##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 FOR QUARTERLY PERIOD ENDED JUNE 30, 2006
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 Commission File Number: 0-20117
 ENCYSIVE PHARMACEUTICALS INC.
  Delaware
    
    13-3532643(State or other jurisdiction of
    
    (I.R.S. Employer Identification No.)incorporation or organization)
 4848 Loop Central Drive, Suite 700, Houston, Texas
    
    77081(Address of principal executive office)
    
    (Zip code)
  
   
  þ o
  o þ o
 o þ
  Class
    
    Outstanding at July 31, 2006Common stock, $0.005 par value
    
    59,255,103




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##### 



ENCYSIVE PHARMACEUTICALS INC.
 TABLE OF CONTENTS
 PAGE NO.Part I. Financial InformationItem 1: Financial Statements (Unaudited)Consolidated Balance Sheets as of June 30, 2006 and December 31, 2005
    
    
    1Consolidated Statements of Operations and Comprehensive Loss for the three and six months ended June 30, 2006 and 2005
    
    
    2Consolidated Statements of Cash Flows for the six months ended June 30, 2006 and 2005
    
    
    3Notes to Consolidated Financial Statements
    
    
    4Item 2: Managements Discussion And Analysis Of Financial Condition And Results Of Operations
    
    
    12Item 3: Quantitative And Qualitative Disclosures About Market Risk
    
    
    22Item 4: Controls And Procedures
    
    
    22Part II. Other InformationItem 1: Legal Proceedings
    
    
    22Item 1A: Risk Factors
    
    
    22Item 2: Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    24Item 3: Defaults Upon Senior Securities
    
    
    24Item 4: Submission Of Matters To A Vote Of Security Holders
    
    
    25Item 5: Other Information
    
    
    25Item 6: Exhibits
    
    
    25SIGNATURES
    
    
    26Separation AgreementTransition AgreementCertification of CEO pursuant to Rule 13a-14(a)/15d-14(a)Certification of CFO pursuant to Rule 13a-14(a)/15d-14(a)Certification Pursuant to 18 U.S.C. Section 1350Certification Pursuant to 18 U.S.C. Section 1350




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ENCYSIVE PHARMACEUTICALS INC. AND SUBSIDIARIES
 
 CONSOLIDATED BALANCE SHEETS
 ($ in thousands, except per share data)
 (Unaudited)
 June 30,
    
    
    December 31,2006
    
    
    2005ASSETSCurrent assets:Cash and cash equivalents
    
    $
    65,443
    
    
    $
    127,913Short-term investments
    
    
    9,974
    
    
    
    Accounts receivable
    
    
    3,391
    
    
    
    5,337Other current receivables
    
    
    40
    
    
    
    139Inventory
    
    
    2,526
    
    
    
    2,183Prepaids
    
    
    1,634
    
    
    
    1,677Total current assets
    
    
    83,008
    
    
    
    137,249Equipment and leasehold improvements, net
    
    
    6,006
    
    
    
    4,942Deferred debt origination costs, net of
accumulated amortization of $867 and $538
    
    
    3,796
    
    
    
    4,125Intangible assets, net of accumulated
amortization of $632 and $580
    
    
    334
    
    
    
    386Total assets
    
    $
    93,144
    
    
    $
    146,702LIABILITIES AND STOCKHOLDERS DEFICITCurrent liabilities:Accounts payable
    
    $
    4,680
    
    
    $
    3,218Accrued expenses
    
    
    20,696
    
    
    
    21,645Deferred revenue
    
    
    1,288
    
    
    
    1,288Total current liabilities
    
    
    26,664
    
    
    
    26,151Deferred revenue
    
    
    642
    
    
    
    1,286Long-term debt
    
    
    130,000
    
    
    
    130,000Commitments and contingencies
    
    
    
    
    
    
    Stockholders deficit:Preferred stock, par value $.005 per share. 5,000,000
Shares authorized; none issued or outstanding
    
    
    
    
    
    
    Common stock, par value $.005 per share.
150,000,000 shares authorized. At June 30, 2006,
59,460,176 shares issued, 59,247,176 outstanding;
at December 31, 2005, 58,869,398 shares issued,
58,656,398 shares outstanding
    
