ENZON PHARMACEUTICALS, INC. - Quarter Report: 2008 September (Form 10-Q)

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, 2008
	or

o	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.)

685 Route 202/206, Bridgewater, New Jersey	08807
(Address of principal executive offices)	(Zip Code)

(908) 541-8600
(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 o

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

Large Accelerated Filer o Accelerated Filer x Non-Accelerated Filer o Smaller Reporting Company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No x

Shares of Common Stock outstanding as of November 3, 2008: 44,953,665.

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, 2008

December 31, 2007*

ASSETS

Current assets:

Cash and cash equivalents

$

78,128

$

40,053

Short-term investments

57,903

123,907

Restricted investments and cash

—

73,592

Accounts receivable, net of allowance for doubtful accounts of $66 at September 30, 2008 and $280 at December 31, 2007

15,262

14,927

Inventories

16,804

22,297

Other current assets

6,155

6,401

Total current assets

174,252

281,177

Property and equipment, net of accumulated depreciation of $38,510 at September 30, 2008 and $37,031 at December 31, 2007

45,006

45,312

Marketable securities

66,479

20,653

Amortizable intangible assets, net

63,366

68,141

Other assets

4,247

5,074

Total assets

$

353,350

$

420,357

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:

Accounts payable

$

6,510

$

9,441

Notes payable

—

72,391

Accrued expenses

29,718

23,650

Total current liabilities

36,228

105,482

Notes payable

275,000

275,000

Other liabilities

3,924

3,302

Total liabilities

315,152

383,784

Commitments and contingencies

Stockholders’ equity:

Preferred stock - $.01 par value, authorized 3,000,000 shares; no shares issued and outstanding at September 30, 2008 and December 31, 2007

—

—

Common stock - $.01 par value, authorized 170,000,000 shares; issued and outstanding 44,896,010 shares and 44,199,831 shares at September 30, 2008 and December 31, 2007, respectively

449

442

Additional paid-in capital

342,448

335,318

Accumulated other comprehensive (loss) income

(2,937

)

326

Accumulated deficit

(301,762

)

(299,513

)

Total stockholders’ equity

38,198

36,573

Total liabilities and stockholders’ equity

$

353,350

$

420,357

* Condensed from audited financial statements.

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

2

ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)

Three months ended
September 30,

Nine months ended
September 30,

2008

2007

2008

2007

Revenues:

Product sales, net

$

28,912

$

24,874

$

85,547

$

72,542

Royalties

14,611

18,206

44,346

52,840

Contract manufacturing

5,267

3,761

18,634

12,159

Total revenues

48,790

46,841

148,527

137,541

Costs and expenses:

Cost of product sales and contract manufacturing

14,473

14,118

48,018

40,851

Research and development

15,654

10,456

42,489

40,449

Selling, general and administrative

18,253

14,632

52,121

47,905

Amortization of acquired intangible assets

167

171

500

541

Restructuring charge

249

5,513

2,392

6,837

Total costs and expenses

48,796

44,890

145,520

136,583

Gain on sale of royalty interest, net

—

88,666

—

88,666

Operating (loss) income

(6

)

90,617

3,007

89,624

Other income (expense):

Investment income, net

1,268

2,689

4,567

7,632

Interest expense

(3,025

)

(4,286

)

(9,591

)

(13,330

)

Other, net

(94

)

497

226

914

(1,851

)

(1,100

)

(4,798

)

(4,784

)

(Loss) income before income tax provision

(1,857

)

89,517

(1,791

)

84,840

Income tax provision

163

1,987

458

2,055

Net (loss) income

$

(2,020

)

$

87,530

$

(2,249

)

$

82,785

(Loss) earnings per common share - basic

$

(0.05

)

$

1.99

$

(0.05

)

$

1.89

(Loss) earnings per common share - diluted

$

(0.05

)

$

1.23

$

(0.05

)

$

1.25

Weighted average shares - basic

44,464

43,925

44,328

43,890

Weighted average shares - diluted

44,464

74,344

44,328

72,818

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,

2008

2007

Cash flows from operating activities:

Net (loss) income

$

(2,249

)

$

82,785

Adjustments to reconcile net (loss) income to net cash provided by operating activities:

Depreciation and amortization

15,470

12,481

Write-down of manufacturing assets

810

5,124

Gain on sale of property and equipment

—

(26

)

Share-based compensation

6,362

6,064

Loss on sale of marketable securities 266 —

Loss on impairment of available-for-sale securities

645

—

Gain on redemption of notes payable

(371

)

(481

)

Write off and amortization of debt issue costs

990

1,386

Amortization of debt securities premium/discount

(2,531

)

114

Changes in operating assets and liabilities

3,773

(15,601

)

Net cash provided by operating activities

23,165

91,846

Cash flows from investing activities:

Purchase of property and equipment

(6,199

)

(15,231

)

Purchase of product rights

—

(17,500

)

Proceeds from sale of marketable securities

66,564

159,110

Purchase of marketable securities

(106,816

)

(315,639

)

Maturities of marketable securities

132,380

129,742

Net cash provided by (used in) investing activities

85,929

(59,518

)

Cash flows from financing activities:

Proceeds from exercise of common stock options

983

395

Proceeds from employee stock purchase plan

718

446

Issuance of shares pursuant to employee stock purchase plan

(700

)

—

Redemption of notes payable

(72,020

)

(40,240

)

Net cash used in financing activities

(71,019

)

(39,399

)

Net increase (decrease) in cash and cash equivalents

38,075

(7,071

)

Cash and cash equivalents at beginning of period

40,053

28,431

Cash and cash equivalents at end of period

$

78,128

$

21,360

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) Organization and Basis of Presentation

          The unaudited condensed consolidated financial statements have been prepared from the books and records of Enzon Pharmaceuticals, Inc. and its subsidiaries (Enzon or the Company) in accordance with United States generally accepted accounting principles (GAAP) for interim financial information and Rule 10-01 of the U.S. Securities and Exchange Commission (SEC) Regulation S-X. Accordingly, these financial statements do not include all of the information and footnotes required for complete annual financial statements. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. Research and development and general and administrative expense have been modified by immaterial amounts for the three months and nine months ended September 30, 2007 and the three months ended March 31, 2008. Certain patent-related legal costs were reclassified reducing research and development expense and increasing general and administrative expense by: $358,000 for the three months ended September 30, 2007, $1.3 million for the nine months ended September 30, 2007 and $405,000 for the three months ended March 31, 2008. Beginning April 2008, amounts were classified appropriately and no reclassification was necessary. There was no net effect from these reclassifications on earnings, financial position or cash flows.

          Interim results are not necessarily indicative of the results that may be expected for the year. The interim 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, 2007.

(2) Spin-Off of Research and Development Operations

          On May 7, 2008, the Company announced that the Board of Directors has authorized a plan to spin-off its biotechnology activities in a transaction that would result in two independent public companies. The newly independent biotechnology business would be engaged in research and development based on Enzon’s PEGylation and the Locked Nucleic Acid technologies, among others, to develop therapeutics for cancer and other life-threatening diseases. Enzon would contribute $100.0 million in cash and securities and $50.0 million in the form of an interest-bearing term note, as well as certain operating assets and liabilities to the newly created company. Enzon would retain the currently marketed products, Oncaspar, DepoCyt, Abelcet and Adagen, the rights to current and future royalty revenues from existing licenses, including PEG-INTRON, Pegasys, Macugen, Cimzia and Hematide, certain deferred tax assets, including net operating loss carryforwards and its manufacturing facility in Indianapolis, Indiana. Enzon’s outstanding convertible notes would remain an obligation of Enzon. Completion of the spin-off is subject to numerous conditions, including final approval by the Board of Directors and the effectiveness of a registration statement with the SEC. The Company continues to work with the SEC towards finalizing the registration statement on Form 10 under the name Evivrus, Inc.

          On August 11, 2008, the Company announced it was exploring strategic alternatives for its specialty pharmaceuticals business. These alternatives included, among other things, selling the entire specialty pharmaceuticals business, or selling one or more of Enzon’s marketed products, Oncaspar, DepoCyt, Abelcet and Adagen, and its Indianapolis, Indiana manufacturing facility.

          Through September 30, 2008, $3.8 million of transaction costs have been incurred related to strategic initiatives including the spin-off and the potential sale of the specialty pharmaceuticals business. These charges have been expensed as incurred and are included in Selling, General and Administrative expense. As announced on November 5, 2008, the potential sale of the specialty pharmaceuticals business has been negatively impacted by the external financial markets, effectively eliminating this alternative from further consideration at this time. Assuming the spin-off is finalized, total costs of the strategic initiatives could range from approximately $8.0 million to $10.0 million.

5

ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)

(3) New Accounting Standards

          Effective January 1, 2008, the Company adopted the provisions related to financial assets and liabilities of Statement of Financial Accounting Standards No. 157, “Fair Value Measurements”, (SFAS No. 157), as amended. SFAS No. 157 provides guidance on the use of fair value in accounting and disclosure for assets and liabilities when such accounting and disclosure is called for by other accounting literature. As amended by Financial Accounting Standards Board (FASB) Staff Position (FSP) 157-2, the applicability of SFAS No. 157 for most nonfinancial assets and nonfinancial liabilities has been delayed to 2009 for calendar-year companies.

          Enzon currently has no financial assets or liabilities for which it recognizes in earnings periodic gains or losses resulting from fair value fluctuations. Short-term investments and marketable securities are carried at fair value on the consolidated balance sheets with temporary gains and losses reflected in other comprehensive income. The Company has no significant nonfinancial assets or liabilities that it expects will be affected in 2009 when SFAS No. 157 becomes fully effective.

          The Company also adopted, as of January 1, 2008, SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” and Emerging Issues Task Force consensus No. 07-3 (EITF 07-3), “Accounting for Advance Payments for Goods and Services to Be Used in Future Research and Development Activities”. SFAS No. 159 permits companies to measure many financial assets and liabilities at fair value on a contract-by-contract basis in order to prevent distortions in earnings in the event certain other instruments in the balance sheet are marked-to-market through earnings. EITF 07-3 calls for capitalization of non-refundable advance payments to acquire goods or pay for services that will be consumed or performed in future periods in conducting research and development activities and to amortize them over the period of expected benefit. The Company’s adoption of SFAS No. 159 and EITF 07-3 did not have an impact on its financial statements.

(4) Investments and Marketable Securities

          The Company classifies its investments in debt and equity securities as either short-term or long-term based upon their stated maturities and the Company’s intent and ability to hold them. Investments with stated maturities of one year or less are classified as current assets. Investments in debt securities with stated maturities greater than one year and marketable equity securities are classified as noncurrent assets when the Company has the intent and ability to hold such securities for at least one year.

          The cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. The amortization and accretion, along with realized gains and losses, are included in investment income, net. The cost of securities is based on the specific identification method.

