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Contributors: Douglas McIntyre Jon C. Ogg

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Tuesday, July 25, 2006

The Encysive Gamble

Shares of Encysive Pharmaceuticals (ENCY) had been down by essentially half in pre-market trading this morning on after the FDA withheld its approval of its THELIN™ for the treatment for chronic high blood pressure in the blood vessel that carries oxygen-poor blood to the lungs until a question is cleared up. The shares have recovered a bit, and are trading down 39% at $3.73 for now.

This was still shown and represented as an “Approvable” letter, which is essentially its second delay for more information to be cleared up. The company said that the FDA again offered the alternative of conducting additional clinical work and the FDA provided recommendations on the company's risk management plan, which the Company views as constructive.

The first “approvable” delay came on March 24, when the agency requested more clinical work on the drug. On that date the shares fell from $9.00+ down to under $5.00, and since then shares had tried and tried to get back up to $7.00. This does mark a clear blow to the stock, but for now it is acting as though the old $3.29 intra-day lows will hold.

In a press release after Monday's close, Encysive said only one of the issues raised in the earlier letter remains unresolved. Unfortunately, it was anticipated that they would get an approval. The company does chew through its cash at a rate of $18 million to $30 million per quarter, and it had $100.5 million cash as of last quarter. Unfortunately, the company has $130 million in long-term debt it is carrying.

The company does get payments for Argatroban, a drug developed to treat heparin-induced thrombocytopenia (HIT), a serious immune reaction to heparin that causes abnormal clotting and often leads to limb amputation and even death. This is FDA Approved since 2000 and marketed by GlaxoSmithkline, but unfortunately it is not enough to offset their R&D and drug trial costs.

So here is your risk: investors tip-toeing in right now are making the gamble that the company will get this approved and will therefore begin a rapid recovery of cash. If so, it has an opportunity to capture a giant market. It may not be deemed a blockbuster drug, but it would be huge. If not, then the downside is worse than other biotech stocks with implosions that trade close to cash value, because it looks like the company will essentially be trading at or close to negative liquidity with this debt. If that is true, then you know how low it can go. If the company can get this resolved and then approved in a timely manner, then traders deciding to enter here today will be highly rewarded. Since there was the suggestion of additional clinical work you can just assume that this puts it at a critical juncture.

There was a substantial amount of options trading going into this FDA review yesterday, and it looks like there was a large hedge placed against this FDA action. Even if the street was hoping for an approval the volume, someone either cleaned up on this or at least kept a large stock position from getting worse.

Now the company has some decisions to make, and it is racing the clock. This was something we wanted to cover last night with some conviction, but until that conference call was past that showed some body language and some hint at where the company stands it was just not worth trying to be brave. This is a situation that definitely needs to be monitored.

Jon C. Ogg
July 25, 2006
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