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Encysive Drug Cuts Through in Europe

An advisory panel backs a blood pressure drug just months after a U.S. setback.



could be on the mend.

The wounded biotech, hurt by questions from the Food and Drug Administration, has won over health care regulators in Europe. Encysive announced on Friday that a special advisory committee has recommended approval of the company's new blood pressure drug, known as Thelin, for use in the European Union. The company expects a formal decision from European regulators within 90 days and could start selling the drug overseas in the latter part of the year.

Encysive had originally planned to launch Thelin in the U.S. instead. But the FDA blindsided the company -- and its investors -- by requesting more data on Thelin first. That setback, announced in late March, chopped the company's stock in half and left some people wondering if the drug had any future at all.

Still, Punk Ziegel analyst Matthew Kaplan never gave up hope. Unlike his peers, Kaplan kept recommending the company's stock throughout the recent turmoil and still feels good about his pick right now.

"Obviously, this is very good news for the company," says Kaplan, whose firm makes a market in the company's stock. "This puts to rest all of the doomsday scenarios for Thelin. ... It tells me that there are no huge red-flag issues with respect to the efficacy and safety of the drug."

Investors welcomed the announcement with clear relief. They pushed the company's stock up 38% to $5.94 in heavy trading on Friday. To be sure, the shares -- which fetched around $10 before the FDA scare -- still have some ground to recover. But Kaplan sees several triggers ahead.

Perhaps most notably, Kaplan says, Encysive last week submitted its full response to the FDA -- without seeing any need for further clinical trials -- and should hear back from the agency by the end of this month. That feedback should establish a clear timetable for Thelin's approval here at home. In the meantime, Kaplan says, the company's stock could jump again on Thelin's formal approval overseas.

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"I think there are a number of important catalysts that still remain in this story," he concludes.

Mixed Reviews

But others have cooled on the story already.

With poor timing, as it turns out, Deutsche Bank analyst Jennifer Chao last month downgraded Encysive from buy to hold -- as the stock dipped below $4 -- over concerns about Thelin's future. More recently, JPMorgan analyst Geoffrey Meacham stuck by his neutral rating on the company's stock despite the positive development overseas.

"Given the approvable letter and request for additional clinical work from the FDA, the news today comes as somewhat of a surprise," admitted Meacham, whose firm owns at least 1% of Encysive's stock and counts the company as a client. But "ironically, an EU launch of Thelin may be more of a negative as launch costs raise ENCY's burn in a region that may be tougher to penetrate (versus the U.S.) and at a time when the Street is concerned about financing for Encysive."

Most mainstream analysts continue to favor



instead. They believe that Myogen's own blood pressure drug, which will compete with Thelin, ranks as the best treatment in its class.

But some people have their doubts. Specifically, they question whether the drug -- known as ambrisentan -- is as safe as its maker claims.

"I am of the opinion that there is the likelihood that these guys will come out at some point during the drug trials, which are ongoing, and say we do see some evidence of liver toxicity beyond 12 weeks," says Source Capital Vice President Robert Lawton, who has a short position in Myogen and a long position in Encysive. "To me, they don't pass the smell test. And I don't find it difficult to imagine a 30% to 50% haircut in the stock one day based on a press release -- after the insiders have cashed out substantially."