          Investments in marketable equity securities and debt securities, including auction rate securities are classified as available-for-sale. Debt and marketable equity securities are carried at fair value, with the unrealized gains and losses (which are deemed to be temporary), net of related tax effect, when appropriate, included in the determination of other comprehensive income and reported in stockholders’ equity.

          Fair value is determined in accordance with SFAS No. 157, which established a hierarchy of preferred measures based upon the level of market observability used in determining the investment’s fair value. The preferred level is that which is derived from readily available quoted prices in active markets (Level 1). As the table below indicates, the majority of the Company’s investments and marketable securities are valued based on Level 1 inputs. Recently, due to instability in the financial markets, failed auctions for a certain auction rate security have occurred and, as a result, the Company has had to seek alternative measures of fair value which were deemed to be Level 2. The model used to value the auction rate securities considers listed quotes of bonds with comparable maturities, the underlying collateral of the securities and the issuer's credit worthiness.

6

ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)

           The table below indicates the fair value measurements employed as of September 30, 2008 (in thousands):

Quoted
Prices
in Active
Markets for
Identical Assets
(Level 1)

Significant
Unobservable
Inputs
(Level 2)

Total

U.S. corporate debt

$

116,164

$

—

$

116,164

Auction rate securities

4,650

1,035

5,685

Other

2,533

—

2,533

$

123,347

$

1,035

$

124,382

          The majority of the auction rate securities are rated AAA or AA and are variable-rate debt instruments for which interest rates are reset approximately every 28 days. The underlying securities have contractual maturities that are long-term, but because of the historical ability to liquidate holdings at the time of the periodic auctions, they have been classified as short-term, available-for-sale securities. Refer to the analysis of unrealized losses below regarding the impairment of auction rate securities.

          The amortized cost, gross unrealized holding gains or losses, and fair value of the Company’s available-for-sale securities by major security type at September 30, 2008 were as follows (in thousands):

Amortized
Cost

Gross
Unrealized
Holding Gains

Gross
Unrealized
Holding Losses

Fair
Value*

U.S. corporate debt

$

119,769

$

87

$

(3,692

)

$

116,164

Auction rate securities

5,505

180

—

5,685

Other

2,206

511

(184

)

2,533

$

127,480

$

778

$

(3,876

)

$

124,382

* Includes short-term investments of $57,903 and marketable securities of $66,479 at September 30, 2008.

          The amortized cost, gross unrealized holding gains or losses, and fair value of the Company’s available-for-sale securities by major security type at December 31, 2007 were as follows (in thousands):

Amortized
Cost

Gross
Unrealized
Holding Gains

Gross
Unrealized
Holding Losses

Fair
Value*

U.S. Government and GSE debt

$

9,796

$

2

$

(19

)

$

9,779

U.S. corporate debt

136,037

83

(97

)

136,023

Auction rate securities

51,375

—

(240

)

51,135

Other

2,308

333

—

2,641

$

199,516

$

418

$

(356

)

$

199,578

* Includes short-term investments of $123,907, restricted investments of $55,018 and marketable securities of $20,653 at December 31, 2007.

7

ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)

          Restricted investments and cash were held in a separate account for the sole purpose of repayment or repurchase of the Company’s 4.5% convertible subordinated notes due July 1, 2008. As of December 31, 2007, restricted investments amounted to $55.0 million of which $29.0 million was held in auction rate securities and restricted cash amounted to $18.6 million. In July 2008, the Company paid off the remaining $12.5 million due on its 4.5% notes according to their terms. Amounts remaining in restricted cash after settlement of the 4.5% notes amounted to $1.8 million and were returned to the Company’s unrestricted cash accounts to be used for general corporate purposes.

          Other securities include investments of participants in the Company’s Executive Deferred Compensation Plan (predominantly mutual fund shares) totaling $2.0 million as of September 30, 2008 and $2.3 million as of December 31, 2007. The assets of the deferred compensation plan also include cash ($1.5 million and $0.6 million at September 30, 2008 and December 31, 2007, respectively). There is a non-current liability that offsets the aggregate deferred compensation plan assets. In addition, other securities included $0.5 million and $0.3 million, respectively of corporate equity securities as of September 30, 2008 and December 31, 2007.

          Maturities of marketable debt securities, excluding securities related to the Company’s Executive Deferred Compensation Plan, at September 30, 2008 were as follows (in thousands):

Twelve-Month
Periods Ending
September 30,

Amortized
Cost

Fair
Value

2009

$

59,791

$

57,391

2010

56,160

55,341

2011

9,323

9,117

$

125,274

$

121,849

          Impairment assessments are made at the individual security level each reporting period. When the fair value of an investment is less than its 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 cost and fair value at such date. The Company has one investment in auction rate securities at risk with an original cost basis of $1.5 million. Beginning in the latter portion of 2007, there have been no successful auctions for this security and the credit rating of the issuer was downgraded in June 2008. Based upon the foregoing, the Company concluded that the decline in estimated fair value (Level 2) at June 30, 2008 of $645,000 was other than temporary. An impairment write-down to the security’s estimated fair value of $855,000 was recognized as of June 30, 2008 and is reflected in investment income in the statement of operations for the nine months ended September 30, 2008. As of September 30, 2008, the fair value of the Company’s holdings of U.S. corporate debt was lower than the amortized cost basis by approximately $3.6 million. This net unrealized holding loss was reflective of general capital market conditions affecting over fifty separate corporate debt holdings and not the credit worthiness of any individual security. No individual investment constitutes greater than five percent of the Company’s portfolio. Accordingly, the Company has determined that there were no other-than-temporary holding losses as of September 30, 2008. Despite continued disruption in the global financial markets subsequent to September 30, 2008, there is no change in this conclusion.

8

ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)

          The following table shows the gross unrealized losses and fair values of the Company’s available-for-sale securities (both short-term and long-term) aggregated by investment category and length of time that individual securities have been in a continuous loss position at September 30, 2008 (in thousands):

Less Than 12 Months

12 Months or Greater

Fair
Value

Unrealized
Loss

Fair
Value

Unrealized
Loss

U.S. corporate debt ⁽¹⁾

$

97,180

$

(2,794

)

$

6,109

$

(898

)

Other⁽²⁾

955

(184

)

—

—

Total

$

98,135

$

(2,978

)

$

6,109

$

(898

)

⁽¹⁾ U.S. corporate debt. The unrealized losses of $3.7 million on the U.S. corporate debt were attributable to increases in interest rates, as well as bond pricing. Of the unrealized loss reflected in the 12 months or greater column, the majority arose during the quarter ended September 30, 2008. The Company invests in bonds that are rated A1 or better, as dictated by its investment policy. Since the changes in the market value of these investments are due to changes in interest rates and not the credit quality of the issuer, and the Company has the ability and intent to hold these investments until recovery of the cost, the Company does not consider its investments in U.S. corporate debt to be other-than-temporarily impaired at September 30, 2008.

⁽²⁾ The Company’s investments in other securities relate to the Company’s Executive Deferred Compensation Plan.

(5) Comprehensive (Loss) Income

          The following table reconciles net (loss) income to comprehensive (loss) income (in thousands):

Three months ended
September 30,

Nine months ended
September 30,

2008

2007

2008

2007

Net (loss) income

$

(2,020

)

$

87,530

$

(2,249

)

$

82,785

Other comprehensive (loss) income:

Unrealized (loss) gain on securities that arose during the period ⁽¹⁾

(2,842

)

280

(4,174

)

948

Reclassification adjustment for losses included in net loss⁽¹⁾

266

—

911

—

Total other comprehensive (loss) income

(2,576

)

280

(3,263

)

948

Comprehensive (loss) income

$

(4,596

)

$

87,810

$

(5,512

)

$

83,733

⁽¹⁾ Information has not been tax-effected due to an estimated annual effective tax rate of zero.

9

ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)

(6) Earnings Per Common Share

          Basic earnings (loss) per common share is computed by dividing the net income (loss) available to common stockholders by the weighted average number of shares of common stock outstanding during the period. Restricted stock awards and restricted stock units (collectively, nonvested shares) are not considered to be outstanding shares until the service vesting period has been completed. 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 using the treasury stock method, nonvested shares, 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 to the numerator under the assumption that the interest would not have been incurred if the notes payable were converted into common stock.

          The following table reconciles the numerators and denominators of the basic and diluted earnings per share computations for the three- and nine-month periods ended September 30, 2008 and September 30, 2007 (amounts in thousands except per-share amounts):

Three Months
Ended
September 30,

Nine Months
Ended
September 30,

2008

2007

2008

2007

Earnings Per Common Share - Basic:

Net (loss) income

$

(2,020

)

$

87,530

$

(2,249

)

$

82,785

Weighted average common shares outstanding

44,464

43,925

44,328

43,890

Basic earnings per share

$

(0.05

)

$

1.99

$

(0.05

)

$

1.89

Earnings Per Common Share - Diluted:

Net (loss) income

$

(2,020

)

$

87,530

$

(2,249

)

$

82,785

Add back interest expense on 4% convertible notes

*

2,750

*

8,250

Add back interest expense on 4.5% convertible notes

*

1,055

*

*

Adjusted net income

$

(2,020

)

$

91,335

$

(2,249

)

$

91,035

Weighted average number of common shares outstanding

44,464

43,925

44,328

43,890

Incremental shares related to ESPP and vesting of nonvested awards

*

346

*

132

Incremental shares assuming conversion of 4% notes

*

28,796

*

28,796

Incremental shares assuming conversion of 4.5% notes

N/A

1,277

*

*

Weighted-average number of common shares outstanding and common share equivalents

44,464

74,344

44,328

72,818

Diluted earnings per share

$

(0.05

)

$

1.23

$

(0.05

)

$

1.25

* For the three months and nine months ended September 30, 2008, the effect of inclusion of all potentially dilutive common stock equivalents and related earnings effects would have been anti-dilutive. Consequently, reported diluted earnings per share is equal to basic earnings per share for these periods. Approximately 39.6 million potentially dilutive common stock equivalents were anti-dilutive for the nine-month period ended September 30, 2008. For the nine-months ended September 30, 2007, approximately 1.5 million anti-dilutive common stock equivalents related to the 4.5% convertible notes were excluded from the computations.

N/A - Not applicable

10

ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)

(7) Share-Based Compensation

           The Company accounts for its share-based compensation plans, including stock options, nonvested share awards and ESPP, according to the provisions of Statement of Financial Accounting Standards No. 123 (revised), “Share-Based Payment” (SFAS No. 123R).

Stock Option and Nonvested Share Awards

          During the three-month periods ended September 30, 2008 and 2007, the Company recognized share-based compensation expense of $2.0 million and $1.5 million, respectively, relating to stock option and nonvested share awards. During the nine-month periods ended September 30, 2008 and 2007, the Company recognized share-based compensation expense of $6.2 million and $6.0 million, respectively, for these plans. These expenses were recorded in the same expense categories in the interim consolidated statement of operations as the underlying employee compensation. The weighted average grant price of the options granted during the nine months ended September 30, 2008 was $9.22 per share and fair values ranged from $3.27 to $3.53 per share. The fair value of the options granted during the nine months ended September 30, 2008 was $0.7 million. The nonvested shares granted during the nine months ended September 30, 2008 had a weighted average grant-date fair value of $8.98 per share for an aggregate fair value of $4.6 million. The Company uses historical data to estimate forfeiture rates. Activity in options and nonvested shares during the nine-months ended September 30, 2008 and related balances outstanding as of that date are reflected below (in thousands).

