I haven’t even told you the most incredible part…
“Because the company is very small and this deal is complicated, few people in the investment world know about it. (Those who do have literally invested millions for the chance to capitalize on the opportunity.)
“In other words, there is a way for you to possibly get in on this opportunity BEFORE the enormous dividend is announced to the general public.
“Believe me, when this information does go public, the share price will likely shoot up as investors clamor to take advantage of such a large one-day windfall.”
So that’s the backdrop — this is a small company in New Jersey, with a potential big dividend. Can we get some more specifics?
Indeed we can … here’s some more about the deal …
“You likely haven’t heard of this company…
“But in the world of healthcare, the firm is considered a true pioneer, having perfected a niche drug to treat a severe immune deficiency syndrome and another to treat a common type of cancer in children.
“It is these drugs – plus two other specialty medications – that are central to a recent deal signed between this New Jersey-based company and a European drug maker that specializes in marketing niche drugs.
“The details of the contractual agreement – inked just a few weeks ago – were filed with the SEC on November 9th, 2009.
“It’s a complicated deal, involving about $27 million based on sales milestones, and future royalty payments too.
“But what’s most important for you to know is that there will be a $300 million UP FRONT cash payment from the sale of a portion of the New Jersey company’s business, including the four drugs.
“In other words, the firm is selling four potentially profitable drugs… for about $300 million in cash.
“Relative to the N.J.-based company’s size, $300 million is a HUGE payment… almost two-thirds of market cap…
“Better still, the SEC filing also disclosed that the company’s Board of Directors ‘is evaluating options to return most of the value of this sale to shareholders.’
“In other words… they have committed to paying a huge special dividend, but have yet to make an official announcement to the investing public.”
That word “committed” is probably a bit strong, but they back it up by saying that Carl Icahn usually gets his way — and he’s been the bane of underperforming, shareholder-ignoring biotechs for years, turning many of them into big winners. They go on to describe a few of the deals Icahn has had a hand in, and the muscle he brings to the table — examples include Biogen Idec, ImClone, and Amylin.
We even get a few specifics about Icahn’s interest in this teased company:
“So far, Mr. Icahn has poured $34 million into the New Jersey company we’ve been following – that’s 7% of the shares outstanding. He also has options exposure to another 7% of the business.
“In January 2009, Icahn proposed that Mulligan and Denner, the same two men he’d worked with on the ImClone deal, be elected to the New Jersey firm’s Board.
“Shortly afterward, the three men began negotiations with a European niche drug maker… and in November, they signed an agreement to sell the company’s four specialty drugs for $300 million in cash.”
OK, so I’m sure there are a good number of folks out there who could identify this one given the meaty pile of clues we’re gnawing on here, and some folks over at the forum have started to discuss it as well, but this is Enzon Pharmaceuticals (ENZN — click here to see a free instant trend analysis of ENZN, going gangbusters at the moment).
And yes, Carl Icahn owns close to 7% of the company — actually a bit closer to 6% now, and has owned these shares for quite a while, I think the announcement of his first big position came about two years ago, and at the time his interest helped stabilize the shares … though not for long, the financial crisis hit ENZN very hard and the shares got as low as $3 or so back in November of 2008. They’ve since recovered substantially, in part thanks to that deal to sell off their approved drugs, and the shares are now where they were when Icahn enthusiasm first hit the shares, around $10.75 as I type.
So what’s the story? Yes, Icahn is leaning on them to “create value” for shareholders, which is undoubtedly part of the reason they’re selling off these profitable drugs to Sigma-Tau Pharmaceuticals, and why they’re also buying back shares (they just authorized $50 million in buybacks). ENZN has a fair amount of cash and near-cash on hand (more than $100 million as of the last quarter), though they do also carry some debt (about $250 million in long term debt) so the net cash position is still negative as of the end of September.
