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May 18, 2007
Zacks Research Digest
Research Analyst: Shilpa Chandak, CA.
Sr. Ed: Ian Madsen, CFA, [email protected]; 1-800-767-3771, x9417
111 N. Canal Street, Suite 1101 • Chicago, IL 60606
www.zackspro.com
Encysive Pharmaceuticals, Inc.
(ENCY - NASDAQ)
$3.25
Note: This report contains substantially new material; all subsequent reports will have additions
highlighted.
Reason for Report: Q1 2007 Earnings Update.
Previous Update: March 21, 2007
Recent Events
On May 7, 2007, ENCY announced financial results for 1Q07.
Overview
Encysive Pharmaceuticals, Inc. (ENCY) is a biopharmaceutical company headquartered in Houston,
Texas. The company (formerly Texas Biotechnology Corporation) is engaged in the discovery,
development, and commercialization of novel, synthetic, and small molecule compounds. Encysive’s first
product, Argatroban, is approved for the prophylaxis or treatment of thrombosis in patients with heparininduced thrombocytopenia (HIT). Argatroban is being promoted by GlaxoSmithKline, PLC.
ENCY is in Phase II development with the selective antagonist called Bimosiamose, for asthma,
psoriasis, and atopic dermatitis. Additionally, ENCY has several other research and development
programs for a range of cardiovascular and inflammatory diseases. ENCY has collaboration agreements
with Mitsubishi Pharma Corporation, GlaxoSmithKline (GSK), and Encysive L.P. The company’s website
is http://www.encysive.com.
Brokerage firms have identified the following factors for evaluating the investment merits of Encysive:
Key Positive Arguments
Key Negative Arguments
Encysive is gearing up its sales and marketing resources
in anticipation of potential FDA approval of Thelin.
Thelin faces a significant risk from Myogen’s
Ambrisentan, due to be launched in 2007 or 2008, which
has a potentially superior clinical profile, according to
analysts.
Encysive depends heavily upon intellectual property to
protect its patented products from potential infringement
by competitors.
Encysive has one of the broadest product pipelines in the
sector.
Note: The company’s fiscal year coincides with the calendar year.
© Copyright 2007, Zacks Investment Research. All Rights Reserved.
Revenue
Argatroban
Indication: Treatment of heparin-induced thrombocytopenia (HIT), a serious immune reaction to heparin
that causes abnormal clotting and often leads to limb amputation and even death.
Stage of development: Mature, widely sold and distributed.
Importance: Argatroban is Encysive’s first product, and promoted by GSK. Encysive receives roughly
15% royalty on its sales. As HIT is a relatively small market, brokerage firms believe Argatroban’s peak
sales market potential is less than $100 million.
Partners: Argatroban (received FDA approval in June 2000) is being marketed by partner GSK.
Royalty Income: According to the Zacks Digest report, royalty income in 1Q07 increased 29% to $4.1
million versus $3.2 million earned in 1Q06.
Safety Issues: The most serious side effect associated with Argatroban, is an increased danger of a
hemorrhagic event in disease states; and other circumstances like severe hypertension, immediately
following lumbar puncture, spinal anesthesia, and major surgery, especially involving the brain, spinal
cord, or eye; hematological conditions associated with increased bleeding tendencies, such as, cogenital
or acquired bleeding disorders; and gastrointestinal lesions, such as, ulcerations.
Argatroban Royalty
2006A
$16.9M
2007E
$19M
2008E
$21.6M
2009E
$21.7M
Est. Growth
18.7%
Pipeline Drugs
Thelin (Sitaxsentan sodium)
Indication: Treatment of pulmonary arterial hypertension (PAH), a condition that involves high blood
pressure and structural changes in the walls of pulmonary arteries of the heart.
Stage of Development: Thelin was approved in Australia, while Canadian approval is pending. Thelin
will be slowly rolled out in Europe, following pricing and reimbursement negotiation with individual EU
countries. The PDUFA day for Thelin in the U.S. is June 15, 2007.
Importance: Analysts expect Thelin to be the major value driver for Encysive in the future.
Safety Issues: In clinical trials, most frequent adverse events that occurred in patients receiving Thelin,
which were more common than in placebo-treated patients, were headache, edema, nausea, upper
respiratory tract infection, dizziness, insomnia, nasopharyngitis, and nasal congestion.