Options

Nonvested
Shares

Outstanding at January 1, 2008

8,385

1,774

Granted

200

508

Exercised and vested

(40

)

(309

)

Expired and forfeited

(47

)

(82

)

Outstanding at September 30, 2008

8,498

1,891

Options vested and expected to vest at September 30, 2008

7,822

Options exercisable as of September 30, 2008

6,038

          As of September 30, 2008, there was $6.6 million of total unrecognized compensation cost related to unvested options that the Company expects to recognize over a weighted-average period of 16 months and $10.4 million of total unrecognized compensation cost related to nonvested shares expected to be recognized over a weighted-average period of 22 months.

Employee Stock Purchase Plan

          For the quarter and nine months ended September 30, 2008, compensation expense recognized for the ESPP was $0.1 million and $0.2 million, respectively which was recorded in the same expense categories in the interim consolidated statement of operations as the underlying employee compensation. For the quarter and nine months ended September 30, 2007, ESPP compensation expense was $0.1 million. Amounts withheld from participants are classified as cash from financing activities in the cash flow statement and as a liability in the balance sheet until such time as shares are purchased. Issuance of shares under the ESPP during the nine months ended September 30, 2008 amounted to 72,201 shares. Based on a purchase price established at September 30, 2008, 56,851 shares were allocated to employees for purchase under the ESPP in October 2008.

11

ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)

(8) Inventories

          As of September 30, 2008 and December 31, 2007 inventories consisted of the following (in thousands):

September 30, 2008

December 31, 2007

Raw materials

$

8,215

$

9,809

Work in process

5,064

5,419

Finished goods

3,525

7,069

$

16,804

$

22,297

(9) Intangible Assets

          As of September 30, 2008 and December 31, 2007 intangible assets consisted of the following (in thousands):

September 30,
2008

December 31,
2007

Weighted
Average
Remaining
Useful Lives

Product acquisition costs

$

83,694

$

78,694

5.9 years

Product patented technology

6,000

6,000

6.3 years

Manufacturing patent

9,000

9,000

6.3 years

Patent

1,875

1,875

       *

100,569

95,569

Less: Accumulated amortization

37,203

27,428

$

63,366

$

68,141

* fully amortized

          During the quarter ended June 30, 2008, the Company recognized a $5.0 million intangible asset and a liability due to Sanofi-Aventis related to its license of rights to market and distribute Oncaspar in the U.S. The license agreement, effective in January 2006, called for this incremental payment upon achievement of a specified level of Oncaspar sales. The threshold sales level was achieved in the third quarter of 2008 and the incremental amount due to Sanofi-Aventis is payable in January 2009. At the time the liability was recognized, the Company immediately recorded $1.9 million of amortization to reflect benefit derived from the payment over the entire term of the agreement. The remaining $3.1 million is being amortized over the remaining six-year term of the agreement.

          Amortization of intangibles amounted to $2.7 million for the three months ended September 30, 2008 and $2.6 million for the three months ended September 30, 2007. Of the amounts recognized in each of the three-month periods, $2.5 million and $2.4 million were charged to cost of product sales and contract manufacturing for the periods ended September 30, 2008 and 2007, respectively. For the nine-months ended September 30, 2008 and September 30, 2007, amortization charges were $9.8 million and $7.8 million, respectively, with $9.3 million and $7.2 million, respectively, classified as cost of product sales and contract manufacturing.

12

ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)

(10) Notes Payable

          The table below reflects the composition of the notes payable balances as of September 30, 2008 and December 31, 2007 (in thousands):

September 30, 2008

December 31, 2007

Current

4.5% Convertible Subordinated Notes due July 1, 2008

$

—

$

72,391

Long-Term

4% Convertible Senior Notes due June 1, 2013

$

275,000

$

275,000

          The 4.5% notes matured on July 1, 2008 and were repaid in full plus accrued and unpaid interest.

          The 4% notes mature on June 1, 2013, unless earlier redeemed, repurchased or converted, at the option of the holders, into the Company’s common stock at an initial conversion price of $9.55 per share. The 4% notes are senior unsecured obligations and rank equal to all future senior unsecured debt of the Company.

          At any time on or after June 1, 2009, 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 percent of the applicable conversion price on the date of such notice, the Company, at its option, may redeem the 4% notes in whole or in part, at a redemption price in cash equal to 100 percent of the principal amount of the 4% notes to be redeemed, plus accrued and unpaid interest, if any, to the redemption date. The 4% notes are not redeemable prior to June 1, 2009. Upon occurrence of a “fundamental change”, as defined in the indenture governing the 4% notes, holders of the notes may require the Company to redeem the notes at a price equal to 100 percent 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.

          Interest on the 4% notes is payable on June 1 and December 1 of each year. As of September 30, 2008 accrued interest on the 4% notes amounted to $3.7 million, and as of December 31, 2007, $1.0 million. Interest on the 4.5% notes was payable on January 1 and July 1 of each year. Accrued interest on the 4.5% notes was $1.6 million as of December 31, 2007.

          The Company evaluates the accounting for the conversion feature in accordance with Emerging Issues Task Force Issue (EITF) No. 00-19, “Accounting for Derivative Financial Instruments Indexed to and Potentially Settled in, a Company’s Own Stock.” If a conversion feature is required to be bifurcated in the future, changes in the fair value of the conversion feature would be included in operations in each period. The Company concluded that no beneficial conversion feature existed at the inception of the notes.

(11) Restructuring

          During the first quarter of 2007, the Company announced plans to consolidate manufacturing operations in its Indianapolis, Indiana location. This action was taken as part of the Company’s continued efforts to streamline operations.

          The transfer of operations at the Company’s South Plainfield, New Jersey facility to the Company’s Indianapolis facility is essentially complete as of the end of September 2008, resulting in the incurrence of certain restructuring and exit costs. Among these costs were employee severance and related benefits for affected employees. Severance costs were fully accrued by June 30, 2008, resulting in $1.5 million being recognized this year. In the three-month and nine-month periods ended September 30, 2007, the severance costs were $0.4 million and $1.7 million, respectively. These amounts are being paid in 2008 and 2009 in connection with the successful transfer of production to the Company’s Indianapolis facility and closure of the South Plainfield facility.

13

ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)

          During 2007, the Company recognized $0.4 million of employee severance and related benefits when it combined its previous two specialized sales forces into one sales team.

          The Company incurred the following costs in connection with its restructuring programs during the nine months ended September 30, 2008 and from inception of the manufacturing restructuring through December 31, 2007. All restructuring charges have been related to the Products segment. Amounts are in thousands.

Nine Months
Ended
September 30, 2008

Year Ended
December 31, 2007

Total

Employee termination costs - manufacturing

$

1,524

$

2,232

$

3,756

                                              - sales forces

—

385

385

1,524

2,617

4,141

Write-down of manufacturing assets

810

5,124

5,934

Other

58

—

58

$

2,392

$

7,741

$

10,133

          The amounts for employee termination benefits are reflected in accrued expenses. Payments have commenced and are expected to continue for several months relating to the manufacturing restructuring. Payments in connection with the sales force restructuring have ended. Payments to terminated employees have amounted to $1.7 million during the nine months ended September 30, 2008, leaving an accrued liability as of September 30, 2008 of $2.3 million.

          In addition to the restructuring charges described above, costs incurred during 2007 related to validation batches at the Indianapolis facility for Oncaspar and Adagen, were expensed and included in cost of product sales in the amount of $1.9 million.

          The Company may experience additional restructuring charges associated with lease termination or sublease of the South Plainfield facility. When the Company ceases use of the property, a determination will be made as to the appropriate accounting. Such costs may be incurred and recognized when the Company terminates its lease or enters into an unfavorable sublease. As of the date of this report, the Company does not know what the final use or disposition of the leased South Plainfield facility will be.

(12) Supplemental Cash Flow Information

          The Company considers all highly liquid investment securities with original maturities of three months or less to be cash equivalents. For each of the nine-month periods ended September 30, 2008 and 2007, there were payments of interest on the Company’s notes payable of $7.5 million and $11.1 million, respectively. Income tax payments for the nine months ended September 30, 2008 and 2007, were $2.4 million and $0.5 million, respectively.

          During the nine months ended September 30, 2008, the Company accrued a liability of $5.0 million for an incremented payment to Sanofi-Aventis in the first quarter of 2009 for achievement of a specified level of Oncaspar sales. Payment is expected to be made in January 2009.

14

ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)

(13) Income Taxes

          During the three months and nine months ended September 30, 2008, the Company recorded a net tax expense of $0.2 million and $0.5 million, respectively, which primarily represents a provision-to-return adjustment for 2007 final Federal tax filings. During the three months and nine months ended September 30, 2007, the Company recorded a net tax expense of $2.0 million and $2.1 million representing Federal, state and Canadian tax liabilities as well as an adjustment to taxes payable. Other than alternative minimum tax, the Company did not recognize a U.S. Federal income tax provision for these periods as the estimated annual effective tax rate is zero. As of September 30, 2008, 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.

(14) Segment Information

          The Company operates in the following business and reportable segments:

          Products - The Products segment performs the manufacturing, development, marketing and selling of pharmaceutical products for patients with cancer or other life-threatening diseases. Currently, the Company has developed or acquired four therapeutic products approved by the U.S. Food and Drug Administration focused primarily in oncology and other life-threatening diseases. The Company currently markets its products through its specialized U.S. sales force that calls upon specialists in oncology, hematology, infectious disease and other critical care disciplines. The Company’s four proprietary marketed brands are Oncaspar, DepoCyt, Abelcet and Adagen.

          Royalties - The Company receives royalties on the manufacture and sale of products that utilize its proprietary technology. Royalty revenues are currently derived from sales of products that use the Company’s PEGylation platform, namely PEG-INTRON marketed by Schering-Plough, Macugen marketed by OSI Pharmaceuticals, Inc. and Pfizer Inc., and Pegasys marketed by Hoffmann-La Roche. Through an agreement with Nektar Therapeutics, Inc. (Nektar) the Company shares in Nektar’s royalties on sales of Pegasys, Macugen, Cimzia and Hematide which utilize Enzon technology.

          Contract Manufacturing - The Company manufactures products for third parties. It manufactures for Cephalon France, Abelcet for export and MYOCET. It also produces the injectable multivitamin, MVI^®, for Hospira, Inc. The Company's contract with Hospira, Inc. for the manufacture of MVI will terminate effective April 30, 2010. The Company has negotiated two contracts to produce clinical products for other companies.

