Discontinued Operations

12 Months Ended

Dec. 31, 2011

Disposal Groups, Including Discontinued Operations, Disclosure [Text Block]

(22) Discontinued Operations

           On January 29, 2010, the Company consummated the sale to the Sigma-Tau Group of the specialty pharmaceutical business, comprised principally of the Company’s Products and Contract Manufacturing segments, in addition to certain in-process research and development. The Products and Contract Manufacturing segments constituted components of Enzon and qualified for treatment as discontinued operations upon consummation of the transaction. In-process research and development, which comprised part of the total transaction, did not constitute a component of Enzon and, accordingly, was treated as an asset sale and not as discontinued operations.

Terms of Sale

          The asset purchase agreement for the sale of the specialty pharmaceutical business contained the following major provisions. Updated status regarding each element is also provided.

• Cash purchase price was $300.0 million, subject to certain customary working capital adjustments.

          The cash proceeds received, including the second-quarter 2010 working capital adjustment, amounted to approximately $308.0 million. Transaction costs amounted to approximately $5.0 million reducing net proceeds to approximately $303.0 million. Of this amount, $40.9 million was allocated to the sale of in-process research and development (see Note 9 above). The net proceeds then attributable to discontinued operations amounted to $262.6 million and this amount less the book basis in the respective assets and liabilities (see below) yielded the gain from discontinued operations of $176.4 million.

• Up to $27.0 million based on certain success milestones.

           During January 2011, the Company received notice that one of the milestones – the approval of an sBLA regarding a new API starting material for the manufacture of SS Oncaspar - was reached, resulting in Enzon being entitled to receive and recognize $5.0 million of milestone income in 2011. During the latter half of 2010, circumstances emerged making it unlikely that another of the milestones related to an expedited approval process in Europe would be achieved. This would have resulted in a $5.0 million payment to Enzon. 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 the Company will receive any such payments in the future.

          The receipt of milestone payments does not constitute continuing cash flows of the divested business. These payments are not contingent upon Enzon performing the research or development activity. Enzon would be entitled to receive the payments if the buyer utilized another research and development provider.

• Royalties of 5 to 10 percent on incremental net sales above a 2009 baseline amount from what had been Enzon’s four marketed specialty pharmaceutical products through 2014.

          Sales of the four products during 2011 and 2010 outside the U.S. were sufficiently in excess of 2009 baseline amounts to enable Enzon to earn and recognize a nominal amount of royalty revenue related to this agreement. There can be no assurance that the Company will receive any additional royalty payments pursuant to this agreement.

          These royalties do not constitute a migration or continuation by Enzon of the activities that generate the payments. Enzon is no longer engaged in any manufacturing or marketing activities. Consequently, these cash flows are deemed to be indirect in nature.

• Transition services agreement - Enzon has performed product-support research and development and has provided various general and administrative functions for the purchasing parties during 2010 and 2011. In consideration for this work, Enzon is being compensated based upon costs incurred plus a mark-up defined in the transition services agreement.

          Revenues from and associated costs related to research and development transition services are reflected in the statements of operations as contract research and development and research and development – specialty and contracted services, respectively. Transition services revenues related to general and administrative efforts are reported in miscellaneous income and the associated costs are shown as general and administrative – contracted services. As of December 31, 2011, the Company’s involvement in general and administrative support efforts has essentially been concluded. Some diminishing level of research and development support will continue into 2012.

          The cash flows related to the transition services being provided to the buyer in connection with research and development activities represent a continuation of Enzon’s corporate research function. However, the cost-plus arrangement did not generate sufficient net cash flows during 2011 to be considered significant. These cash flows will be substantially lower in 2012. The services are performed at the request of the sigma-tau Group as a convenience to them. The services could have been performed by others.

Discontinued Operations Accounting Treatment

          While the sale of the specialty pharmaceutical business was initiated in November 2009, the assets were not considered to be held for sale as of December 31, 2009 due to the fact that the transaction was subject to shareholder approval. Such approval was obtained at a special meeting of shareholders on January 27, 2010. As a result, discontinued operations treatment began in the first quarter of 2010 for the Products and Contract Manufacturing segments whereby results of discontinued operations and net assets and liabilities are reported separately in the statements of operations and cash flows. The sale of in-process research and development associated with marketed products was treated as an asset sale and was not part of discontinued operations for accounting purposes due to the Company’s significant continuing involvement in research and development related to marketed products subsequent to the sale.

• Assets and liabilities acquired by the Purchasing Parties include:

• ownership of the four marketed products, Oncaspar, Adagen, Abelcet and DepoCyt and all related rights;
• real estate, personal property and equipment of the business used in the manufacture of products and performance of the contract manufacturing operations, including the manufacturing facility in Indianapolis;
• working capital, including accounts receivable, inventories, accounts payable and other prepaids and accruals;
• patents, trademarks, copyrights and other intangible properties related to the products and product-specific assets;
• in-process research and development related to the sourcing of Oncaspar and Adagen; and
• other assets and liabilities as specified in the asset purchase agreement.

• Assets and liabilities excluded from the sale of the specialty pharmaceutical business include:
• cash and cash equivalents;
• tax refunds and tax attributes related to assets, liabilities and past operations;
• royalties business with the exception of one contract related to Oncaspar;
• PEG-SN38 and Enzon’s LNA compounds and PEG technology platform;
• 4% convertible senior notes due 2013;
• stock compensation arrangements;
• product claims, product return claims, environmental and tax liabilities arising prior to the closing date in excess of any reserves;
• lease related to South Plainfield, New Jersey facility; and
• other assets and liabilities as specified in the asset purchase agreement.

           Summary results of operations of the specialty pharmaceutical business through January 29, 2010 and for the year ended December 31, 2009 were as follows (in thousands):

	January 1, 2010 through January 29, 2010		December 31, 2009
Revenues	$	8,720	$	133,213
Income before income tax	$	3,620	$	57,661
Income tax benefit (provision)		—		224
Gain on sale of discontinued operations, net of income tax, as adjusted		176,423		—
Income and gain from discontinued operations, net of income tax, as adjusted	$	180,043	$	57,885

          The sale was a taxable transaction for federal income tax purposes. The Company did not, however, incur significant tax liabilities as a result of the transaction due to the tax basis it has in the disposed of assets and the current year net operating loss. The potential receipt of milestone and/or royalty payments will also be taxable events, but the tax consequences of these payments cannot be estimated at this time.

          The carrying amounts of major classes of assets and liabilities of the specialty pharmaceutical business were as follows (in thousands):

	January 29,
	2010
Trade accounts receivable, net	$	11,886
Inventories		19,516
Other current assets		693
Current assets of discontinued operations	$	32,095
Property and equipment, net	$	12,621
Amortizable intangible assets, net		48,896
Non-current assets of discontinued operations	$	61,517
Trade accounts payable	$	700
Accrued expenses		5,763
Liabilities of discontinued operations	$	6,463