    
    297
    
    
    
    294Additional paid-in capital
    
    
    313,639
    
    
    
    306,402Deferred compensation expense
    
    
    (5,493
    )
    
    
    (2,834
    )Treasury stock, 213,000 shares at June 30, 2006
and December 31, 2005
    
    
    (1,602
    )
    
    
    (1,602
    )Accumulated deficit
    
    
    (371,003
    )
    
    
    (312,995
    )Total stockholders deficit
    
    
    (64,162
    )
    
    
    (10,735
    )Total liabilities and stockholders deficit
    
    $
    93,144
    
    
    $
    146,702
 See accompanying notes to consolidated financial statements
 1




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ENCYSIVE PHARMACEUTICALS INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 AND COMPREHENSIVE LOSS
 ($ in thousands, except per share data)
 (Unaudited)
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Revenues:Royalty income
    
    $
    3,340
    
    
    $
    2,654
    
    
    $
    6,579
    
    
    $
    5,000License fee and milestones
    
    
    322
    
    
    
    322
    
    
    
    644
    
    
    
    462Total Revenues
    
    
    3,662
    
    
    
    2,976
    
    
    
    7,223
    
    
    
    5,462Expenses:Research and development
    
    
    14,676
    
    
    
    17,366
    
    
    
    33,055
    
    
    
    33,681Sales and marketing
    
    
    11,767
    
    
    
    3,263
    
    
    
    21,603
    
    
    
    4,380General and administrative
    
    
    5,364
    
    
    
    3,605
    
    
    
    11,106
    
    
    
    6,199Total expenses
    
    
    31,807
    
    
    
    24,234
    
    
    
    65,764
    
    
    
    44,260Operating loss
    
    
    (28,145
    )
    
    
    (21,258
    )
    
    
    (58,541
    )
    
    
    (38,798
    )Investment income
    
    
    1,085
    
    
    
    1,339
    
    
    
    2,384
    
    
    
    1,933Interest expense
    
    
    (978
    )
    
    
    (976
    )
    
    
    (1,958
    )
    
    
    (1,147
    )Loss from continuing operations
    
    
    (28,038
    )
    
    
    (20,895
    )
    
    
    (58,115
    )
    
    
    (38,012
    )Income from discontinued operations
    
    
    
    
    
    
    1,661
    
    
    
    
    
    
    
    1,335Loss before cumulative effect of
change in accounting principle
    
    $
    (28,038
    )
    
    
    (19,234
    )
    
    
    (58,115
    )
    
    
    (36,677
    )Cumulative effect of change in
accounting principle
    
    
    
    
    
    
    
    
    
    
    107
    
    
    
    Net loss applicable to common
shares
    
    $
    (28,038
    )
    
    $
    (19,234
    )
    
    $
    (58,008
    )
    
    $
    (36,677
    )Other comprehensive income:Reclassification adjustment for
gains included in net loss
    
    
    
    
    
    
    (222
    )
    
    
    
    
    
    
    (189
    )Comprehensive loss
    
    $
    (28,038
    )
    
    $
    (19,456
    )
    
    $
    (58,008
    )
    
    $
    (36,866
    )Loss per share:Continuing operations, basic
and diluted
    
    $
    (0.48
    )
    
    $
    (0.33
    )
    
    $
    (0.99
    )
    
    $
    (0.63
    )Weighted average common shares used
To compute net loss per share basic
And diluted
    
    
    58,464,618
    
    
    
    57,895,298
    
    
    
    58,367,915
    
    
    
    57,776,253
 See accompanying notes to consolidated financial statements
 2




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ENCYSIVE PHARMACEUTICALS INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 ($ in thousands)
 (Unaudited)
 Six Months Ended June 30,2006
    
    
    2005 (Revised)Cash flows from operating activities:Net loss
    
    $
    (58,008
    )
    
    $
    (36,677
    )Adjustments to reconcile net loss to cash used
In operating activities:Income from discontinued operations
    
    
    
    
    
    
    (1,335
    )Depreciation and amortization
    
    
    499
    
    
    
    494Expenses paid with stock
    
    
    50
    
    
    
