##### 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 SEPTEMBER 30, 2007
 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)
  (Registrants telephone number, including area code)
  (Former name, former address and former fiscal year, if changed since last report)
  þ o
  o þ o
 o þ
  Class
    
    Outstanding at October 31, 2007Common stock, $0.005 par value
    
    79,306,943




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TABLE OF CONTENTS  Certification Pursuant to Rule 13a-14(a) / Rule 15d-14(a)Certification Pursuant to Rule 13a-14(a) / Rule 15d-14(a)Certification Pursuant to Section 1350Certification Pursuant to Section 1350    Table of Contents




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ENCYSIVE PHARMACEUTICALS INC. AND SUBSIDIARIES
 
 CONSOLIDATED BALANCE SHEETS
($ in thousands, except per share data)
(Unaudited)
 September 30,
    
    
    December 31,2007
    
    
    2006ASSETSCurrent assets:Cash and cash equivalents
    
    $
    54,097
    
    
    $
    43,798Restricted cash
    
    
    100
    
    
    
    Accounts receivable
    
    
    7,088
    
    
    
    5,211Other current receivables, net of
reserve of $0 and $65
    
    
    1,207
    
    
    
    141Inventory, net of reserve of $860 and $496
    
    
    3,063
    
    
    
    2,343Prepaids
    
    
    1,365
    
    
    
    1,926Total current assets
    
    
    66,920
    
    
    
    53,419Equipment and leasehold improvements, net of
accumulated depreciation of $12,498 and $11,892
    
    
    5,385
    
    
    
    5,976Deferred debt origination costs, net of
accumulated amortization of $5,119 and $1,202
    
    
    4,725
    
    
    
    3,461Intangible assets, net of accumulated
amortization of $764 and $685
    
    
    202
    
    
    
    281Total assets
    
    $
    77,232
    
    
    $
    63,137LIABILITIES AND STOCKHOLDERS DEFICITCurrent liabilities:Accounts payable
    
    $
    1,639
    
    
    $
    3,435Accrued expenses
    
    
    19,987
    
    
    
    22,133Deferred revenue
    
    
    320
    
    
    
    1,286Total current liabilities
    
    
    21,946
    
    
    
    26,854Long-term debt
    
    
    191,888
    
    
    
    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 Sept. 30,
2007, 79,474,351 shares issued 79,261,351 outstanding;
at December 31, 2006, 62,660,802 shares issued,
62,447,802 shares outstanding
    
    
    397
    
    
    
    313Additional paid-in capital
    
    
    373,104
    
    
    
    329,817Treasury stock, 213,000 shares at Sept. 30, 2007
and December 31, 2006
    
    
    (1,602
    )
    
    
    (1,602
    )Accumulated other comprehensive income
    
    
    80
    
    
    
    33Accumulated deficit
    
    
    (508,581
    )
    
    
    (422,278
    )Total stockholders deficit
    
    
    (136,602
    )
    
    
    (93,717
    )Total liabilities and stockholders deficit
    
    $
    77,232
    
    
    $
    63,137
 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
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Revenues:Sales
    
    $
    3,625
    
    
    $
    7
    
    
    $
    6,834
    
    
    $
    7Royalty income
    
    
    4,838
    
    
    
    6,003
    
    
    
    15,330
    
    
    
    12,582License fee and milestones
    
    
    322
    
    
    
    322
    
    
    
    966
    
    
    
    966Total Revenues
    
    
    8,785
    
    
    
    6,332
    
    
    
    23,130
    
    
    
    13,555Expenses:Cost of goods sold
    
    
    798
    
    
    
    14
    
    
    
    1,275
    
    
    
    14Research and development
    
    
    7,389
    
    
    
    16,271
    
    
    
    41,573
    
    
    
    49,326Sales and marketing
    
    
    6,817
    
    
    
    10,039
    
    
    
    27,293
    
    
    
    31,642General and administrative
    
    
    5,572
    
    
    
    5,340
    
    
    
    17,465
    
    
    
    16,446Restructuring
    
    
    5,409
    
    
    