          The performance of each of the Company’s segments is monitored by the Company’s chief operating decision maker, the President and Chief Executive Officer. Segment profit (loss) is measured based on operating results, excluding investment income, interest expense and income taxes. The Company’s research and development expense is considered a corporate expense until a product candidate enters Phase III clinical trials at which time related costs would be chargeable to one of the Company’s operating segments. The Company does not identify or allocate property and equipment by operating segment, and does not allocate depreciation, to the operating segments. Operating segments do not have intersegment revenue, and accordingly, there is none to be reported.

15

ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)

          The following tables present segment revenues and profitability information for the three-month and nine-month periods ended September 30, 2008 and 2007 (in thousands):

Three months ended September 30,

Segment

Products

Royalties

Contract
Manufacturing

Corporate⁽¹⁾

Consolidated

Revenues

2008

$

28,912

$

14,611

$

5,267

$

—

$

48,790

2007

$

24,874

$

18,206

$

3,761

$

—

$

46,841

Profit (Loss)

2008

$

5,994

$

14,611

$

1,250

$

(23,712

)

$

(1,857

)

2007

$

(1,330

)

$

106,872

$

821

$

(16,846

)

$

89,517

Nine months ended September 30,

Segment

Products

Royalties

Contract
Manufacturing

Corporate⁽¹⁾

Consolidated

Revenues

2008

$

85,547

$

44,346

$

18,634

$

—

$

148,527

2007

$

72,542

$

52,840

$

12,159

$

—

$

137,541

Profit (Loss)

2008

$

13,269

$

44,346

$

6,228

$

(65,634

)

$

(1,791

)

2007

$

2,872

$

141,506

$

2,675

$

(62,213

)

$

84,840

⁽¹⁾ Corporate expenses include operating income (loss) components that are not directly attributable to an operating segment, including general and administrative expenses, treasury activities and exploratory, preclinical and clinical research and development expenses not specifically identifiable with existing marketed products or product candidates that have not entered Phase III clinical trials.

          Following is a reconciliation of segment profit to consolidated (loss) income before income tax provision (in thousands):

Three Months Ended
September 30

Nine Months Ended
September 30,

2008

2007

2008

2007

Segment profit

$

21,855

$

106,363

$

63,843

$

147,053

Unallocated operating expense

21,861

15,746

60,836

57,429

Operating (loss) income

(6

)

90,617

3,007

89,624

Other corporate expense

(1,851

)

(1,100

)

(4,798

)

(4,784

)

(Loss) income before income
tax provision

$

(1,857

)

$

89,517

$

(1,791

)

$

84,840

16

Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.

Overview

          We are a biopharmaceutical company dedicated to the development, manufacturing and commercialization of important medicines for patients with cancer and other life-threatening conditions. We operate in three business segments: Products, Royalties and Contract Manufacturing. We have a portfolio of four marketed products, Oncaspar, DepoCyt, Abelcet and Adagen. Our drug development programs utilize several cutting-edge technologies, including our PEGylation Customized Linker Technology^TM and the LNA, or Locked Nucleic Acid, technology, to create product candidates with benefits such as reduced dosing frequency and less toxicity. Our PEGylation technology was used to develop two of our products, Oncaspar and Adagen, and has created a royalty revenue stream from licensing partnerships for other products developed using the technology. Enzon also engages in contract manufacturing opportunities for several pharmaceutical companies to broaden the Company’s revenue base.

          On May 7, 2008, we announced that the Board of Directors has authorized a plan to spin-off our biotechnology activities in a transaction that would result in two independent public companies. The newly independent biotechnology business would be engaged in research and development based on our PEGylation and the Locked Nucleic Acid technologies, among others, to develop therapeutics for cancer and other life-threatening diseases. We plan to contribute $100.0 million in cash and securities and $50.0 million in the form of an interest-bearing term note as well as certain operating assets and liabilities to the newly created company. We would retain the currently marketed products, Oncaspar, DepoCyt, Abelcet and Adagen, the rights to current and future royalty revenues from existing licenses, including PEG-INTRON, Pegasys, Macugen, Cimzia and Hematide, certain deferred tax assets, including net operating loss carryforwards and our manufacturing facility in Indianapolis, Indiana. Our outstanding convertible notes would remain an obligation of Enzon. Completion of the spin-off is subject to numerous conditions, including final approval by the Board of Directors and the effectiveness of a registration statement with the SEC. The Company continues to work with the SEC towards finalizing the registration statement on Form 10 under the name Evivrus, Inc.

          On August 11, 2008, we announced we were exploring strategic alternatives for our specialty pharmaceuticals business. These alternatives included, among other things, selling the entire specialty pharmaceuticals business, or selling one or more of our marketed products, Oncaspar, DepoCyt, Abelcet and Adagen, and our Indianapolis, Indiana manufacturing facility. As announced on November 5, 2008, the potential sale of the specialty pharmaceuticals business has been negatively impacted by the external financial markets, effectively eliminating this alternative from further consideration at this time.

Results of Operations

Three-Month and Nine-Month Periods Ended September 30, 2008 and 2007

Overview

          Following is a reconciliation of segment profitability to consolidated (loss) income before income tax (millions of dollars). The percentage changes reflected in Management’s Discussion and Analysis are based on thousands of dollars and not the rounded millions of dollars reflected throughout this section.

Three Months Ended

Nine Months Ended

September
2008

September
2007

September
2008

September
2007

Products Segment profit (loss)

$

5.9

$

(1.3

)

$

13.2

$

2.9

Royalty Segment profit

14.6

106.9

44.3

141.5

Contract Manufacturing Segment profit

1.3

0.8

6.3

2.7

Corporate and other expenses*

(23.7

)

(16.9

)

(65.6

)

(62.3

)

(Loss) income before income tax provision

$

(1.9

)

$

89.5

$

(1.8

)

$

84.8

*

     We do not allocate certain corporate income and expenses not directly identifiable with the respective segments, including exploratory and preclinical research and development expenses, general and administrative expenses, investment income and interest expense. Research and development expenses

17

are considered corporate expenses unless they relate to an existing marketed product or a product candidate enters Phase III clinical trials at which time related research and development expenses would be chargeable to one of our operating segments. Depreciation and income taxes are not allocated to the segments.

Products Segment

          Products Segment profitability (millions of dollars):

Three Months Ended

Nine Months Ended

September
2008

%
Change

September
2007

September
2008

%
Change

September
2007

Revenues

$

28.9

16

$

24.8

$

85.5

18

$

72.5

Cost of product sales

10.4

(6

)

11.2

35.6

14

31.4

Research and development

4.5

179

1.6

11.7

53

7.6

Selling and marketing

7.6

(2

)

7.7

22.1

(5

)

23.3

Amortization of intangibles

0.2

n.m.

0.1

0.5

—

0.5

Restructuring

0.3

(95

)

5.5

2.4

(65

)

6.8

Segment profit

$

5.9

n.m.

$

(1.3

)

$

13.2

362

$

2.9

      n.m. – not meaningful

          Revenues

          Sales performance of individual products is provided below (millions of dollars):

Three Months Ended

Nine Months Ended

Product

September
2008

%
Change

September
2007

September
2008

%
Change

September
2007

Oncaspar

$

12.5

19

$

10.5

$

38.0

37

$

27.7

DepoCyt

2.2

2

2.2

6.5

(1

)

6.6

Abelcet

6.6

(2

)

6.7

20.3

(4

)

21.1

Adagen

7.6

39

5.4

20.7

21

17.1

Totals

$

28.9

16

$

24.8

$

85.5

18

$

72.5

          The 16 percent growth in net product sales for the three months ended September 30, 2008 compared to the same period of 2007 was attributable primarily to higher revenues from our oncology product, Oncaspar, and our treatment for immunodeficiency disease, Adagen. Oncaspar unit sales were essentially unchanged for the quarter. For the nine months ended September 30, 2008, product sales grew by 18 percent, led by Oncaspar and Adagen. The year-to-date increase in Oncaspar revenues is primarily attributable to a price increase effective in the first quarter of 2008 necessitated by significantly higher raw material cost and expenses related to the development of manufacturing process improvements and technology transfer. See discussions below in cost of sales and research and development regarding increased production costs and production process enhancements. The growth in sales of Oncaspar reflects its adoption in certain patient treatment protocols by hospitals and cooperative groups. Adagen sales in 2008 were favorably affected by a first-quarter price increase. Sales of DepoCyt, for treatment of lymphomatous meningitis, and Adagen tend to fluctuate from quarter-to-quarter. Abelcet, for treatment of invasive fungal infections, continues to experience competitive pressures in the marketplace, although the rate of sales decline has moderated recently.

          Cost of sales

          Cost of sales of marketed products for the three months ended September 30, 2008 decreased to $10.4 million, or 36 percent of sales, compared to $11.2 million, or 45 percent of sales, for the comparable three-month period of 2007. This was primarily due to unfavorable Abelcet manufacturing variances experienced during the third quarter of 2007. On a nine-month period-to-period basis, cost of products sold as a percentage of sales declined from approximately 43 percent to 41 percent. Cost of products sold as a percentage of sales declined from approximately 41 percent of sales to 39 percent of sales in the same nine-month comparison after excluding two separate charges each for $1.9 million in the second quarter of 2008 and 2007. Included in the second-quarter of 2008 amount was $1.9 million of accelerated amortization associated with a $5.0 million licensing milestone payment that was triggered during that quarter. The remaining $3.1 million of this milestone payment will be recognized in cost of sales over its remaining life of 6 years. The second-quarter

18

2007 cost of sales includes a $1.9 million charge for test batches produced in connection with the transfer of production of Oncaspar and Adagen from our South Plainfield, New Jersey facility to our Indianapolis, Indiana facility. Production of such batches is necessary in order to validate the new production processes and assure the continued quality and stability of the Oncaspar and Adagen products. The gross margin on sales of Oncaspar was lower during the nine months ended September 30, 2008 compared to the same period in 2007 due to the timing of the effects of raw material price increases arising from a December 2006 supply agreement. The full effect of this cost increase was not reflected in cost of products sold until the latter half of 2007. The gross margin on Oncaspar showed a one percentage point improvement in the quarter ended September 30, 2008 compared to the same period last year.

          Research and development

          Research and development spending with respect to marketed products, primarily Oncaspar and Adagen, rose 179 percent from $1.6 million in the third quarter of 2007 to $4.5 million in the third quarter of 2008. On a year-to-date basis research and development expenses rose from $7.6 million to $11.7 million or 53 percent. As previously disclosed, we are investing in the next generation of L-asparaginase and recombinant adenosine deaminase enzyme (ADA). We will also invest during the next few years to enhance and secure the supply of Oncaspar and Adagen. We intend to continue to increase efforts to improve the manufacturing processes and pharmaceutical properties of both Oncaspar and Adagen.