    616Share-based compensation expense
    
    
    4,101
    
    
    
    111Amortization of debt issue costs
    
    
    329
    
    
    
    203Loss on disposition of fixed assets
    
    
    33
    
    
    
    7Change in interest receivable included in
short-term investments
    
    
    
    
    
    
    (249
    )Changes in operating assets and liabilities:Accounts receivable
    
    
    1,946
    
    
    
    1,952Inventory
    
    
    (343
    )
    
    
    Prepaids
    
    
    43
    
    
    
    (426
    )Other current receivables
    
    
    99
    
    
    
    117Accounts payable and accrued expenses
    
    
    513
    
    
    
    4,681Deferred revenue
    
    
    (644
    )
    
    
    1,538Net cash used in operating activities
    
    
    (51,382
    )
    
    
    (28,968
    )Net cash used in discontinued operation
    
    
    
    
    
    
    (603
    )Net cash used in operating activities
    
    
    (51,382
    )
    
    
    (29,571
    )Cash flows from investing activities:Purchases of equipment and leasehold improvements
    
    
    (1,544
    )
    
    
    (1,473
    )Purchases of investments
    
    
    (9,974
    )
    
    
    (73,274
    )Maturity of investments
    
    
    
    
    
    
    51,261Net cash used in investing activities
    
    
    (11,518
    )
    
    
    (23,486
    )Cash flows from financing activities:Borrowing of long-term debt
    
    
    
    
    
    
    130,000Debt issue costs
    
    
    
    
    
    
    (4,663
    )Proceeds from option exercises
    
    
    430
    
    
    
    456Net cash provided by financing activities
    
    
    430
    
    
    
    125,793Effect of exchange rate changes on cash
    
    
    
    
    
    
    (52
    )Net (decrease) increase in cash and cash
equivalents
    
    
    (62,470
    )
    
    
    72,684Cash and cash equivalents at beginning of period
    
    
    127,913
    
    
    
    46,130Cash and cash equivalents at end of period
    
    $
    65,443
    
    
    $
    118,814Supplemental schedule of cash flow information:Interest paid
    
    
    1,625
    
    
    
    6
 See accompanying notes to consolidated financial statements
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ENCYSIVE PHARMACEUTICALS INC. AND SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 June 30, 2006 (unaudited)
 (1) Basis of Presentation
  (2) Organization and Significant Accounting Policies
 (a) Organization
   (b) Basis of Consolidation
  4




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(c) Share-Based Payment
 Accounting for Stock Issued to Employees Share-Based Payment
  (d) Debt Issue Costs
  (e) Use of Estimates
  (f) Reclassifications
  5




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(3) Inventory
  (4) Capital Stock
  Stock option plans
    
    
    7,958,2932.50% Convertible Senior Notes due 2012
    
    
    9,322,001Total shares reserved
    
    
    17,280,294
 (5) Cash, Cash Equivalents, and Short-Term Investments
  June 30, 2006Gross
    
    
    Gross
    
    
    EstimatedAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    ValueCorporate commercial paper and loan
participations
    
    $
    9,865
    
    
    $
    107
    
    
    $
    
    
    
    $
    9,972Total short-term held-to-maturity
Investments
    
    $
    9,865
    
    
    $
    107
    
    
    $
    
    
    
    $
    9,972
 (6) Net Loss per Common Share
   (7) Income Taxes
  6




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(8) Entity-Wide Geographic Data
  Three Months Ended June 30,
    
    
    Six Months Ended June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Entities:GSK
    
    $
    3,340
    
    
    $
    2,654
    
    
    $
    6,579
    
    
    $
    5,000Schering-Plough
    
    
    322
    
    
    
    322
    
    
    
    644
    
    
    
    462Total
    
    $
    3,662
    
    
    $
    2,976
    
    
    $
    7,223
    
    
    $
    5,462
 (9) Long-Term Debt
    (10) Share-Based Payment
    7




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Three Months
    
    
    Six MonthsEnded
    
    
    Ended(In thousands, except per share amounts)
    
    June 30, 2005
    
    
    June 30, 2005Net loss, as reported
    
    $
    (19,234
    )
    
    $
    (36,677
    )Add: Total stock-based employee
compensation expense included in reported
net loss
    