    
    
    
    
    13,351
    
    
    
    Total expenses
    
    
    25,985
    
    
    
    31,664
    
    
    
    100,957
    
    
    
    97,428Operating loss
    
    
    (17,200
    )
    
    
    (25,332
    )
    
    
    (77,827
    )
    
    
    (83,873
    )Investment income
    
    
    753
    
    
    
    846
    
    
    
    2,388
    
    
    
    3,230Interest expense
    
    
    (6,076
    )
    
    
    (988
    )
    
    
    (10,864
    )
    
    
    (2,946
    )Loss before cumulative effect of
change in accounting principle
    
    $
    (22,523
    )
    
    $
    (25,474
    )
    
    
    (86,303
    )
    
    
    (83,589
    )Cumulative effect of change in
accounting principle
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    107Net loss applicable to common
Shares
    
    $
    (22,523
    )
    
    $
    (25,474
    )
    
    $
    (86,303
    )
    
    $
    (83,482
    )Other comprehensive income:Unrealized loss
on foreign currency
    
    
    133
    
    
    
    (2
    )
    
    
    47
    
    
    
    (2
    )Comprehensive loss
    
    $
    (22,390
    )
    
    $
    (25,476
    )
    
    $
    (86,256
    )
    
    $
    (83,484
    )Loss per share:Continuing operations, basic
and diluted
    
    $
    (0.32
    )
    
    $
    (0.44
    )
    
    $
    (1.28
    )
    
    $
    (1.43
    )Weighted average common shares used
to compute net loss per share basic
and diluted
    
    
    70,649,304
    
    
    
    58,477,871
    
    
    
    67,680,703
    
    
    
    58,404,970
 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)
 Nine Months EndedSeptember 30,2007
    
    
    2006Cash flows from operating activities:Net loss
    
    $
    (86,303
    )
    
    $
    (83,482
    )Adjustments to reconcile net loss to cash used
in operating activities:Depreciation and amortization
    
    
    794
    
    
    
    811Expenses paid with stock
    
    
    121
    
    
    
    97Share-based compensation expense
    
    
    2,080
    
    
    
    5,973Amortization of debt issue costs
    
    
    3,917
    
    
    
    497Loss on disposition of fixed assets
    
    
    109
    
    
    
    33Changes in operating assets and liabilities:Restricted cash
    
    
    (100
    )
    
    
    Accounts receivable
    
    
    (1,546
    )
    
    
    (714
    )Inventory
    
    
    (1,084
    )
    
    
    (586
    )Reserve for obsolescence
    
    
    364
    
    
    
    369Prepaids
    
    
    570
    
    
    
    639Other current receivables
    
    
    (1,277
    )
    
    
    104Accounts payable and accrued expenses
    
    
    (4,134
    )
    
    
    633Deferred revenue
    
    
    (966
    )
    
    
    (966
    )Net cash used in operating activities
    
    
    (87,455
    )
    
    
    (76,592
    )Cash flows from investing activities:Proceeds from sale of equipment
    
    
    27
    
    
    
    Purchases of equipment and leasehold improvements
    
    
    (248
    )
    
    
    (1,824
    )Net cash used in investing activities
    
    
    (221
    )
    
    
    (1,824
    )Cash flows from financing activities:Borrowing of long-term debt
    
    
    128,000
    
    
    
    Debt issue costs
    
    
    (5,181
    )
    
    
    Repayment of long-term debt
    
    
    (66,112
    )
    
    
    Proceeds from sale of common stock in
direct public placement
    
    
    13,967
    
    
    
    Proceeds from sale of common stock in
private offerings
    
    
    27,142
    
    
    
    Proceeds from option exercises
    
    
    61
    
    
    
    431Net cash provided by financing activities
    
    
    97,877
    
    
    
    431Effect of exchange rate changes on cash
    
    
    98
    
    
    
    Net increase (decrease) in cash and cash equivalents
    
    
    10,299
    
    
    
    (77,985
    )Cash and cash equivalents at beginning of period
    
    
    43,798
    
    
    
