Encysive Takes Decisive Loss

Rival Gilead gets its drug approved.
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In a fierce battle to supply competing drugs on its home turf, Encysive (ENCY) has officially struck out and handed rival Gilead (GILD) - Get Report a decisive victory in the process.

The Food and Drug Administration on Friday refused to approve Thelin, Encysive's new treatment for pulmonary arterial hypertension, after the company's third attempt to satisfy regulatory concerns about the drug fell short. Meanwhile, Gilead scored FDA approval for its own PAH treatment its first time up to bat.

Encysive's stock plummeted early Monday, losing nearly half its value as the company's prospects in the crucial U.S. market seemed to disappear. Even so, Gilead failed to take off. The company's stock inched up less than 1%, with a strict "black box" warning for its own PAH drug -- triggered by liver toxicity and birth defects -- possibly curtailing the company's gains.

Until last week's regulatory blow, which is likely to limit Thelin's sales to markets outside the U.S., Encysive had offered investors no clues about the FDA's concerns. If anything, the company seemed to indicate that Thelin faced class-related issues that could hamper approval of competing drugs -- including Gilead's ambrisentan -- as well. On Friday, however, Encysive finally disclosed that the FDA felt that Thelin "did not demonstrate the evidence of effectiveness needed for approval" and would require another clinical trial to supply that proof.

Encysive fielded a third "approvable letter" from the FDA in the meantime. The company stopped short of officially abandoning its U.S.-based efforts, which could require years of expensive trial work, but has already laid out plans to slash its domestic operations.

Some experts view Encysive as a company with limited opportunities -- and mounting liabilities -- as a result.

"The U.S. commercial organization will likely be dismantled," Rodman & Renshaw analyst Navdeep Jaikaria predicted on Sunday. "And we do expect a considerable level of management turnover and many lawsuits to be filed against Encysive and its current management."

Jaikaria has slashed his outlook for Encysive. He downgraded Encysive to market-underperform from market-perform on Monday and now values the company's stock at just $2 a share.

Jaikaria's firm makes a market in Encysive's securities.

In contrast, analysts touted Gilead -- which is now poised to dominate the U.S. PAH market -- following the company's big regulatory win. Gilead plans to begin selling ambrisentan under the brand name Letairis in the U.S. market as early as this week.

Experts look for Gilead to price Letairis around $4,000 a month -- the same as an older drug already on the market -- and emerge as the favored treatment for PAH down the road. Letairis reportedly works just as well as the competition, a drug known as Tracleer sold by Europe's Actelion, but enjoys a better safety profile. Still, Letairis now looks a bit riskier than some people thought.

Previously, based on company presentations, experts had portrayed Letairis as a drug causing no real liver toxicity. Now, however, the FDA has specifically ordered a black box warning for Letairis because of liver problems -- which surfaced in nearly 3% of patients involved in long-term studies -- and risks to pregnant women as well.

"Letairis is very likely to produce serious birth defects if used by pregnant women, as this effect has been seen consistently when it is administered to animals," Gilead acknowledged on Friday. "Because of the risks of liver injury and birth defects, Letairis is available only through a special restricted distribution program called the Letairis Education and Access Program."

Only those involved in LEAP -- including patients, pharmacies and physicians -- will have access to the new drug.

Experts believe that LEAP could limit Letairis' sales initially. But they feel that the drug could overtake Tracleer eventually.

"We believe Letairis's improved clinical profile and once-daily dosing will drive market share gains in both treatment-naive patients as well as switches from Tracleer," Thomas Weisel Partners analyst M. Ian Somaiya wrote on Monday. "Given the advantages, Letairis is well positioned to become a leading PAH therapy."

Somaiya has an outperform rating on Gilead's stock, which he values at $92.50 a share. His firm makes a market in the company's securities.