    
    25
    
    
    
    38Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards
    
    
    (1,392
    )
    
    
    (2,416
    )Pro forma net loss
    
    $
    (20,601
    )
    
    $
    (39,055
    )Loss per share:As reported, basic and diluted
    
    $
    (0.33
    )
    
    $
    (0.63
    )Pro forma, basic and diluted
    
    $
    (0.36
    )
    
    $
    (0.68
    )
 8




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Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Expected dividend yield
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %Risk-free interest rate
    
    
    5.1
    %
    
    
    3.8
    %
    
    
    4.7
    %
    
    
    4.1
    %Expected volatility
    
    
    71.8
    %
    
    
    59.8
    %
    
    
    64.9
    %
    
    
    67.8
    %Expected life in years
    
    
    4.0
    
    
    
    4.9
    
    
    
    3.9
    
    
    
    4.9
 9




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##### Table of Contents



Weighted
    
    
    Weighted Average
    
    
    AggregateStock
    
    
    Average
    
    
    Remaining
    
    
    Intrinsic ValueOptions
    
    
    Exercise Price
    
    
    Contractual Term
    
    
    (in Thousands)Outstandingat December 31, 2005
    
    
    5,340,142
    
    
    $
    8.07
    
    
    
    6.63Grants
    
    
    512,958
    
    
    $
    8.85Forfeited or expired
    
    
    (46,081
    )
    
    $
    9.85Exercises
    
    
    (96,614
    )
    
    $
    4.34Outstandingat March 31, 2006
    
    
    5,710,405
    
    
    $
    8.18
    
    
    
    6.75
    
    
    $
    2,050Grants
    
    
    60,000
    
    
    $
    3.57Forfeited or expired
    
    
    (44,454
    )
    
    $
    8.93Exercises
    
    
    (10,833
    )
    
    $
    0.93Outstandingat June 30, 2006
    
    
    5,715,118
    
    
    $
    8.13
    
    
    
    6.39
    
    
    $
    5,265Vested and expected to vest
in the future atJune 30 2006
    
    
    5,677,782
    
    
    $
    8.12
    
    
    
    0.39
    
    
    $
    5,261Exercisableat June 30, 2006
    
    
    3,990,935
    
    
    $
    7.40
    
    
    
    5.46
    
    
    $
    5,099Available for grant atJune 30, 2006
    
    
    2,243,175
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Weighted average:Grant date fair value
per option
    
    $
    2.05
    
    
    $
    5.24
    
    
    $
    4.34
    
    
    $
    6.39Total intrinsic value of
options exercised
    
    $
    41,000
    
    
    $
    402,000
    
    
    $
    532,000
    
    
    $
    888,000
  Weighted AverageRestricted
    
    
    Grant DateShares
    
    
    Fair ValueUnvested at December 31, 2005
    
    
    441,923
    
    
    $
    8.60Activity during quarter ended March 31, 2006Grants
    
    
    436,659
    
    
    $
    8.85Vested
    
    
    (127,438
    )
    
    $
    2.84Forfeited
    
    
    (12,870
    )
    
    $
    11.22Unvested at March 31, 2006
    
    
    738,274
    
    
    $
    9.69Activity during quarter ended June 30, 2006Grants
    
    
    65,127
    
    
    $
    3.57Vested
    
    
    (10,000
    )
    
    
    7.00Forfeited
    
    
    (15,678
    )
    
    $
    10.34Unvested at June 30, 2006
    
    
    777,723
    
    
    $
    9.21
 10




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Weighted AverageGrant DateShares
    
    
    Fair ValueUnvested at March 31, 2006
    
    
    
    
    
    
    Activity during quarter ended June 30, 2006Grants
    
    
    34,962
    
    
    $
    3.86Vested
    
    
    
    
    
    
    Forfeited
    
    
    
    
    
    
    Unvested at June 30, 2006
    
    
    34,962
    
    
    $
    3.86
  (11) Commitments and Contingencies
 (a) Foreign Currency Exchange Risk
  (b) Other contingencies
  11




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Item 2.
 ENCYSIVE PHARMACEUTICALS INC. AND SUBSIDIARIES
 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Three and Six Months Ended June 30, 2006, and June 30, 2005
 OVERVIEW
      12