          Selling and marketing expenses

          Selling and marketing expenses consist primarily of expenses related to sales and marketing personnel, other commercial expenses and marketing programs to support our sales force as well as medical education. Selling and marketing expenses for the three months ended September 30, 2008 were $7.6 million, down 2 percent from $7.7 million in the third quarter of 2007. On a year-to-date, basis selling and marketing expense decreased 5 percent to $22.1 million in 2008 from $23.3 million for 2007. In both periods, the reduction in selling and marketing expense reflects the effects of the sales force realignment that took place in late 2007. Also included in selling and marketing expenses are the costs associated with our medical affairs program, which is continuing to expand, offsetting to some degree the savings from the sales force realignment.

          Restructuring

          During the first quarter of 2007, we announced plans to consolidate our manufacturing operations in our Indianapolis location. This action was taken as part of our continued efforts to streamline operations. The transfer of operations at our South Plainfield facility to our Indianapolis facility is essentially complete, resulting in the incurrence and full accrual of certain employee severance and facility exit costs. Among these costs were employee severance and related benefits for affected employees of approximately $3.7 million. Payment of these amounts has commenced and is expected to continue into 2009. Severance charges and related benefits of $2.2 million had been recognized through December 31, 2007. An additional $1.5 million of severance costs were recognized during the first nine months of 2008.

          A reassessment of the estimated time to complete the manufacturing consolidation resulted in shortening the amortization period for leasehold improvements at South Plainfield resulting in an accelerated amortization charge of $226,000 in the first quarter of 2008 and $246,000 in the second quarter of 2008 included in restructuring expense. In addition, certain assets consisting primarily of manufacturing equipment that will not be transferred to the Indianapolis facility, nor continue to be used in manufacturing at the South Plainfield facility have been identified and written off. We recognized the remaining depreciation totaling $5.1 million on assets decommissioned during the third quarter of 2007 and additional write-downs of $147,000 and $204,000 during the second and third quarters of 2008, respectively.

          During 2007, $1.9 million, the cost of required validation batches at our Indianapolis facility for both Oncaspar and Adagen, was expensed and included in cost of product sales. There have been no such charges for validation batches during 2008.

          We may experience additional restructuring charges associated with the lease termination or the subleasing of the South Plainfield facility. When we cease use of the property, a determination will be made as to the appropriate accounting. Such costs may be incurred and recognized when we terminate the lease or enter into an unfavorable sublease. As of the date of this report, we do not know what the final disposition of the leased South Plainfield facility will be.

19

          Additionally, during 2007, we recognized $0.4 million of employee severance and related benefits when we combined our previous two specialized sales forces into one sales team.

Royalties Segment

(millions of dollars)

Three Months Ended

Nine Months Ended

September
2008

%
Change

September
2007

September
2008

%
Change

September
2007

Royalty revenue

$

14.6

   (20)

$

18.2

$

44.3

   (16)

$

52.8

Gain on sale of royalty interest, net

—

n.m.

88.7

—

n.m.

88.7

Segment profit

$

14.6

n.m.

$

106.9

$

44.3

n.m.

$

141.5

n.m. – not meaningful

          Revenues

          PEG-INTRON royalties account for the majority of our total royalty revenues. In August 2007, we sold a 25 percent interest in our future PEG-INTRON royalties as described below. During the three months ended September 30, 2008, PEG-INTRON royalty revenue declined 26 percent compared to the prior year third quarter, in line with the sold interest. Combined royalties from Pegasys and Cimzia in the third quarter of 2008, represented an increase of approximately $0.8 million over the corresponding quarter of 2007 due to timing of shipments. The increased royalties moderated the overall decline in third-quarter royalty revenues to 20 percent. For the nine months ended September 30, 2008, the period-over-period decline in royalty revenues was 16 percent. Royalties on PEG-INTRON decreased by 20 percent in the first nine months of 2008, despite the sale of the 25 percent interest in the royalty stream indicating strong underlying performance of the product.

          During the quarter ended September 30, 2007, we sold a 25 percent interest in future royalties payable to us by Schering-Plough Corporation on net sales of PEG-INTRON occurring after June 30, 2007. The purchaser of the 25 percent interest will be obligated to pay an additional $15.0 million to us in the first quarter of 2012 if it receives a certain threshold level of royalties on sales of PEG-INTRON occurring from July 1, 2007 through December 31, 2011. The gain on the sale of the royalty interest, net of related costs, was $88.7 million. The $15.0 million contingent gain will be recognized when and if the contingency is removed and collection is assured.

          Costs and expenses

          Current royalty revenues do not require any material specific maintenance costs. At some point in the future, costs associated with initiation of new outlicensing agreements that could result in our receipt of a royalty stream and, if necessary, costs necessary to maintain the underlying technology may be charged to the Royalties segment.

Contract Manufacturing Segment

(millions of dollars)

Three Months Ended

Nine Months Ended

September
2008

%
Change

September
2007

September
2008

%
Change

September
2007

Revenues

$

5.3

40

$

3.8

$

18.7

   53

$

12.2

Cost of sales

4.0

37

3.0

12.4

   31

9.5

Segment profit

$

1.3

52

$

0.8

$

6.3

133

$

2.7

          Revenues

          Contract manufacturing revenues for the three months ended September 30, 2008 were $5.3 million compared to $3.8 million for the same period in 2007. The increase in contract manufacturing revenue was due to timing of shipments of MVI. The timing of shipments to our customers (adversely affecting the first quarter of 2007 and having a favorable effect on first-quarter 2008 sales) and compensation for certain non-routine services all contributed to a 53

20

percent growth in revenues from $12.2 million for the nine months ended September 30, 2007 to $18.7 million for the nine months ended September 30, 2008. Our contract with Hospira, Inc. for the manufacture of MVI will terminate effective April 30, 2010. MVI currently represents a significant portion of revenues and profits.

          Cost of sales

          Cost of sales for contract manufacturing for the three months ended September 30, 2008 was $4.0 million compared to $3.0 million for the comparable three-month period of 2007. For the nine months ended September 30, 2008, cost of sales as a percent of sales was approximately 67 percent compared to 78 percent for the nine months ended September 30, 2007. Events of the first quarters of 2008 and 2007 have had a significant influence on the year-to-date data. Cost of sales for the first quarter of 2008, as a percentage of sales, was favorably affected by the above-referenced non-routine services which contributed $0.9 million of revenues. These services were performed in 2007 but recognition was delayed until all criteria for revenue recognition were met. Cost of sales for the first quarter of 2007 was adversely affected by certain start-up costs related to a new customer arrangement.

Non-U.S Revenue

          During the three months ended September 30, 2008, we had export sales and royalties on export sales of $17.5 million, of which $11.4 million were in Europe. This compares to $20.0 million of export sales and related royalties in the same period of 2007, of which $11.5 million were in Europe.

          We had export sales and royalties on export sales of $58.2 million and $56.6 million, of which $39.2 million and $34.0 million were in Europe, for the nine months ended September 30, 2008 and 2007, respectively.

Corporate and Other Expense

(millions of dollars)

Three Months Ended

Nine Months Ended

September
2008

%
Change

September
2007

September
2008

%
Change

September
2007

Research and development

$

11.2

26

$

8.9

$

30.8

(6)

$

32.9

General and administrative

10.7

55

6.9

30.0

22

24.6

Other (income) expense:

Investment income, net

(1.3

)

(53)

(2.7

)

(4.6

)

(40)

(7.6

)

Interest expense

3.0

(29)

4.3

9.6

(28)

13.3

Other, net

0.1

n.m.

(0.5

)

(0.2

)

(25)

(0.9

)

1.8

68

1.1

4.8

—

4.8

Corporate and other expenses

$

23.7

41

$

16.9

$

65.6

5

$

62.3

     n.m. – not meaningful

          Research and development. We continue to invest in our research and development efforts in areas such as rhMBL, PEG-SN38, the HIF-1 alpha antagonist and other LNA- and PEGylation-based programs. For the three months ended September 30, 2008, research and development expenses increased by $2.3 million to $11.2 million as compared to the three months ended September 30, 2007. The third quarter of 2008 spending included $1.0 million in milestone payments related to the LNA platform. The decrease in research and development expenses for the nine months ended September 30, 2008 was primarily the result of timing of certain research and development expenses associated with the commencement of clinical trials, including the purchase of clinical drug supply, that were incurred in the first half of 2007. Year-to-date, milestone payments amounted to $3.0 million.

          General and administrative. General and administrative expenses increased $3.8 million for the three months ended September 30, 2008 from $6.9 million in the three months ended September 30, 2007 whereas general and administrative expenses for the nine months ended September 30, 2008 were up $5.4 million over the prior-year comparative period. The increase experienced during the three months ended September 30, 2008 was due in part to $2.7 million of expenses related to strategic initiatives including the proposed spin-off of our biotechnology business and potential asset sales. One of the expenses incurred in connection with the potential sale of assets was the solicitation of consent of holders of our notes payable to effect such sales. Assuming the spin-off is finalized, total costs of the strategic initiatives could range from approximately $8.0 million to $10.0 million.

21

For the nine months ended September 30, 2008, general and administrative expenses were up $5.4 million. Costs incurred in connection with the strategic initiatives amounted to $3.8 million. An offsetting benefit arose from vesting of certain stock option awards in the first quarter of 2007 not recurring in first-quarter 2008.

          Other (income) expense. Other (income) expense for the three months ended September 30, 2008 was net expense of $1.8 million, as compared to net expense of $1.1 million for the three months ended September 30, 2007. On a year-to-date basis, 2008 net expense was $4.8 million unchanged from the first nine months of 2007. Other (income) expense includes: net investment income, interest expense and other income or expense.

          Net investment income for the quarter and nine months ended September 30, 2008 was adversely affected by the impairment write-down of an auction rate security of $645 thousand reducing the amount of investment income reported during the three months ended June 30, 2008. Also, we have fewer investment holdings in 2008 as a result of our retirement of our 4.5% notes payable.

          Interest expense was $3.0 million and $9.6 million for the three-month and nine-month periods ended September 30, 2008 and $4.3 million and $13.3 million for the three-month and nine-month periods ended September 30, 2007, respectively. The reduction in interest expense resulted from the declining balance of 4.5% notes payable.

Income taxes

          During the three months and nine months ended September 30, 2008, we recorded income tax expense of approximately $0.2 million and $0.5 million, respectively, which primarily represents a provision-to-return adjustment for 2007 final Federal tax filings. During the three months and nine months ended September 30, 2007, we recorded tax expense of $2.0 million and $2.1 million, respectively, representing Federal state and Canadian taxes liabilities plus an adjustment to taxes payable. A Federal income tax provision was recorded for the three months and nine months ended September 30, 2007 which represents federal alternative minimum tax primarily related to the gain on sale of a royalty interest recognized in the third quarter. Other than alternative minimum tax, no federal income tax provision was recorded for the three months and nine months ended September 30, 2008 as the estimated annual effective tax rate is zero.