Thelin Launch: Thelin’s launch ex-U.S. remains on track, with new launches in Ireland and the
Netherlands. Reimbursement is being sought in Australia after a March approval, and next launches are
expected in Spain, Italy, France, and Canada. Early experience showed 40% of Thelin’s use was in
“incremental” patients (those new to ETRA therapy, and those returning to ETRAs after prior
discontinuation from side effects). ENCY reiterated it expects a slow ramp for Thelin ex-U.S.;
Regulatory Issues: On April 16, 2007, ENCY announced the commercial availability of Thelin 100 mg
tablets in the Netherlands for the treatment of pulmonary arterial hypertension (PAH). The company
received European Union marketing authorization for Thelin from the European Commission in August
2006.
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On April 2, 2007, ENCY announced the commercial availability of Thelin 100 mg tablets in the Republic
of Ireland for the treatment of pulmonary arterial hypertension (PAH).
On March 7, 2007, ENCY announced the Australian Therapeutic Goods Administration (TGA) has
granted marketing approval for Thelin 100 mg tablets as a once daily oral treatment for patients with
pulmonary arterial hypertension (PAH). Thelin is indicated for the treatment of PAH in patients with New
York Heart Association (NYHA)/World Health Organization (WHO) functional class III symptoms to
improve exercise ability. Efficacy has been shown in primary pulmonary hypertension and pulmonary
hypertension associated with connective tissue disease.
On December 28, 2006, ENCY announced the U.S. Food and Drug Administration (FDA) has accepted
for review the company's complete response to the July 24, 2006 approvable letter regarding its New
Drug Application (NDA) for Thelin. FDA has designated the review as a Class 2 resubmission, and
issued a new Prescription Drug User Fee Act (PDUFA) target action date of June 15, 2007. The
company has indicated it will work with FDA to schedule a meeting as soon as possible in an effort to
clarify the situation, and move the application forward.
Additional Studies: Patient enrollment in the Phase II trial of Thelin in diastolic heart failure patients, is
roughly 2/3rd completed. This is a randomized, double-blind, placebo-controlled trial examining the
efficacy of Thelin to improve exercise tolerance in patients with diastolic heart failure. Patient inclusion
criteria include chronic NYHA Class II/III heart failure, LVEF levels greater than or equal to 50%, exercise
time in the range of 120-720 seconds, and echocardiographic evidence of concentric remodeling and/or
diastolic dysfunction.
Competition: Thelin is the major value driver for ENCY, but is likely to face competition from the
increasing number of participants in the PAH space, including Actelion, Gilead, Myogen, United
Therapeutics, and Pfizer. The Thelin PDUFA date (June 15, 2007) is only three days ahead of that of
Ambrisentan. The company believes it could launch Thelin in the U.S. within 30 days of FDA approval,
although one firm (J.P. Morgan) remains concerned that Ambrisentan’s apparent best-in-class efficacy
and safety profiles will enable Gilead to capture the majority of new patients and switches from Tracleer.
Other: The company hired and trained 52 sales representatives for promotion of Thelin in late 2005, but
due to uncertainty regarding the launch of Thelin in the U.S., one representative has left till date.
Thelin Sales
2006A
$0.3M
2007E
$19.2M
2008E
$83.2M
2009E
$143.2M
Est. Growth
-
Bimosiamose
Indication: Treatment of asthma and psoriasis.
Stage of Development: Phase II trials are underway with Bimosiamose as an inhaled therapy for
asthma. All costs to develop the product for asthma and psoriasis are being borne by Revotar
Biopharmaceuticals AG, based in Berlin, Germany, and a majority owned affiliate of Encysive.
Importance: Bimosiamose inhibits all three selectins known to support the inflammatory process,
thereby blocking the inflammatory process at an early stage.
TBC3711
Indication: Treatment of pulmonary arterial hypertension (PAH), a condition that involves high blood
pressure and structural changes in the walls of the pulmonary arteries of the heart.
Stage of Development: Phase II.
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On March 21, 2007, ENCY announced the enrollment of the first patient into its Phase II dose-ranging
study of oral TBC3711, the company's next-generation, highly selective endothelin receptor antagonist in
resistant hypertension. The 12-week, multi-center, randomized, double-blind, placebo-controlled study
will evaluate four once-daily oral doses of TBC3711 in approximately 150 patients with diagnosed
resistant hypertension.
Importance: TBC3711 showed excellent kinetics in Phase I studies.
VLA-4 Antagonists
Indication: Prevention of inflammation.
Mechanism of Action: The compound may block the adhesion of certain cell adhesion molecules,
thereby preventing inflammation in a highly specific manner.
Stage of development: Pre-clinical.