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A,
 
     14




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Critical Accounting Policies
 Revenue Recognition
 
    
    We recognize royalty revenue as a licensee sells products and we have received
sufficient information to record a receivable. Our royalty revenue is based on net sales
of product, that is, sales net of discounts, returns and allowances. Argatroban is
licensed to GSK, which distributes and sells the product, and from which we receive a
quarterly royalty payment. At the time of each payment, GSK provides us with limited
quarterly data related to the products gross sales, sales returns, discounts and
allowances. While we are informed of the amount of product returns recorded each quarter,
we do not have information necessary to identify the period or periods to which such
returns correspond. We believe that substantially all discounts and allowances pertain to
current period sales. We also believe that a portion of sales recorded in each period
will ultimately be returned, and therefore estimate future returns and their impact on
royalty revenues. In the pharmaceutical industry, product returns are primarily
influenced by remaining or expired shelf life, product withdrawals or recalls, significant
price changes from competitors or the introduction of generic products or other new
competition. We are not aware of any pending product recalls or withdrawals, significant
price fluctuations or generic or new competition. Accordingly, we have estimated only the
impact of product dating on returns.Since we do not manufacture, sell or distribute Argatroban, we do not have information
related to levels of inventory in the distribution channels. However, due to the cost of
the drug and pressures on hospitals to minimize operating expenditures, we believe
inventory levels are maintained at a minimally acceptable level. Inventory level is
therefore not a part of the Companys estimate process.We have estimated remaining shelf life, which is an important reason for product returns,
based upon the fact that Argatroban has an expiration date of two years from manufacture.
Common industry practice is that prescription drugs can be returned to the manufacturer at
any time; however, product is normally returned when the remaining shelf life is reduced to
six months or less. Our reserve is therefore based upon an estimate of the percentage of
sales made in the preceding 18-month period that may be returned in future periods.
Initially, lacking any historical sales data for Argatroban and based upon managements
experience with other pharmaceutical products in the industry, management estimated that
four percent of gross sales of Argatroban would be returned during future periods. Based
upon subsequent analysis of historical sales data, we believe that differences between
estimated and actual future returns will not have a material effect upon our results of
operations or financial condition.
    
    Revenue from collaborative research and development activities is recognized as
services are performed.
    
    We defer the recognition of milestone payments related to contractual agreements that
are still in the development stage. Such deferred revenues are amortized into income over
the estimated remaining development period. Milestone payments received under contractual
agreements which have completed the development stage are evaluated, and either recognized
into income when earned, or amortized over a future period, depending upon whether we
continue to have obligations under the terms of the arrangement.
    
    License fees received under the terms of licensing agreements for our intellectual
property are deferred and amortized into income over the estimated development period of
the licensed item or items.
    
    Revenue from grants is recognized as earned under the terms of the related grant
agreements, typically as expenses are incurred.
 
 15




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Share-Based Payments
 Accounting
for Stock Issued to Employees Share-Based Payment
 Drug Manufacturing and Packaging
  Costs Related to Issue of Long-Term Debt
  16




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Results of Operations
  Three and six month periods ended June 30, 2006 and 2005
 Revenues
  Research and Development Expense
   17




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Sales and Marketing Expense
  General and Administrative Expense
  Total Operating Expenses
  Operating Loss
  Interest Expense
  Investment Income
  18




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Income from discontinued operations
  Liquidity and Capital Resources
     Material Commitments
  19




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Less than
    
    
    1-3
    
    
    3-5
    
    
    After 5Contractual Obligations
    
    Total
    
    
    1 year
    
    
    Years
    
    
    Years
    
    
    yearsLong-term debt
    
    $
    130,000
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    130,000Operating leases
    
    
    2,738
    
    
    
    1,820
    
    
    
    918
    
    
    
    
    
    
    
    Purchase
obligations
    
    
    232
    
    
    
    232
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    132,970
    
    
    $
    2,052
    
    
    $
    918
    
    
    $
    
    
    