    127,913Cash and cash equivalents at end of period
    
    $
    54,097
    
    
    $
    49,928Supplemental schedule of cash flow information:Interest paid
    
    
    7,775
    
    
    
    3,250
 See accompanying notes to consolidated financial statements
 3




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ENCYSIVE PHARMACEUTICALS INC. AND SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 September 30, 2007 (unaudited)
 (1) Liquidity and Managements Plans
     SM
 4




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SM
   (2) Organization and Significant Accounting Policies
 (a) Organization
   (b) Basis of Consolidation
  5




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(c) Revenue Recognition
  (d) Debt issue costs
   (e) Use of Estimates
  6




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f) New Accounting Pronouncements
    (3) Inventory
  September 30,
    
    
    December 31,2007
    
    
    2006Work-in-process
    
    $
    3,215
    
    
    $
    2,448Finished goods
    
    
    708
    
    
    
    3913,923
    
    
    
    2,839Less reserve
    
    
    (860
    )
    
    
    (496
    )Net
    
    $
    3,063
    
    
    $
    2,343
 (4) Capital Stock
   7




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Stock option plans
    
    
    9,420,819Warrants
    
    
    7,692,3052.50% Convertible Senior Notes due 2012
    
    
    9,322,001Total shares reserved
    
    
    26,435,125
 (5) Cash, Cash Equivalents, and Restricted Cash
   (6) Net Loss per Common Share
  (7) Income Taxes
  8




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(8) Entity-Wide Geographic Data
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Entities:GSK
    
    $
    4,838
    
    
    $
    6,003
    
    
    $
    15,330
    
    
    $
    12,582Others
    
    
    3,947
    
    
    
    329
    
    
    
    7,800
    
    
    
    973Total
    
    $
    8,785
    
    
    $
    6,332
    
    
    $
    23,130
    
    
    $
    13,555
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Geographical Area:United States
    
    $
    5,160
    
    
    $
    6,325
    
    
    $
    16,296
    
    
    $
    13,548Europe
    
    
    3,625
    
    
    
    7
    
    
    
    6,834
    
    
    
    7Total
    
    $
    8,785
    
    
    $
    6,332
    
    
    $
    23,130
    
    
    $
    13,555
  September 30,
    
    
    December 31,2007
    
    
    2006Geographical Area:United States
    
    $
    10,049
    
    
    $
    9,499Europe
    
    
    263
    
    
    
    219Total
    
    $
    10,312
    
    
    $
    9,718
 (9) Long-Term Debt
    9




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(10) Share-Based Payment
   10




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Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Options
    
    $
    591
    
    
    $
    1,169
    
    
    $
    1,782
    
    
    $
    4,135Nonvested shares
of common stock
    
    
    451
    
    
    
    694
    
    
    
    298
    
    
    
    1,936Total
    
    $
    1,042
    
    
    $
    1,863
    
    
    $
    2,080
    
    
    $
    6,071
   11




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##### Table of Contents



Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2007
    
    2006
    
    2007
    
    2006Expected dividend yield
    
    
    
    
    
    
    
    
    
    
    0.0
    %
    
    
    0.0
    %Risk-free interest rate
    
    
    
    
    
    
    
    
    
    
    4.7
    %
    
    
    4.7
    %Expected volatility
    
    
    
    
    
    
    
    
    
    
    77.6
    %
    
    
    64.9
    %Expected life in years
    
    
    
    
    
    
    
    
    
    
    5.0
    
    
    
    3.9
  Weighted
    
    
    Weighted Average
    
    
    AggregateStock
    
    
    Average
    
    
    Remaining
    
    
    Intrinsic ValueOptions
    
    
    Exercise Price
    
    
    Contractual Term
    
    
    (in Thousands)Outstanding
at December 31, 2006
    
    
    5,614,455
    
    
    $
    8.14
    
    
    
    5.70
    
    
    $
    1,496Grants
    
    
    714,532
    
    
    $
    2.995Forfeited or expired
    
    
    (222,206
    )
    
    $
    6.26Exercises
    
    
    (4,166
    )
    