          Liquidity and Capital Resources

          Total cash reserves, which include cash, cash equivalents, short-term investments, and marketable securities, were $202.5 million as of September 30, 2008. At December 31, 2007, cash reserves also included restricted investments and cash of $73.6 million and totaled $258.2 million. The decrease is primarily due to the repurchase of $72.4 million principal amount of our 4.5% notes payable offset by cash provided by operating activities. We invest our excess cash primarily in investment-grade corporate debt securities.

          Operating activities provided $23.2 million of cash during the nine months ended September 30, 2008 as compared to $91.8 million provided by operating activities during the same period last year. Operating income for the nine months ended September 30, 2007 included the net gain on the sale of a future royalty interest of $88.7 million. Net loss, adjusted for noncash items such as depreciation, amortization and asset write-downs yielded approximately $19.4 million in cash in the current year. In addition, changes in balance sheet operating assets and liabilities generated a modest cash in-flow in the first nine months of 2008 versus a significant use of cash in 2007 when opening levels of accounts payable were particularly high.

          Cash was provided by investing activities in the first nine months of 2008 in the amount of approximately $85.9 million as marketable securities, including $55.0 million of restricted investments, matured or were liquidated and $6.2 million was invested in plant and equipment. The proceeds of the restricted investments were used to repurchase our 4.5% notes payable. In the first nine months of 2007, cash used in by investing activities was $59.5 million. During that period, we made a $17.5 million payment for a license related to our December 2006 agreement related to Oncaspar production and invested $15.2 million in property and equipment while approximately $26.8 million was added to investments, net of redemptions and maturities.

          Repurchase and repayment of $72.4 million principal amount of the 4.5% notes payable during the first nine months of 2008 for a cash outlay of $72.0 million constituted the primary financing cash outflow. In the nine months of 2007, $40.2 million was expended for repurchase of the 4.5% notes.

22

          As of September 30, 2008, we had outstanding $275.0 million of convertible senior notes payable that bear interest at an annual rate of 4%. The 4.5% notes payable matured on July 1, 2008 and were repaid in full plus accrued interest. Interest is payable on June 1 and December 1 for the 4% notes and was payable January 1 and July 1 for the 4.5% notes. Accrued interest on the 4% notes was $3.7 million as of September 30, 2008 and aggregate accrued interest was $2.5 million as of December 31, 2007.

          In connection with the proposed spin-off of our biotechnology activities, we would contribute $100.0 million in cash and securities and $50.0 million in the form of an interest-bearing term note as well as certain operating assets and liabilities to the newly created company.

          Our current sources of liquidity are: our cash reserves; interest earned on such cash reserves; sales of Oncaspar, DepoCyt, Abelcet and Adagen; royalties earned, which are primarily related to sales of PEG-INTRON; and contract manufacturing revenue. Based upon our current planned research and development activities and related costs and our current sources of liquidity, we anticipate our current cash reserves and expected cash flow from operations will be sufficient to meet our capital and operational requirements for the near future.

          Included in our short-term investments at September 30, 2008 are investments in auction rate securities totaling $5.5 million par value ($5.7 million fair value), most of which are rated AAA or AA. Recent difficulties in the auction rate securities marketplace have raised concerns about the liquidity of such investments. One auction rate security with a par value of $1.5 million has experienced failed auctions since late 2007. During the quarter ended June 30, 2008, the credit rating of the issuer was downgraded by two rating agencies. Based on this information, we concluded that the decline in estimated fair value (Level 2) to $855,000 as of June 30, 2008 was other than temporary and we recognized an impairment write-down of $645,000 in investment income. We will continue to monitor our investments in this and other auction rate securities. As of September 30, 2008, the impaired auction rate security was valued at $1.0 million. The unrealized gain is included in other comprehensive income. At this time, there are active auctions for all but one of our auction rate securities we own and we continue to receive regularly scheduled interest on all of them.

          As of September 30, 2008, the fair value of our holdings of U.S. corporate debt was lower than the amortized cost basis by approximately $3.6 million. This net unrealized holding loss was reflective of general capital market conditions affecting over fifty separate corporate debt holdings and not the credit worthiness of any individual security. No individual investment constitutes greater than five percent of our portfolio. Accordingly, we have determined that there were no other-than-temporary holding losses as of September 30, 2008. Despite continued disruption in the global financial markets subsequent to September 30, 2008, there is no change in this conclusion as of the date of this report.

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 (SPE), which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow limited purposes. As of September 30, 2008, 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. The maximum potential dilutive effect of conversion of the 4% notes is 28.8 million shares. Our 4.5% notes were fully repaid in July 2008. Notes payable are discussed in greater detail in Liquidity and Capital Resources above and in the notes to our condensed consolidated financial statements.

          In addition, stock options to purchase 8.5 million shares of our common stock at a weighted average exercise price of $11.32 per share and 1.9 million restricted stock units were outstanding at September 30, 2008 that represent additional potential dilution.

Contractual Obligations

          As of September 30, 2008, we had accrued a $5.0 million liability to Sanofi-Aventis for a licensing intangible milestone payment that was triggered during the second quarter of 2008. The $5.0 million is payable in January 2009.

          Other major outstanding contractual obligations relate to our operating leases, inventory purchase commitments, convertible debt, and license agreements with collaborative partners.

          In July 2008, we repaid the remaining $12.5 million principal amount of our 4.5% notes. In August 2008, we obtained the consent of holders of our 4% convertible senior notes due 2013 to amend the indenture by:

23

     (i) eliminating any exceptions to circumstances under which a sale, transfer or lease by us of all or substantially all of our properties or assets to another person would constitute a fundamental change (as defined in the indenture);

     (ii) providing that we may not sell, transfer, lease or otherwise dispose of all or substantially all of our properties or assets unless: (a) an amount in cash sufficient to satisfy its obligations under the indenture to repurchase the notes in the event of a fundamental change is designated by us for such purpose and held in a segregated account for 60 business days after the consummation of the sale, transfer, lease or disposition transaction and (b) no default or event of default under the indenture will have occurred and be continuing;

     (iii) providing that upon a sale, transfer, lease or other disposition of all or substantially all of our properties or assets that is a fundamental change, the transferee will not be required to assume our obligations under the indenture and the notes; and

     (iv) increasing the number of additional shares issuable per $1,000 initial principal amount of notes upon conversion of the notes in connection with a fundamental change.

          There have been no material changes with respect to our contractual obligations as disclosed under Management’s Discussion and Analysis of Financial Condition and Results of Operations - Contractual Obligations in our Annual Report on Form 10-K for the year ended December 31, 2007 other than as described above.

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 consolidated financial statements are presented in accordance with accounting principles that are generally accepted in the United States. All accounting standards effective as of September 30, 2008 have been taken into consideration in preparing the consolidated financial statements. The preparation of the 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 have been highlighted as critical because changes to certain judgments and assumptions inherent in these policies could affect our 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 ongoing basis and make changes when necessary. Actual results could differ from our estimates.

Revenues

          Revenues from product sales and contract manufacturing revenue are recognized when title passes to the customer as described below. For product sales, we also record a provision at the time of shipment for estimated future credits, chargebacks, sales discounts, rebates and returns. These sales provision accruals, except for rebates which are recorded as a liability, are presented as a reduction of the accounts receivable balances. We continually monitor the adequacy of the accruals by comparing the actual payments to the estimates used in establishing the accruals.

          We recognize revenues for Abelcet at the time of sale to the wholesaler. Sales of Oncaspar and DepoCyt are recorded when product is shipped by our third-party distributor to the end-user. Adagen is sold directly to a specialty distributor that then sells the product to end-users. We recognize revenue for Adagen upon sale to the specialty distributor. We recognize revenue on contract manufactured products upon shipment.

          We provide chargeback payments to wholesalers based on their sales to members of buying groups at prices determined under a contract between us and the member. Administrative fees are paid to buying groups based on the total amount of purchases by their members. We estimate the amount of the chargeback that will be paid using (a) distribution channel information obtained from certain of our wholesalers which allows us to

24

determine the amount and expiry of inventory in the distribution channel and (b) historical trends, adjusted for current conditions. The settlement of the chargebacks generally occurs within three months after the sale to the wholesaler. We regularly analyze the historical chargeback trends and make adjustments to recorded reserves for changes in trends.

          In addition, state agencies that administer various programs, such as the U.S. Medicaid programs, receive rebates. Medicaid rebates and administrative fees are recorded as a liability and a reduction of gross sales when we record the sale of the product. In determining the appropriate accrual amount, we use (a) distribution channel information obtained from certain of our wholesalers which allows us to determine the amount and expiry of inventory in the distribution channel, (b) our historical rebate and administrative fee payments by product as a percentage of our historical sales and (c) any significant changes in sales trends. Current Medicaid rebate laws and interpretations, and the percentage of our products that are sold to Medicaid patients are also evaluated. Factors that complicate the rebate calculations are the timing of the average manufacturer pricing computation, the lag time between sale and payment of a rebate, which can range up to nine months, and the level of reimbursement by state agencies.

          The following is a summary of reductions of gross sales accrued as of September 30, 2008 and December 31, 2007 (in thousands):

September 30, 2008

December 31, 2007

Accounts Receivable Reductions

Chargebacks

$

2,719

$

2,578

Cash Discounts

173

159

Other (including returns)

2,309

2,046

Total

5,201

4,783

Accrued Liabilities

Medicaid Rebates

2,307

1,382

Administrative Fees

38

187

Total

2,345

1,569

Grand Total

$

7,546

$

6,352

          Royalties under our license agreements with third parties are recognized as revenue when reasonably estimable and earned through the sale of the product by the licensee net of future credits, chargebacks, sales discount rebates, refunds and product returns 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 is generally received from the licensees in the quarter subsequent to the period in which the sales occur.

          At the request of the customer, certain contract manufacturing arrangements involve the transfer of title of the finished product to the customer prior to shipment. The product in question is manufactured to the unique specifications of the customer and cannot be used to fill other orders. If all necessary conditions are met, including: the product is complete and ready for shipment, the risks of ownership have passed to the customer and the customer pays for storage of the product at our facility, we will recognize revenue.

          Non-refundable milestone payments that represent the completion of a separate earnings process are recognized as revenue when earned, upon the occurrence of contract-specified events and when the milestone has substance. 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.

25

Income Taxes

          Under the asset and liability method of Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards (SFAS) No. 109, “Accounting for Income Taxes” (SFAS No. 109), deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases. 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. We believe, based on future projections, that it is more likely than not that our net deferred tax assets, including our net operating losses from operating activities and stock option exercises, 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 that we will be able to sustain our position.

Available-for-Sale Securities

          We assess the carrying value of our available-for-sale securities in accordance with FASB Staff Position (FSP) 115-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.” An impairment write-down is recorded when a decline in the value of an investment is determined to be other-than-temporary. These determinations involve a significant degree of judgment and are subject to change as facts and circumstances change.

