Encysive ( ENCY), still seeking approval of its most important drug, better hope the third time is a charm.

The Houston-based biotech company has now failed twice to secure a blessing from the Food and Drug Administration to sell Thelin, a new treatment for pulmonary arterial hypertension, in this country. Following a similar setback in March, the company announced on Tuesday that it has received an "approvable letter" from the FDA citing concerns about a single issue. That's down from "several" earlier, but still suggests the possibility of further clinical trials.

Investors, who had been counting on outright approval, once again sent the company's shares plummeting. The stock tumbled 42% to $3.57 on Tuesday, leaving it near the two-year low it set in May before some regulatory breakthroughs -- including recommended approval of Thelin in Europe and a quick review by the FDA here -- lifted hopes for the new treatment.

Now, despite management's continued optimism, many experts foresee additional trial work as inevitable and the hit to Thelin's sales as significant. Notably, they believe that Thelin could actually trail Myogen's ( MYOG) supposed "best-in-class" PAH drug to the market and miss out on the competitive advantages that it would have enjoyed by winning that fierce race. Myogen soared 12% to $31.61 on the development.

Meanwhile, in a conference call held early Tuesday morning, Encysive CEO Bruce Given expressed his own surprise at the latest setback.

"We were quite in suspense yesterday and were very hopeful of an approval," Given said. But "our reading of the letter is that we got very close."

Judgment Call

Importantly, Given stressed, the FDA has asked for further information about a single item that the agency itself has portrayed as a "matter of judgment," rather than a firm issue of fact. Thus, he expressed confidence that the company could respond with some "intellectual scientific discussion" and perhaps satisfy the agency without any real delay in Thelin's launch.

By now, however, analysts have grown increasingly skeptical.

"Given that Thelin received ... recommendation for European approval and that the company was able to secure a Class 1 review from the FDA upon submitting complete response, we were hopeful that this time the FDA would finally grant approval pending some labeling issues to be resolved in a short time frame," Rodman & Renshaw analyst Navdeep Jaikaria stated. "Clearly, a second approvable letter accompanied by the recommendation for additional trial is a major disappointment. ... (And) at this juncture, we can no longer take management's optimism at its face value."

In the meantime, Jaikaria has placed his rating and price target on Encysive's stock under review. His firm, which makes a market in the stock, has provided investment banking services to the company over the past 12 months and hopes to do so again in the next three.

Tight-Lipped

Encysive continues to remain tight-lipped about the FDA's concerns.

In the conference call on Tuesday, Given spent no more than a minute or so sharing his prepared remarks with investors. In a nutshell, he said that the FDA had withheld approval for Thelin based on a single issue that -- due to competitive reasons -- he felt he should not divulge.

At least one analyst expressed clear frustration with that stand.

"I have to admit that I'm a bit unsatisfied with the disclosure," Jennifer Chao of Deutsche Bank declared. "It seems like the FDA is not entirely convinced of the risk/benefit (reward for Thelin). ... The issues are pretty perplexing."

To be fair, Given tried to address some of Chao's concerns without giving any secrets away. He started with the issue of risk. He said that company leaders "have always said that we felt this class of drugs, absolutely, requires a risk-management plan." He went on to say that Encysive submitted its own plan to the FDA and received recommendations on that plan -- well ahead of schedule -- along with Monday's letter. Under a best-case scenario, he said, the time saved on that plan could actually offset the delay caused by the latest request from the FDA.

Ultimately, Given said he hopes to resolve the FDA's concerns when he meets with the agency over the next 30 days and remains just as optimistic that Thelin will soon hit the U.S. market -- without further clinical work -- as he was in March.

But some analysts have been steering investors away from Encysive and toward Myogen in the meantime. Take Geoffrey Meacham of JPMorgan, for example. Already a Myogen bull, Meacham predicted on Monday that the company's own PAH drug -- known as Ambrisentan -- will beat Thelin to the market and start racking up significant sales beginning next year. By 2010, he looks for Ambrisentan to hit peak sales of $600 million. He now sees Thelin generating just one-eighth of that amount.

Meacham's firm counts Myogen and Encysive as investment banking clients and owns stock in both companies. His firm lists itself as a "major shareholder" of Myogen.

Robert Lawton, vice president of Source Capital, has by now exited positions in both stocks. Previously, he had a large short position in Myogen -- which he cashed in ahead of this week's run-up -- and a small long position in Encysive that had started to make him feel nervous.

"I felt that the stock wasn't acting right going into the FDA decision," Lawton explained. "I truly feel sorry for the shareholders. In light of the recent European Union approval, this second FDA request was difficult to anticipate and must be heartbreaking for them."

But Given, for one, continues to hope for a hard-fought victory in the end.

He compared the current situation to being "first and goal on the 1-yard line. You're not in," he said. "But it's not a bad place to be."