Updated from 2:43 p.m.

Encysive

(ENCY)

keeps bouncing back.

After suffering a huge blow this spring, the biotech company has received a second round of good news about its most promising drug. The company announced on Thursday that the Food and Drug Administration will conduct a speedy "Class 1" review of Thelin, its new treatment for pulmonary arterial hypertension, and could decide on the drug's approval by the end of July.

The FDA's action comes about a week after European officials recommended approval of Thelin over there. The latest development brought clear relief to those who have worried about the drug's fate ever since the FDA issued an "approvable" letter with some concerns -- instead of approving the drug outright -- three months ago.

Most analysts immediately downgraded Encysive after that surprise. But one never lost faith in the company. Matthew Kaplan of Punk Ziegel reiterated his buy recommendation after the stock's big plunge and continued to do so in recent weeks as good news rolled in.

Still, even Kaplan had been looking for a Class II review of Thelin -- which would have taken months longer -- instead of the quickest review offered.

"This is the best-case scenario," says Kaplan, whose firm makes a market in the company's stock. "The company has done all of the things it had said it was going to do -- which has obviously had a very positive outcome with respect to the timeline for the drug."

If this roll continues, Encysive could beat competing

Myogen

(MYOG)

to the market with a new treatment for PAH. Such drugs, while targeting a rare condition, can command premium prices and generate hundreds of millions of dollars in annual sales as a result.

Shares of Encysive rocketed 37% to $6.90 on the latest news. They have still yet to recover from their big spring dive, when they dropped from the $10 level, but Kaplan expects them to surpass that price and go on to hit $17 over the course of the next year.

Meanwhile, Wall Street favorite Myogen weathered the news quite well. The company's stock barely budged, slipping just 12 cents to $29.57, after the announcement.

Bullish Calls

Kaplan felt especially confident about Encysive -- and the chances for its new drug -- after the company last month managed to file a complete response to the FDA without conducting additional trial work.

Back then, with the stock sitting at $4.45 a share, he suggested that Encysive could win FDA approval of Thelin sometime this year. He now believes that could happen as early as this summer. Meanwhile, he notes, the company has already trained a sales forces that's ready to market the drug as soon the FDA moves.

Kaplan has predicted that Thelin could generate more than $300 million in sales -- and $1.53 per share in earnings -- by 2009.

Two other analysts recently upgraded Encysive and started recommending the company's stock as well. Indeed, one of them -- Navdeep Jaikaria of Rodman & Renshaw -- looked especially prescient by reiterating his new "outperform" rating on the stock just hours before the company announced the FDA's latest plans on Thursday.

"We met with Encysive senior management yesterday to get an update," explained Jaikaria, whose firm has an investment banking relationship with the company. And "we do believe that the FDA will accept the (company's) filing as complete, and that there is a reasonably high probability that the FDA may not request additional studies before granting approval."

Jaikara had viewed even a Class II review of Thelin -- which could have stretched on for six months -- as good news for the company.

"It would enable Thelin to be approved ahead of ambrisentan of Myogen," he stressed. "Early approval of Thelin would allow it to establish a foothold in the PAH market before the availability of ambrisentan in our opinion and will also give Thelin more time to make into hospital formulary, which routinely only features two therapies from the same class for any given indication."

If approved, Thelin will in fact emerge as the second treatment of its kind -- following a foreign-made competitor. Jaikaria, while somewhat less optimistic than Kaplan, believes that Thelin could go on to become a $200 million drug as a result.

Misplaced Bets

Oppenheimer analyst Cory Kasimov, another recent Encysive bull, had assumed that Thelin would rank third in the market -- at least in terms in sales -- even when upgrading the company's stock to buy earlier this month. He nevertheless viewed the stock as a bargain that, even based on conservative assumptions, could shoot to $9 a share.

Meanwhile, Leerink Swann analyst Joseph Schwartz offered a decidedly different take this month. He seemed to downplay the recommendation in Europe -- which triggered the recent upgrades and previous jump in the stock -- and continued to brace for the worst. Notably, he assumed that the FDA would reject Encysive's recent response and call for more trial work instead. He did see a 25% chance that the agency could opt for a Class II review of the current information. But he offered only a 10% shot that the agency would select the quickest review of all.

"Although there may be upside in the event that ENCY is able to garner a complete response and approval with existing clinical data, we believe the probability of such an outcome is relatively low," Schwartz wrote in early June, when the stock climbed toward $6 a share on the favorable European news. Ultimately, "we believe that an uncertain regulatory path and a likely truncated competitive advantage period may continue to garner a relatively low revenue/earnings multiple for ENCY."

He, therefore, predicted that the stock could wind up being worth as little as $2 or $3 a share.

Robert Lawton, vice president of Source Capital, has stopped listening to most biotech analysts altogether. He has taken a long position in Encysive -- and a much larger short position in Wall Street darling Myogen -- based on his own research instead.

The FDA decision is "great news for Encysive and bad news for Myogen," Lawton said on Thursday. But "to me, the interesting story has been and will continue to be analysts' value -- or, more precisely, appalling lack thereof -- to the institutional and retail investment community."