That will change quickly if they deal goes through with the $300 million upfront payment, and it’s certainly easy to see Icahn getting very antsy if they don’t use a large portion of that cash to buy back shares or issue a dividend. Doesn’t mean they have to listen to him, of course, but they do seem intent on increasing “shareholder value.”
Enzon is actually a fairly storied name in biotech, it has been disappointing investors for several years but has a long history before that (it was founded almost 30 years ago out of a Rutgers lab), and has made some significant and profitable discoveries that led to those four marketed niche products and some royalty streams from other companies who built products on their research. They reorganized after a failed merger several years ago, brought in a new CEO, and refocused on cancer therapies (where a lot of the biotech money flows).
And Icahn is not alone — activist value investor Seth Klarman is also on board more recently, with his Baupost Group now holding about 4.5% of the shares after buying in the third quarter last year, and Iridian Asset Management, also often followed by value investors, owns nearly 15% of the shares. There’s also a very large and growing short interest in the shares (28% of the float as of today, according to shortsqueeze.com), so there are certainly a good number of folks betting against the shares as well. The stock is up almost 100% over the past year.
As to the potential dividend — beats me, it’s accurate to say that they’ve given lip service to returning value to shareholders, here’s the quote from the press release announcing the deal back in November:
“After the sale of these assets, Enzon’s businesses will consist of its royalties, Peg SN38 and our LNA and PEG technology platforms. ‘Enzon’s Board of Directors is evaluating options to return most of the value of this sale to shareholders’ stated Alex Denner, Chairman. ‘We will refocus the company on our royalty business, pipeline, and technology platforms.'”
And yes, you read that right — Alex Denner is Carl Icahn’s guy on the board, so the bet that things will work out as Icahn wants is probably a pretty decent one. What does Carl want? I don’t know whether he’d prefer a cash dividend, big buybacks, or something else that “returns value” to him for his shares. That doesn’t necessarily mean that it makes sense for individual shareholders to buy shares in expectation of a special dividend — special divvies usually do drive up the shares, at least temporarily, but they’re not sustained drivers of stock value, so it’s always important to understand the company underneath — and what will be left after that dividend passes (assuming that there is a dividend).
If you buy shares now at $10.75 and get a dividend of, let’s say, $4 in March (made that number up) and the stock remains otherwise unchanged and dips to $6.75 after the dividend payout (which is what logically should happen, though logic isn’t always predominant in special situations like this), then what you’ve done is incurred a tax liability for the dividend payment and you end up with shares that are otherwise just about the same, representing the same company (without those four products and associated stuff that they sold). If the special dividend and Icahn’s interest means that the stock is worth more as a royalty and pipeline firm than folks currently think, then maybe the stock will do well in six months regardless of how they return value to shareholders, and a special dividend is a nice way to repay the folks who’ve stuck with this stock for a couple rough years, but it doesn’t necessarily mean that Enzon is a better long term investment now.
There’s also some risk, of course, that folks who buy in for the dividend will sell as soon as the ex-dividend date passes, making the stock fall further than just the dividend payout would indicate. If we assume that the stock price was rational before this deal was announced, and that they will dividend out most of the cash they receive, then the logical starting point is the price before the deal, about $8 — so the stock has already moved up about 30% based largely on this deal. It may well be that this move understates the importance, or that any official announcement of a dividend, if that’s what they choose to use to create value, could spike the shares further, but it’s worth noting that there’s already some new enthusiasm beneath these shares … and like all new loves, it might not last through the first taste of disappointment.
And as to timing, I’ll take Huang at his word that something is likely to happen this quarter — he certainly knows more about the company and its path than I do. The deal won’t be voted on by shareholders until January 27, though, so it seems unlikely that there will be pivotal dates for ENZN before then.
That’s what I can share about ENZN, whose products and potential pipeline I know not at all — if you’ve got an opinion on Icahn, Enzon, Huang or anything else, feel free to let us know with a comment below.
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