Long-Lived Assets

          Long-lived assets, including amortizable intangible assets are tested for impairment when impairment indicators are present. Impairment indicators are events or circumstances that may be indicative of possible impairment such as a significant adverse change in legal factors or in business climate, a current period operating loss combined with a history of operating losses or a projection or forecast that demonstrates continuing losses associated with the use of a long-lived asset or asset group.

          Testing for the recoverability of amortizable intangible assets is performed initially by comparing the carrying amount of the asset group to the future undiscounted net cash flows to be generated by the assets. If the undiscounted net cash flow stream exceeds the carrying amount, no further analysis is required. However, if this test shows a negative relationship, the fair value of the assets within the asset group must be determined and we would record an impairment charge for any excess of the carrying amount over the fair value. These evaluations involve amounts and forecasts that are based on management’s best estimates and judgment. Actual results may differ from these estimates.

Share-Based Payment

          We account for share-based compensation in accordance with SFAS No. 123R, “Share-Based Payment.” SFAS No. 123R establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services and requires that the compensation cost relating to share-based payment transactions be recognized in the financial statements, measured by the fair value of the equity or liability instruments issued, adjusted for estimated forfeitures. We have elected the modified prospective transition method for SFAS No. 123R which requires that compensation costs be recorded, as earned, for all unvested stock options and restricted stock awards outstanding at June 30, 2005.

          The impact that share-based payment awards will have on our results of operations is a function of the number of shares awarded, vesting and the trading price of our stock at date of grant, combined with the application of the Black-Scholes valuation model. Fair value of share-based payments is determined using the Black-Scholes valuation model which employs weighted average assumptions for expected volatility of the Company’s stock, expected term until exercise of the options, the risk free interest rate, and dividends, if any. Expected volatility is based on historical Enzon stock price information.

26

Recently Issued Accounting Standards, Not Adopted as of September 30, 2008

          In December 2007, the FASB issued two statements that would apply prospectively to potential, business combinations for which the acquisition date is on or after January 1, 2009. Early application is not permitted. These pronouncements would be adopted at such time as we undertake a business combination and will have no impact on our current or historical financial statements. SFAS No. 141R, “Business Combinations”, retains the fundamental requirements of purchase accounting but changes, among other things, the way assets and liabilities are recognized such as requiring recognition of in-process research and development as an intangible asset at fair value. It also calls for the recognition of most acquisition costs as expense rather than part of the total acquisition cost. SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements”, establishes accounting and reporting standards for the noncontrolling (minority) interest in a subsidiary and for the deconsolidation of a subsidiary.

          In December 2007, the Emerging Issues Task Force (EITF) issued EITF 07-1, “Accounting for Collaborative Arrangements”. Effective beginning in 2009, the consensus prohibits participants in a collaborative agreement from applying the equity method of accounting to activities performed outside a separate legal entity and requires gross or net presentation of revenues and expenses by the respective parties depending upon their roles in the collaboration. We are in the process of evaluating the possible impact the consensus may have on our financial statements, but do not expect it to be material to our financial position or results of operations.

          The FASB ratified the consensus of the Emerging Issues Task Force in Issue No. 07-5 (EITF 07-5), “Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock” in June 2008. The issue addresses the determination of whether an instrument (or an embedded feature) is indexed to an entity’s own stock and establishes a two-step approach with which to make the determination. Under current U.S. GAAP, the conversion options embedded in our convertible debt are considered to be indexed to our stock and, as a result, we are not required to bifurcate the option from the note payable and mark the option to market each reporting period. We are in the process of evaluating the provisions of EITF 07-5, which would take effect prospectively in the first quarter of 2009, but at this time do not believe there will be a material effect on our financial position or results of operations. There would be no effect on our cash flows.

Factors That May Affect Future Results

          There are forward-looking statements contained herein, which can be identified by the use of forward-looking terminology such as the words “believes,” “expects,” “may,” “will,” “should”, “potential,” “anticipates,” “plans” or “intends” and similar expressions. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results, events or developments to be materially different from the future results, events or developments indicated in such forward-looking statements. Such factors include, but are not limited to:

•

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 will experience operating losses for the next several years.

•

The risk that there will be a decline in sales of one or more of our marketed products or products sold by others from which we derive royalty revenues. Such sales declines could result from increased competition, loss of patent protection, pricing, supply shortages and/or regulatory constraints.

•

The risk that we will be unable to obtain critical compounds used in the manufacture of our products at economically feasible prices or at all, or one of our key suppliers will experience manufacturing problems or delays.

•

Decisions by regulatory authorities regarding whether and when to approve our regulatory applications as well as their decisions regarding labeling and other matters could affect the commercial potential of our products or developmental products.

•

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 the Company.

          A more detailed discussion of these and other factors that could affect our 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, 2007. These factors should be considered carefully and readers are cautioned not to place undue reliance on such forward-looking statements. No assurance can be given that the future results

27

covered by the forward-looking statements will be achieved. All information contained herein is as of the date of this report and we do not intend to update this information.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

          Our holdings of financial instruments are comprised of debt securities and time deposits. All such instruments are classified as securities 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. Our debt security portfolio represents funds held temporarily pending use in our business and operations. We manage these funds accordingly. 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 the majority of which are rated A1 or better. We typically invest the majority of our investments in the shorter-end of the maturity spectrum.

          The table below presents the principal amounts and related weighted average interest rates of our marketable debt securities, excluding those related to our Executive Deferred Compensation Plan, by year of maturity (twelve-month intervals ending September 30 of the year indicated) as of September 30, 2008 (in thousands):

2009

2010

2011

Total

Fair Value

Fixed Rate

$

54,286

$

56,160

$

9,323

$

119,769

$

116,164

Average Interest Rate

5.21

%

6.19

%

5.56

%

5.70

%

Variable Rate

5,505

—

—

5,505

5,685

Average Interest Rate

3.66

%

3.66

%

$

59,791

$

56,160

$

9,323

$

125,274

$

121,849

          Our convertible notes payable outstanding have a fixed interest rate. Accordingly, the fair value will fluctuate as market rates of interest rise or fall. Fair value is also affected by changes in the price of our common stock. Our 4% convertible senior unsecured notes in the principal amount of $275.0 million are due June 1, 2013 and have a fair value of $286.7 million at September 30, 2008.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures.

          Our management, under the direction of our Chief Executive Officer and Chief 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, 2008. Based on the evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of September 30, 2008.

Changes in Internal Controls

          There were no changes in our internal controls over financial reporting as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, during the period covered by this report that have materially affected, or are reasonably likely to materially affect our internal control over financial reporting.

28

PART II OTHER INFORMATION

Item 6. Exhibits

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

Exhibit
Number

Description

Reference
No.

3(i)

Amended and Restated Certificate of Incorporation

(1

)

3(ii)

Amended and Restated By-laws

(2

)

3(iii)

Amendment dated July 31, 2007 to Amended and Restated Bylaws

(3

)

3(iv)

Amendment dated November 21, 2007 to Amended and Restated Bylaws

(4

)

4.1

Rights Agreement dated May 17, 2002 between the Company and Continental Stock Transfer Trust Company, as rights agent

(5

)

4.2

First Amendment to the Rights Agreement, dated as of February 19, 2003 between the Company and Continental Stock Transfer & Trust Company, as rights agent

(6

)

4.3

Second Amendment to the Rights Agreement, dated as of January 7, 2008 between the Company and Continental Stock Transfer and Trust Company, as rights agent.

(7

)

31.1

Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

*

31.2

Certification of Principal Accounting 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 Accounting Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

*

*

Filed herewith.

          Referenced exhibit was previously filed with the Commission as an exhibit to the Company’s filing indicated below and is incorporated herein by reference to that filing:

(1)

Current Report on Form 8-K filed May 19, 2006.

(2)

Quarterly Report on Form 10-Q for the quarter ended June 30, 2006 filed August 3, 2006.

(3)

Quarterly Report on Form 10-Q for the quarter ended June 30, 2007 filed August 2, 2007.

(4)

Current Report on Form 8-K filed on November 26, 2007.

(5)

Form 8-A12G (File No. 000-12957) filed with the Commission on May 22, 2002.

(6)

Form 8-A12G/A (File No. 000-12957) filed with the Commission on February 20, 2003.

(7)

Current Report on Form 8-K filed January 8, 2008.

29

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 5, 2008

By:

/s/Jeffrey H. Buchalter

Jeffrey H. Buchalter,

Chairman, President and

Chief Executive Officer

(Principal Executive Officer)

Date: November 5, 2008

By:

/s/Craig A. Tooman

Craig A. Tooman

Executive Vice President, Finance and

Chief Financial Officer

(Principal Financial Officer)

30


	September 30, 2008				December 31, 2007*


ASSETS

Current assets:
Cash and cash equivalents		$	78,128			$	40,053
Short-term investments			57,903				123,907
Restricted investments and cash			—				73,592
Accounts receivable, net of allowance for doubtful accounts of $66 at September 30, 2008 and $280 at December 31, 2007			15,262				14,927
Inventories			16,804				22,297
Other current assets			6,155				6,401

Total current assets			174,252				281,177

Property and equipment, net of accumulated depreciation of $38,510 at September 30, 2008 and $37,031 at December 31, 2007			45,006				45,312
Marketable securities			66,479				20,653
Amortizable intangible assets, net			63,366				68,141
Other assets			4,247				5,074

Total assets		$	353,350			$	420,357


LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:
Accounts payable		$	6,510			$	9,441
Notes payable			—				72,391
Accrued expenses			29,718				23,650

Total current liabilities			36,228				105,482

Notes payable			275,000				275,000
Other liabilities			3,924				3,302

Total liabilities			315,152				383,784

Commitments and contingencies

Stockholders’ equity:
Preferred stock - $.01 par value, authorized 3,000,000 shares; no shares issued and outstanding at September 30, 2008 and December 31, 2007			—				—
Common stock - $.01 par value, authorized 170,000,000 shares; issued and outstanding 44,896,010 shares and 44,199,831 shares at September 30, 2008 and December 31, 2007, respectively			449				442
Additional paid-in capital			342,448				335,318
Accumulated other comprehensive (loss) income			(2,937	)			326
Accumulated deficit			(301,762	)			(299,513	)

Total stockholders’ equity			38,198				36,573

Total liabilities and stockholders’ equity		$	353,350			$	420,357


	Three months ended September 30,						Nine months ended September 30,

	2008			2007			2008			2007

Revenues:
Product sales, net	$	28,912		$	24,874		$	85,547		$	72,542
Royalties		14,611			18,206			44,346			52,840
Contract manufacturing		5,267			3,761			18,634			12,159

Total revenues		48,790			46,841			148,527			137,541


Costs and expenses:
Cost of product sales and contract manufacturing		14,473			14,118			48,018			40,851
Research and development		15,654			10,456			42,489			40,449
Selling, general and administrative		18,253			14,632			52,121			47,905
Amortization of acquired intangible assets		167			171			500			541
Restructuring charge		249			5,513			2,392			6,837