Total Revenue Synopsis
The company reported revenue of $5.4 million for the first quarter of 2007, versus $3.6 million in the first
quarter of 2006, reflecting approximately $1.0 million in Thelin European sales, and a year- over-year
increase in Argatroban royalty income of approximately $0.9 million.
2006A
1Q07A
2Q07E
3Q07E
4Q07E
2007E
2008E
2009E
Total Revenue
$18.7
$5.4
$7.0
$10.6
$13.4
$39.0
$101.4
$158.0
Digest High
$19.0
$5.4
$8.3
$13.3
$18.5
$68.3
$277.4
$400.4
Digest Low
$16.4
$5.4
$6.0
$7.1
$8.7
$27.2
$39.1
$70.0
Digest Average
$18.7
$5.4
$7.0
$10.6
$13.4
$39.0
$101.4
$158.0
Digest YOY Growth
33.3%
51.8%
90.0%
67.6%
147.1%
108.4%
159.7%
55.8%
-0.1%
29.5%
51.1%
26.4%
Quarterly Growth
Margins
Margins
Gross
2006A
1Q07A
2Q07E
3Q07E
4Q07E
2007E
2008E
2009E
97.9%
98.4%
96.3%
95.0%
93.9%
95.2%
93.5%
93.5%
Operating
-585.2%
-530.9%
-385.0%
-238.2%
-176.9%
-256.7%
-50.6%
-6.4%
Pre tax
-585.3%
-553.5%
-405.6%
-254.6%
-188.6%
-277.6%
-60.9%
-13.5%
Net
-579.6%
-548.6%
-401.7%
-251.9%
-186.1%
-275.0%
-60.2%
-14.3%
Research and development spending of $17.5 million in the first quarter of 2007, was slightly lower than
the last year's first quarter R&D spending of $18.4 million, due to a slowdown in clinical spending.
Sales and marketing expenses were $10.9 million in the current quarter versus $9.8 million in the first
quarter in 2006. General and administrative expenses were $5.6 million in the first quarter of 2007,
versus $5.7 million during the same period in 2006. These changes reflect decreased spending in the
U.S. due to internal spending controls, offset by increased spending in Europe where we are actively
commercializing Thelin.
Encysive stated during the earnings call, it will need to raise additional funds in 2007, regardless of
whether Thelin is approved in the U.S. Management indicated it has taken down $18 million of the equity
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line during the fourth quarter. One firm (C.E. Unterberg) believes Encysive’s U.S. sales force could be
downsized over the next quarter. Given the need for experienced sales people in an increasingly
competitive PAH market, the firm believes many of ENCY’s sales force can be wooed away by
competitors, some of whom already have products in the market.
Earnings per Share
ENCY reported 1Q07 net loss of $0.49 per share, mainly due to higher than expected R&D expenses
and lower than expected Argatroban royalty of $4.1 million.
FY Ends December
2006A
1Q07A
2Q07E
3Q07E
4Q07E
2007E
2008E
2009E
Digest Average
($1.84)
($0.49)
($0.41)
($0.36)
($0.34)
($1.50)
($0.97)
($0.42)
Digest High
($1.72)
($0.49)
($0.36)
($0.29)
($0.27)
($1.21)
($0.65)
($0.05)
Digest Low
($1.87)
($0.49)
($0.45)
($0.43)
($0.39)
($1.75)
($1.35)
($0.70)
Y/Y Growth
-42.8%
4.8%
9.2%
18.5%
-748.0%
15.6%
49.3%
71.5%
Management refrained from issuing precise sales and cost forecasts, citing the uncertainty surrounding
Thelin’s emerging presence in Europe, and pending review by the FDA.
Target Price/Valuation
According to the Zacks Digest report, the average target price is $4.80 (↑ from the previous target price).
The target price ranges from a low of $2.00 (Deutsche Bank.) to a high of $12 (Punk, Ziegel).
Rating Distribution
Positive
18.2%
Neutral
54.5%
Negative
27.3%
Avg. Target Price
$4.80↑
Brokerage firms in the Digest group believe risks to achievement of the target price include financial risk,
development risk, competitive risk, the potential for high share price volatility, market risk, and litigation
risk.
Capital Structure/Solvency/Cash Flow/Governance/Other
Cash, cash equivalents, accrued interest and restricted cash at March 31, 2007, was $62.9 million,
versus $43.8 million at December 31, 2006. Cash utilization during the first quarter included $4.5 million
in debt repayment related to the Argatroban Notes, as well as $1.6 million in interest payments to the
2005 Convertible Note holders. In the quarter, cash balance included $10.2 million of restricted cash
related to the Argatroban Notes, which was held in a holdback account, pending resolution of a United
Kingdom tax withholding issue.
