On a few occasions since last November I wrote how I thought Encysive pharmaceuticals (ENCY) was a good short. Encysive had been having some problems getting its pulmonary arterial hypertension [PAH] treatment Thelin on the market in the U.S.
So far it has only received approvable letters from the FDA. That is, the FDA wanted more data. Encysive's CEO stated that there was one issue the FDA still had a problem with, but wouldn't specify what that issue was. While the CEO stated the issue had been addressed, I was mistrustful of his lack of transparency.
The Monday after I suggested shorting the stock (November 6), it was at $5.76. The stock closed Friday (March 16) at $2.77, a 52% decline (note, in the BC tracking portfolio I covered on December 29 at $4.17, a gain of 27.6%: I guess bulls make money, bears make money, and chemists cover too soon!).
So, while I clearly had no respect for ENCY in the past, I think the stock has been beaten down enough that some money can be made going long. Encysive expects to hear from the FDA on June 15 about its application for Thelin. There is no guarantee it will be approved, and, indeed, I wouldn't even count on it. The drug has, however, been approved in other parts of the world, and has been launched in the UK, Germany, and Australia. So, even without the U.S. market, it will be selling to a combined population of over 160 million. To be clear, pricing controls in these countries does diminish the attractiveness of these markets.
Now, a kicker in all this is that Gilead (NASDAQ:GILD) expects to hear from the FDA about its PAH drug Ambrisenstan (acquired when it purchased Myogen) on June 18, three days after Encysive should hear about Thelin.
Clinical results for both Thelin (J. Am. Coll. Cardiol, 2006, 47, 2049) and for Ambrisenstan (J. Am. Coll. Cardiol, 2005, 46, 529) have been published. The primary endpoints for these studies was improvement in 6 minute walking distance (6MWD, a benchmark for cardiopulmonary function) after 12 weeks. In the Ambrisenstan case, patients displayed on average an improvement of 40m in the 6MWD test. The Thelin study reported an improvement of 25m. In another publication about Thelin (Journal of Heart and Lung Transplantation, 2007, 26, 63) one third of patients experienced improvements of >15% on the 6MWD. As the baseline value was 325m, this represents an improvement of 49m.
While Ambrisenstan does appear to have greater efficacy, differing safety profiles for the two drugs means there is still a place for Thelin. For example, in the clinical trials mentioned above, 13 of 64 (20.3%) patients taking Ambrisenstan experienced clinical worsening, compared with only 4 out of 61 (6.5%) patients taking Thelin.
Encysive also has a phase 2 study underway, on BC3711, to treat resistant hypertension. While good results from this trial might push the stock up a bit, most of Encysive's value is in Thelin.
The other issue facing Encysive - its extended FDA plight - has seriously strained its balance sheet. In releasing the 2006 10K, it expressed potential difficulties in continuing as a going concern - never a good thing. This also raises the possibility of further dilution.
My take is ENCY has been beaten down to a point were it may be worth a buy. To be clear, this is still highly speculative, and I still wish management was more transparent about Thelin's FDA troubles. The launch of its product in a market of substantial size is encouraging. While Ambrisenstan does appear to offer greater efficacy, differing safety profiles may mean some patients will respond better to Thelin. At a price of under $3, even modest revenue for Thelin will afford a rise in price.
I don't recommend buying ENCY until the VIX decreases a bit and until its technicals start to improve. The stock just broke through support at ~$3.30 and could keep falling. If it hits $2.50 I'd consider buying.
ENCY 1-yr chart