After the market close Friday, Encysive Pharmaceuticals (ENCY) received an approvable letter from the Food and Drug Administration regarding its drug Thelin, which was under review for the treatment of pulmonary arterial hypertension. The approvable letter was not positive, however, as it contained concerns and observations which must be satisfied by the company before the drug would achieve FDA approval, including a request for additional clinical trial work.
The letter caused Encysive to trade down to $5 before the market opened this morning, after a previous close of $9.08. The stock, at the time of writing, has settled at $4.77. Our Options strategist notes that the option implied volatility has fallen to 74 from last week's level of 83, which suggests reduced price fluctuations.
The FDA letter also caused a flurry of downgrades by research firms. Needham & Company downgraded Encysive to Buy from Strong Buy. Brean Murray, First Albany and Oppenheimer & Co all downgraded the company to a Neutral position from a Buy position. CE Unterberg and Leerink Swann both downgraded the company further to an Underperform position, CE Unterberg from Buy, Leerink from Market Perform. All of the firms cited the FDA letter and the lack of clarity regarding if and when Thelin would reach the market.
The initial consensus among traders was that the FDA’s communication represented a substantial delay for Thelin, which gave a boost to Encysive’s primary drug-class competitor, Myogen (MYOG), the maker of Ambrisentan. Myogen was up $1.70 to $36.70 at mid-day. Analysts said the market appeared to be discounting that Thelin and Ambrisentan will be in roughly equal positions when Ambrisentan comes to market, with respect to the biotech segment, and that the two companies will now compete eye-to-eye to gain market share.
The chart for Encysive has one feature that is generally a large red flag, a very large bearish (down) gap back in December of 2005, notes our Technical analyst. A gap is simply a large difference between prior day closing and the high of the next day. In this case the gap was over $3, which given the stock was trading at a bit over $11 at the time is a huge percentage difference. This was followed by the stock recovering some of its lost ground (about 50%) with the stock then trading in a horizontal pattern in a very narrow range of price difference for many months. This could have given the impression that there was an all clear. However, it is important to learn that stocks that break out of tight ranges have very extreme price reactions. Those reactions can happen without warning. Further, prices then tend to persist in the direction of the break. That's what has happened here this morning with another very large bearish gap evident on the chart, nearly cutting the stock in half as this is written from the prior day.