Total costs and expenses		48,796			44,890			145,520			136,583

Gain on sale of royalty interest, net		—			88,666			—			88,666

Operating (loss) income		(6	)		90,617			3,007			89,624


Other income (expense):
Investment income, net		1,268			2,689			4,567			7,632
Interest expense		(3,025	)		(4,286	)		(9,591	)		(13,330	)
Other, net		(94	)		497			226			914

		(1,851	)		(1,100	)		(4,798	)		(4,784	)


(Loss) income before income tax provision		(1,857	)		89,517			(1,791	)		84,840

Income tax provision		163			1,987			458			2,055


Net (loss) income	$	(2,020	)	$	87,530		$	(2,249	)	$	82,785


(Loss) earnings per common share - basic	$	(0.05	)	$	1.99		$	(0.05	)	$	1.89

(Loss) earnings per common share - diluted	$	(0.05	)	$	1.23		$	(0.05	)	$	1.25


Weighted average shares - basic		44,464			43,925			44,328			43,890

Weighted average shares - diluted		44,464			74,344			44,328			72,818


	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Unobservable Inputs (Level 2)		Total

U.S. corporate debt	$	116,164	$	—	$	116,164
Auction rate securities		4,650		1,035		5,685
Other		2,533		—		2,533

	$	123,347	$	1,035	$	124,382


	Amortized Cost		Gross Unrealized Holding Gains			Gross Unrealized Holding Losses			Fair Value*

U.S. corporate debt	$	119,769		$	87	$	(3,692	)	$	116,164
Auction rate securities		5,505			180		—			5,685
Other		2,206			511		(184	)		2,533

	$	127,480		$	778	$	(3,876	)	$	124,382


Twelve-Month Periods Ending September 30,	Amortized Cost		Fair Value

2009	$	59,791	$	57,391
2010		56,160		55,341
2011		9,323		9,117

	$	125,274	$	121,849


	Less Than 12 Months					12 Months or Greater

	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss

U.S. corporate debt ⁽¹⁾	$	97,180	$	(2,794	)	$	6,109	$	(898	)
Other⁽²⁾		955		(184	)		—		—

Total	$	98,135	$	(2,978	)	$	6,109	$	(898	)


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

	2008			2007		2008			2007

Earnings Per Common Share - Basic:
Net (loss) income	$	(2,020	)	$	87,530	$	(2,249	)	$	82,785

Weighted average common shares outstanding		44,464			43,925		44,328			43,890

Basic earnings per share	$	(0.05	)	$	1.99	$	(0.05	)	$	1.89

Earnings Per Common Share - Diluted:
Net (loss) income	$	(2,020	)	$	87,530	$	(2,249	)	$	82,785
Add back interest expense on 4% convertible notes		*			2,750		*			8,250
Add back interest expense on 4.5% convertible notes		*			1,055		*			*

Adjusted net income	$	(2,020	)	$	91,335	$	(2,249	)	$	91,035


Weighted average number of common shares outstanding		44,464			43,925		44,328			43,890
Incremental shares related to ESPP and vesting of nonvested awards		*			346		*			132
Incremental shares assuming conversion of 4% notes		*			28,796		*			28,796
Incremental shares assuming conversion of 4.5% notes		N/A			1,277		*			*

Weighted-average number of common shares outstanding and common share equivalents		44,464			74,344		44,328			72,818

Diluted earnings per share	$	(0.05	)	$	1.23	$	(0.05	)	$	1.25


	Options			Nonvested Shares

Outstanding at January 1, 2008		8,385			1,774
Granted		200			508
Exercised and vested		(40	)		(309	)
Expired and forfeited		(47	)		(82	)

Outstanding at September 30, 2008		8,498			1,891


Options vested and expected to vest at September 30, 2008		7,822


Options exercisable as of September 30, 2008		6,038


	September 30, 2008		December 31, 2007


Raw materials	$	8,215	$	9,809
Work in process		5,064		5,419
Finished goods		3,525		7,069

	$	16,804	$	22,297


	September 30, 2008		December 31, 2007		Weighted Average Remaining Useful Lives

Product acquisition costs	$	83,694	$	78,694		5.9 years
Product patented technology		6,000		6,000		6.3 years
Manufacturing patent		9,000		9,000		6.3 years
Patent		1,875		1,875		*

		100,569		95,569
Less: Accumulated amortization		37,203		27,428

	$	63,366	$	68,141


	September 30, 2008		December 31, 2007

Current
4.5% Convertible Subordinated Notes due July 1, 2008	$	—	$	72,391

Long-Term
4% Convertible Senior Notes due June 1, 2013	$	275,000	$	275,000


	Nine Months Ended September 30, 2008			Year Ended December 31, 2007			Total

Employee termination costs - manufacturing		$	1,524		$	2,232	$	3,756
- sales forces			—			385		385

			1,524			2,617		4,141
Write-down of manufacturing assets			810			5,124		5,934
Other			58			—		58

		$	2,392		$	7,741	$	10,133


Segment		Products			Royalties		Contract Manufacturing		Corporate⁽¹⁾			Consolidated

Revenues	2008	$	28,912		$	14,611	$	5,267	$	—		$	48,790
	2007	$	24,874		$	18,206	$	3,761	$	—		$	46,841

Profit (Loss)	2008	$	5,994		$	14,611	$	1,250	$	(23,712	)	$	(1,857	)
	2007	$	(1,330	)	$	106,872	$	821	$	(16,846	)	$	89,517


	Three Months Ended September 30						Nine Months Ended September 30,

	2008			2007			2008			2007

Segment profit	$	21,855		$	106,363		$	63,843		$	147,053
Unallocated operating expense		21,861			15,746			60,836			57,429

Operating (loss) income		(6	)		90,617			3,007			89,624
Other corporate expense		(1,851	)		(1,100	)		(4,798	)		(4,784	)

(Loss) income before income tax provision	$	(1,857	)	$	89,517		$	(1,791	)	$	84,840


	Three Months Ended						Nine Months Ended

	September 2008			September 2007			September 2008			September 2007

Products Segment profit (loss)	$	5.9		$	(1.3	)	$	13.2		$	2.9
Royalty Segment profit		14.6			106.9			44.3			141.5
Contract Manufacturing Segment profit		1.3			0.8			6.3			2.7
Corporate and other expenses*		(23.7	)		(16.9	)		(65.6	)		(62.3	)

(Loss) income before income tax provision	$	(1.9	)	$	89.5		$	(1.8	)	$	84.8


*	We do not allocate certain corporate income and expenses not directly identifiable with the respective segments, including exploratory and preclinical research and development expenses, general and administrative expenses, investment income and interest expense. Research and development expenses


	are considered corporate expenses unless they relate to an existing marketed product or a product candidate enters Phase III clinical trials at which time related research and development expenses would be chargeable to one of our operating segments. Depreciation and income taxes are not allocated to the segments.


	Three Months Ended						Nine Months Ended

Product	September 2008		% Change		September 2007		September 2008		% Change		September 2007

Oncaspar	$	12.5	19		$	10.5	$	38.0	37		$	27.7
DepoCyt		2.2	2			2.2		6.5	(1	)		6.6
Abelcet		6.6	(2	)		6.7		20.3	(4	)		21.1
Adagen		7.6	39			5.4		20.7	21			17.1

Totals	$	28.9	16		$	24.8	$	85.5	18		$	72.5


	September 30, 2008			December 31, 2007


Accounts Receivable Reductions
Chargebacks		$	2,719		$	2,578
Cash Discounts			173			159
Other (including returns)			2,309			2,046

Total			5,201			4,783

Accrued Liabilities
Medicaid Rebates			2,307			1,382
Administrative Fees			38			187

Total			2,345			1,569

Grand Total		$	7,546		$	6,352


•	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 will experience operating losses for the next several years.

•	The risk that there will be a decline in sales of one or more of our marketed products or products sold by others from which we derive royalty revenues. Such sales declines could result from increased competition, loss of patent protection, pricing, supply shortages and/or regulatory constraints.

•	The risk that we will be unable to obtain critical compounds used in the manufacture of our products at economically feasible prices or at all, or one of our key suppliers will experience manufacturing problems or delays.

•	Decisions by regulatory authorities regarding whether and when to approve our regulatory applications as well as their decisions regarding labeling and other matters could affect the commercial potential of our products or developmental products.

•	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 the Company.


	2009			2010			2011			Total			Fair Value

Fixed Rate	$	54,286		$	56,160		$	9,323		$	119,769		$	116,164
Average Interest Rate		5.21	%		6.19	%		5.56	%		5.70	%
Variable Rate		5,505			—			—			5,505			5,685
Average Interest Rate		3.66	%								3.66	%

	$	59,791		$	56,160		$	9,323		$	125,274		$	121,849


Exhibit Number		Description	Reference No.

	3(i)	Amended and Restated Certificate of Incorporation	(1	)
	3(ii)	Amended and Restated By-laws	(2	)
	3(iii)	Amendment dated July 31, 2007 to Amended and Restated Bylaws	(3	)
	3(iv)	Amendment dated November 21, 2007 to Amended and Restated Bylaws	(4	)
	4.1	Rights Agreement dated May 17, 2002 between the Company and Continental Stock Transfer Trust Company, as rights agent	(5	)
	4.2	First Amendment to the Rights Agreement, dated as of February 19, 2003 between the Company and Continental Stock Transfer & Trust Company, as rights agent	(6	)
	4.3	Second Amendment to the Rights Agreement, dated as of January 7, 2008 between the Company and Continental Stock Transfer and Trust Company, as rights agent.	(7	)
	31.1	Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002		*
	31.2	Certification of Principal Accounting 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 Accounting Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002		*


*	Filed herewith.

Referenced exhibit was previously filed with the Commission as an exhibit to the Company’s filing indicated below and is incorporated herein by reference to that filing:

(1)	Current Report on Form 8-K filed May 19, 2006.

(2)	Quarterly Report on Form 10-Q for the quarter ended June 30, 2006 filed August 3, 2006.

(3)	Quarterly Report on Form 10-Q for the quarter ended June 30, 2007 filed August 2, 2007.

(4)	Current Report on Form 8-K filed on November 26, 2007.

(5)	Form 8-A12G (File No. 000-12957) filed with the Commission on May 22, 2002.

(6)	Form 8-A12G/A (File No. 000-12957) filed with the Commission on February 20, 2003.

(7)	Current Report on Form 8-K filed January 8, 2008.


	ENZON PHARMACEUTICALS, INC.
	(Registrant)

Date: November 5, 2008	By:	/s/Jeffrey H. Buchalter

		Jeffrey H. Buchalter,
		Chairman, President and
		Chief Executive Officer
		(Principal Executive Officer)

Date: November 5, 2008	By:	/s/Craig A. Tooman

		Craig A. Tooman
		Executive Vice President, Finance and
		Chief Financial Officer
		(Principal Financial Officer)