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Company Description
Encysive Pharmaceuticals is a biopharmaceutical company engaged in the discovery, development and commercialization of novel, synthetic, small molecule compounds to address unmet medical needs.
Evolving from an R&D boutique to a thriving commercial entity, Encysive successfully developed one FDA-approved product, Argatroban, licensed to GlaxoSmithKline in addition to its broad product pipeline. Its lead drug candidate, THELIN® (sitaxentan sodium) was approved in August 2006 by the European Union for Pulmonary Arterial Hypertension (PAH). THELIN® has been approved in Australia and Canada and is completing the reimbursement process in both countries.
Encysive had several interesting pipeline compounds as well as additional indications for Thelin. TBC3711 is a next-generation endothelin antagonist with potency greater than Thelin for PAH, which is also in Phase II dose-ranging studies of oral TBC3711 in the treatment of resistant hypertension. Through a collaborative agreement with Schering-Plough, Encysive is developing TBC4746, its oral VLA-4 antagonist compound for the treatment of Asthma and Multiple Sclerosis. Encysive completed patient enrollment in a Phase II trial for Thelin in the treatment of Diastolic Heart Failure (DHF), a form of congestive heart failure. Three million Americans have congestive heart failure with 500,000 new cases diagnosed each year, of which DHF accounts for 40-60 percent.
Investment Approach
Cat Trail initiated its original position after Encysive had its first set-back with the US FDA. Following its first FDA approval letter, Cat Trail believed that Encysive would eventually be successful with its US regulatory efforts, given that the EMEA granted marketing authorization for Thelin on its initial submission. Cat Trail maintained its initial position following Encysive's second and third approval letters from the FDA, as well as through the dispute resolution process. Following the denial of Encysive's second dispute resolution, the company's enterprise value depreciated dramatically, far below levels which would value Thelin's European presence or the company's pipeline. Given the apparent dislocation of Encysive's enterprise and intrinsic values, Cat Trail aggressively increased its position.
Exit Strategy
Cat Trail followed Encysive closely through meetings and follow up discussions with management and industry analysts regarding the companies' future. Cat Trail invested further in the open market, particularly when Encysive engaged Morgan Stanley to pursue strategic alternatives. Cat Trail believed Encysive would ultimately be sold in excess of the companies then current trading value. While the process took some months to play out, Encysive announced on February 20, 2008 that Pfizer (www.pfizer.com) was acquiring the company for $2.35 per share. Encysive's stock had been trading below $1.00 per share since November, 2007, allowing Cat Trail time to acquire equity at historically low levels, significantly reducing its cost basis. Following the announcement by Pfizer, Cat Trail liquidated its position.
Investment Takeaways
Cat Trail's investment in Encysive provided many ups-and-downs along the way, ultimately requiring an 18 month plus holding period. The Encysive investment provided Cat Trail first hand insight into the international drug approval process and the challenges encountered with the US FDA. Additionally, given the way the FDA has changed over the past three years, it is clear that investing in the biotechnology space can provide opportunities as companies’ trade at significant discounts to their intrinsic values. The landscape is subsequently awash with drug development companies that have valuable pipelines but are often ignored by investors due to regulatory obstacles. From this experience, Cat Trail is building an investment platform that identifies companies whose enterprise values have fallen significantly below their intrinsic values.
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