    $
    130,000
 Outlook for 2006
  Longer-Term Outlook
  
    
    In anticipation of the commercial launch of Thelin in the U.S. and Europe, we have
incurred and will incur significant commercialization expenses. These costs include:
 
    
    developing post-marketing surveillance systems;
    
    market research;
    
    hiring a general counsel, vice president of sales, chief financial officer, chief
operating officer and other key staff personnel;
    
    hiring a marketing and field sales force in the U.S., Canada and Europe;
    
    establishing appropriate infrastructure to support the field sales force;
    
    preparation and production of educational and promotional materials;
    
    engaging an advertising agency to support our product promotion;
    
    hiring personnel and engaging third party support to administer reimbursement from
government and private third-party payers; and
    
    establishing manufacturing, warehousing and distribution processes for our
products.
 
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
    
    We expect to incur significant expenses in conjunction with clinical trial costs for
our ongoing long-term safety study of Thelin, for clinical trials in new indications for
Thelin and for clinical trials related to other compounds. These costs include:
 
    
    hiring personnel to direct and carry out all operations related to clinical trials;
    
    hospital and procedural costs;
    
    services of a contract research organization; and
    
    purchasing and formulating large quantities of the compound to be used in such trials.
  
    
    expenses and risks associated with clinical trials to expand the indications for Thelin;
    
    regulatory approval of Thelin, including breadth of approved label;
    
    continued scientific progress in our drug discovery programs;
    
    the magnitude of these programs;
    
    progress with preclinical testing and clinical trials;
    
    the time and costs involved in obtaining regulatory approvals;
    
    the costs involved in filing, prosecuting and enforcing patent claims;
    
    competing technological and market developments and changes in our existing research
relationships;
    
    increased administrative costs and costs to commercialize our products as our products
are further developed and marketed;
    
    working capital requirements to support inventory and accounts receivable;
    
    our ability to maintain and establish additional collaborative arrangements; and
    
    effective commercialization activities and arrangements.
 Off-Balance Sheet Arrangements
  Impact of Inflation and Changing Prices
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
 Foreign Currency Exchange Risk
  
 Item 4. Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
    Changes in Internal Controls Over Financial Reporting
  
 PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
 Unless we receive regulatory approval for Thelin in the U.S. and receive additional funding,
we will not be able to continue our current level of operations.
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##### Table of Contents



We have a history of losses and we may never become profitable.
  We face substantial competition that may result in others developing and commercializing products
more successfully than we do.
   
    
    Based on industry research analysts, other pharmaceutical companies and our internal
market research, we estimate that PAH afflicts approximately 100,000 to 200,000
individuals in the United States, Canada and Europe. A number of companies have
endothelin receptor antagonists, or ETRA, compounds either on the market, or in clinical
development.
 
    
    Actelion Ltd., a biotechnology company located in Switzerland,
markets Tracleer® (bosentan) an oral compound for the treatment of PAH
in the United States, Europe, Japan and other countries and they continue to
develop bosentan for other indications. Actelions compound, bosentan, will
compete directly with Thelin.
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##### Table of Contents




    
    Myogen, Inc. is evaluating ambrisentan, an oral endothelin receptor
antagonist, in PAH and has announced that it intends to file an NDA with the FDA
in the fourth quarter of 2006. GSK has the right to market ambrisentan in all
territories outside the U.S. If Myogens compound receives regulatory approval, it
will compete directly with Thelin.
    
    Abbott Laboratories is developing atrasentan for treatment of cancer
and we cannot assure you that it will not compete with Thelin.
    
    Speedel is developing SPP301, which started Phase III clinical
development for diabetic nephropathy in July 2005.
 
    
    In addition to ETRA compounds, other agents are being marketed for the treatment of
PAH.
 
    
    Pfizer Inc. markets Revatio (sildenafil citrate) in PAH for patients
in WHO Group I. We believe that phosphodiesterase type-5 inhibitors such as
Revatio may be used as first-line therapy and as additive or combination therapy
with endothelin antagonists.
    
    Myogen markets Flolan® (epoprostenol), a vasodilator requiring
continuous infusion through a central venous catheter and special infusion pump in
the U.S. Outside the U.S., Flolan is marketed by GSK. Flolan is costly, is
associated with significant adverse events including those related to its
delivery, and is typically reserved by clinicians for patients with the most
severe symptoms, WHO functional class IV status.
    