On February 6, 2007, Encysive Pharmaceuticals announced its newly-formed, wholly-owned subsidiary
has closed a private placement of $60 million in aggregate principal amount of non-convertible, nonrecourse promissory notes (Notes) to institutional investors. The Notes are secured by royalties to be
paid on sales of Argatroban, a drug licensed by Encysive to and sold by GlaxoSmithKline plc (GSK) for
the treatment of heparin-induced thrombocytopenia, and by a pledge by Encysive of the stock of the new
subsidiary.
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Potentially Severe Problems
On October 4, 2006, Federman & Sherwood announced a securities class action lawsuit has been filed
against Encysive Pharmaceuticals Inc.
On October 1, 2006, the law firm of Brower Piven announced a securities class action was commenced
on behalf of shareholders who purchased or acquired the common stock of the company between
February 19, 2004 and March 24, 2006. The case is pending in the United States District Court for the
Southern District of Texas against defendant Encysive, and one or more of its officers and/or directors.
The action charges that defendants violated federal security laws by issuing a series of materially false
and misleading statements to the market throughout the Class Period, which artificially inflated the
market price of the company's securities.
On September 29, 2006, Law Offices of Howard G. Smith announced a similar securities class action
lawsuit.
The complaint alleges Encysive and some of its officers and directors violated federal security laws by
issuing a series of materially false statements regarding the success of Sitaxentan, or Thelin, a drug it
was developing to treat Pulmonary Arterial Hypertension (PAH).
Long-Term Growth
None of the brokerage firms in the Digest group has come out with long-term growth rate for ENCY.
In November 2000, ENCY began to market its first product, Argatroban, through an agreement with GSK.
However, royalties produced by Argatroban have not made it profitable. Most of ENCY’s resources have
been dedicated to the research and development of Argatroban, Thelin and other small molecule drugs
for certain vascular and related inflammatory diseases. It does not have any drug candidate that is likely
to be commercialized in the near future other than Thelin. In March and July of 2005, the company had
received approvable letters from the FDA for Thelin, which contained concerns and observations that
need to be satisfied prior to achieving approval, including a request for additional clinical trial work. One
firm (Needham) continues to be impressed with management’s efforts to resolve the matter, but
considering that the nature of the remaining item has not been made public, it prefers to maintain a
conservative position, and assumes additional clinical trials will be necessary.
Upcoming Events
Date
Event
June 15, 2007
Thelin PDUFA date
Individual Analyst Opinions
POSITIVE RATINGS
Cowen – Outperform – May 7, 2007: INVESTMENT SUMMARY: The brokerage firm expects the stock
to outperform as investors gain confidence in Thelin’s worldwide potential.
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NEUTRAL RATINGS
C.E. Unterberg – Market Perform (Target Price range $3-$4) – May 8, 2007. INVESTMENT
SUMMARY: With a lack of catalysts until the June PDUFA date, and dwindling cash resources, which
will yield turnover in its salesforce, the firm maintains its rating on ENCY’s shares.
Leerink Swann – Market perform – May 7, 2007: INVESTMENT SUMARY: The firm believes an
uncertain regulatory picture and truncated competitive advantage period may continue to garner a
relatively low revenue/earnings multiple for ENCY.
J.P. Morgan – Neutral – May 7, 2007: INVESTMENT SUMMARY: With a slower than expected Thelin
launch in the EU and a Thelin PDUFA date concurrent with Gilead’s Ambrisentan, the firm continues to
be cautious on ENCY shares, given Ambrisentan’s apparent best-in-class profile.
Rodman & Renshaw – Market perform – May 7, 2007: INVESTMENT SUMMARY: Even if Thelin is
approved by the FDA, the firm believes it will not garner any significant market traction, and hence, finds
the risk-reward profile ahead of the FDA decision to be unattractive.
WR Hambrecht – Hold – May 7, 2007. INVESTMENT SUMMARY: Given the lack of clarity regarding
the approval of Thelin in the U.S. and the relative importance of Thelin to Encysive, the firm has
maintained a Hold rating.
NEGATIVE RATINGS
Needham – Under Perform – May 7, 2007. INVESTMENT SUMMARY: Based on the uncertainty
surrounding the Thelin development schedule, a lack of significant news flow in the near term, and the
continuing need for additional financing, the firm has reiterated an Under Perform rating.
Appendix-A
Analysts’ sales estimates by product, EPS forecasts, and a consensus model can be found in the file
ENCY.xls.
Research Analyst: Shilpa Chandak
Copy Editor: Oindrila Banerjee
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