Learn From the Decisive Encysive Deal

Sometimes it's nice to see a drug deal go down.

Pfizer (NYSE: PFE) announced yesterday that it was acquiring Encysive Pharmaceuticals (Nasdaq: ENCY) for $195 million in cash, excluding its debt. Shares of Encysive were up more than 100% because of the deal, but most Encysive investors haven't been cheering, because the $2.35-per-share buyout price is only a fraction of what Encysive was worth last year -- let alone three years ago, when it topped out above $12 per share.

The deal with Pfizer marks the end of a divisive two years for Encysive since its pulmonary arterial hypertension compound Thelin failed to receive FDA regulatory approval in 2006.

Encysive eventually won marketing approval for Thelin in the European Union later that year, but sales of Thelin have never been gellin' like they have for pulmonary hypertension competitors such as Actelion and United Therapeutics (Nasdaq: UTHR). Sales of Thelin last year are estimated to have been only around $12 million, and Encysive's guidance for 2008 is for $40 million to $50 million in worldwide sales for the drug. This compares to the more than $1 billion that Actelion's similar drug, Tracleer, brought in last year.

Even with Thelin sales growing, Encysive has been hemorrhaging cash trying to market Thelin by itself throughout the world, running more clinical trials for it, and developing its other pipeline compounds. After cutting out much of its workforce, monetizing its royalty stream from a previously approved drug, and raising as much cash as it could via share offerings, Encysive was left with a valuable drug in Thelin and pipeline but no way to develop these assets.

For all the above reasons, the only way out for Encysive was via a sale of itself to the highest bidder, as I discussed several times previously.

For Pfizer, the deal makes sense because it already markets its well-known Viagra pill as a treatment for pulmonary hypertension under the brand name Revatio. If Pfizer can get Thelin approved in the U.S. (and I'd bet a lot of money that it eventually will), then the megasized drugmaker will gain access to a compound that is complementary to Revatio, will help round out its portfolio of pulmonary drugs, and will possibly bring in several hundred million dollars in peak sales in various indications.

If a drugmaker focuses only on the scientific and drug development side of its business, things can still be a disaster for investors if it ignores its cash and funding limitations -- even if it has success bringing its compounds to market. That's the real lesson from the conclusion of the disappointing Encysive story.