    CoTherix, Inc. markets Ventavis® (iloprost), an inhalation solution
for the treatment of PAH in WHO Group I, patients with NYHA Class III or IV
symptoms in the U.S. Ventavis® is marketed outside the U.S. by Schering, A.G. or
one of its subsidiaries. During clinical trials, Ventavis® was administered six
to nine times a day.
    
    United Therapeutics Corporation markets Remodulin® (treprostinil
sodium injection), a prostaglandin analog that is required to be administered
subcutaneously or intravenously through an infusion pump, and is also being
studied for potential use through inhalation
  
    
    Refludan®, which was approved by the FDA in 1997 for the treatment of HIT;
    
    Orgaran®, which is a low molecular weight heparinoid that has been approved
for the treatment of deep vein thrombosis, but is believed to be used without an approved
indication (off-label) for the treatment of HIT in the U.S.; and
    
    Angiomax®, which is approved for use in the U.S. as an anticoagulant in
patients with unstable angina undergoing percutaneous transluminal coronary angioplasty
and for the treatment of HIT.
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 3. Defaults Upon Senior Securities
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Item 4. Submission of Matters to a Vote of Security Holders
  Number of Votes
    
    Number of VotesName of Nominee
    
    Voted For
    
    WithheldRon J. Anderson, M.D.
    
    
    50,708,574
    
    
    
    1,315,701J. Kevin Buchi
    
    
    50,607,752
    
    
    
    1,416,523Robert J. Cruikshank
    
    
    49,949,695
    
    
    
    2,074,580John H. Dillon II
    
    
    50,610,655
    
    
    
    1,413,620Richard A. F. Dixon, Ph.D.
    
    
    50,694,699
    
    
    
    1,329,576Bruce D. Given, M.D.
    
    
    50,711,025
    
    
    
    1,313,250Suzanne Oparil, M.D.
    
    
    50,696,237
    
    
    
    1,328,038John M. Pietruski
    
    
    50,702,320
    
    
    
    1,321,955James A. Thomson, Ph.D.
    
    
    50,059,019
    
    
    
    1,965,256James T. Willerson, M.D.
    
    
    50,069,362
    
    
    
    1,954,913
 
 Item 5. Other Information
  
 Item 6. Exhibits
 Exhibit No.
    
    Description10.1
    
    
    Separation Agreement and Release dated July 6, 2006 between the Company and
Terrance C. Coyne, M.D.10.2
    
    
    Transition Agreement dated March 30, 2006 between the Company and Stephen L.
Mueller.31.1
    
    
    Certification of Chief Executive Officer pursuant to Rule 13a-14(a) / Rule
15d-14(a), promulgated under the Securities Exchange Act of 1934, as amended.31.2
    
    
    Certification of Chief Financial Officer pursuant to Rule 13a-14(a) / Rule
15d-14(a), promulgated under the Securities Exchange Act of 1934, as amended.32.1
    
    
    Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.32.2
    
    
    Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
 
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ENCYSIVE PHARMACEUTICALS INC.
 August 9, 2006
 
 SIGNATURES
  ENCYSIVE PHARMACEUTICALS INC.By:
    /s/ Bruce D. Given, M.D.Bruce D. Given, M.D.President and Chief Executive Officer By:
    /s/ Gordon H. BusenbarkGordon H. BusenbarkChief Financial Officer
(Principal Financial and Accounting Officer) 26




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INDEX TO EXHIBITS
 Exhibit No.
    
    Description10.1
    
    Separation Agreement and Release dated July 6, 2006 between the Company and
Terrance C. Coyne, M.D.10.2
    
    Transition Agreement dated March 30, 2006 between the Company and Stephen L.
Mueller.31.1
    
    Certification of Chief Executive Officer pursuant to Rule 13a-14(a) / Rule
15d-14(a), promulgated under the Securities Exchange Act of 1934, as amended.31.2
    
    Certification of Chief Financial Officer pursuant to Rule 13a-14(a) / Rule
15d-14(a), promulgated under the Securities Exchange Act of 1934, as amended.32.1
    
    Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.32.2
    
    Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.