Why the Pros Are Passing on Encysive Pharma

Shares have risen ahead of a huge FDA decision, but institutional holders haven't regained the faith.
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Has

Encysive Pharmaceuticals

(ENCY)

finally convinced drug regulators to approve Thelin?

That's the burning question on the minds of Encysive shareholders as a Friday approval decision nears for Thelin, a treatment for pulmonary arterial hypertension, or PAH. The Food and Drug Administration has delayed two previous attempts to get the drug approved in the U.S., which has only added to the tension as the decision clock winds down.

If my email inbox is any indicator, there's considerable interest from retail investors in Encysive and its quest for approval of Thelin, mainly because the stock is cheap relative to the commercial opportunity for the drug, if approved.

But whatever buzz Thelin is generating on Internet message boards is matched -- even surpassed -- by apathy among Wall Street's professional biotech investors. Sell-side analysts covering Encysive don't seem particularly willing to advocate forcefully for Thelin's approval.

In recent research notes, three analysts state their belief that the FDA will approve Thelin on Friday. Two analysts believe the FDA will once again turn Thelin away with a request for more data. Another four sell-siders aren't making any guesses at all because they just don't know what the FDA will do.

Biotech buy-siders -- the folks I've spoken with, at least -- aren't any more engaged on Thelin. I polled about 30 contacts -- fund managers, analysts, institutional brokers -- to get a sense of where they stood on Thelin's approval. The response was underwhelming, with a majority saying they cared little or had no opinion.

Of the 12 responses I did receive, 11 people felt the FDA would issue another "approvable" letter for Thelin, delaying the drug once again. Only one respondent felt that Encysive would succeed this time.

Just as interesting, none of these Wall Street biotech pros were involved in the stock at all, long or short.

Encysive shares have seen some bids as the decision date nears. At its Tuesday close of $4.66, the stock is up nearly 77% from its recent low in late March.

Just under two years ago, Encysive was a $12 stock. Its fall is largely due to two failed attempts at getting Thelin approved, and it's a big reason for the indecisiveness of the many biotech sector participants viewing the company.

The company first submitted Thelin to the FDA in May 2005. The agency issued an "approvable" letter in March 2006, refusing to approve the drug until Encysive provided additional information on the drug.

Encysive resubmitted Thelin to the FDA in May 2006, but two months later, in July 2006, the FDA once again refused to approve the drug. Thelin was resubmitted to the FDA for a third review in late 2006, and now the company and investors wait to see what happens.

Thelin is approved for use in Europe, Australia and Canada, which makes the long delay for a U.S. approval even more mystifying. The situation is compounded by the reticence of Encysive management, which has never given a full airing to explain the questions or issues that prompted the FDA to keep Thelin on ice for so long.

The delay in getting Thelin to market in this country has helped its competitors.

Gilead Sciences

(GILD) - Get Report

is expecting an FDA decision on its PAH drug ambrisentan on Monday, just three days after Encysive is expected to hear a decision. As I've written before, ambrisentan has

clinical advantages that seem to give it an edge over Thelin. If both drugs are approved, ambrisentan is expected to garner greater market share and sales than Thelin.

If Thelin is approved but only generates minimum revenue, Encysive will have a hard time justifying much of a premium to its current valuation.

Taken together, all these unknowns and issues help explain why the question of Thelin's approval is not exactly a burning question on the minds of institutional investors or sell-side analysts.

Adam Feuerstein writes regularly for RealMoney.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. Feuerstein appreciates your feedback;

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