    $
    0.93Outstanding
at March 31, 2007
    
    
    6,102,615
    
    
    $
    7.61
    
    
    
    6.15
    
    
    $
    708Grants
    
    
    560,000
    
    
    $
    2.06Forfeited or expired
    
    
    (317,821
    )
    
    $
    5.66Exercises
    
    
    (6,666
    )
    
    $
    0.93Outstanding
At June 30, 2007
    
    
    6,338,128
    
    
    $
    7.22
    
    
    
    6.16
    
    
    $
    308Grants
    
    
    Forfeited or expired
    
    
    (504,157
    )
    
    $
    8.64Exercises
    
    
    (53,000
    )
    
    $
    0.93Outstanding
At September 30, 2007
    
    
    5,780,971
    
    
    $
    7.16
    
    
    
    5.86
    
    
    $
    180Vested and expected to vest
in the future at
September 30, 2007
    
    
    5,742,625
    
    
    $
    7.18
    
    
    
    0.39
    
    
    $
    180Exercisable
at September 30, 2007
    
    
    4,110,778
    
    
    $
    7.94
    
    
    
    4.59
    
    
    $
    180Available for grant at
September 30, 2007
    
    
    3,639,848
   Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2007
    
    2006
    
    2007
    
    2006Weighted average:Grant date fair value
per option
    
    $
    
    
    
    $
    
    
    
    $
    1.70
    
    
    $
    4.34Total intrinsic value of
options exercised
    
    $
    47,000
    
    
    $
    6,000
    
    
    $
    77,000
    
    
    $
    538,000
 12




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Weighted AverageGrant DateShares
    
    
    Fair ValueNonvested at December 31, 2006
    
    
    823,675
    
    
    $
    8.83Activity during quarter ended March 31, 2007Grants
    
    
    1,762,572
    
    
    $
    3.04Vested
    
    
    (35,783
    )
    
    $
    8.59Forfeited
    
    
    (11,537
    )
    
    $
    9.17Nonvested at March 31, 2007
    
    
    2,538,927
    
    
    $
    4.81Activity during quarter ended June 30, 2007Grants
    
    
    63,231
    
    
    $
    3.44Vested
    
    
    (23,137
    )
    
    $
    10.26Forfeited
    
    
    (1,231,645
    )
    
    $
    4.37Nonvested at June 30, 2007
    
    
    1,347,376
    
    
    $
    5.05Activity during the quarter
ended September 30, 2007Grants
    
    
    21,976
    
    
    $
    1.78Vested
    
    
    (55,533
    )
    
    $
    6.86Forfeited
    
    
    (342,118
    )
    
    $
    4.65Nonvested at September 30, 2007
    
    
    971,701
    
    
    $
    5.01
  WeightedAveragePhantom
    
    
    Grant DateUnits
    
    
    Fair ValueUnvested at January 1, 2007
    
    
    124,682
    
    
    $
    4.10Grants
    
    
    170,943
    
    
    
    3.00Vested
    
    
    
    
    
    
    Forfeited
    
    
    (10,504
    )
    
    
    4.10Unvested at March 31, 2007
    
    
    285,121
    
    
    $
    3.44Grants
    
    
    21,803
    
    
    
    3.44Vested
    
    
    
    
    
    
    Forfeited
    
    
    
    
    
    
    Unvested at June 30, 2007
    
    
    306,924
    
    
    $
    3.44Grants
    
    
    
    
    
    
    Vested
    
    
    
    
    
    
    Forfeited
    
    
    (21,480
    )
    
    
    3.26Unvested at September 30, 2007
    
    
    285,444
    
    
    $
    3.45
  13




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(11) Accrued expenses
  September 30, 2007
    
    
    December 31, 2006Accrued compensation and benefits
    
    $
    1,549
    
    
    $
    4,498Accrued research and development
Costs
    
    
    8,336
    
    
    
    11,498Accrued interest on long-term debt
    
    
    134
    
    
    
    953Accrued sales and marketing expenses
    
    
    4,376
    
    
    
    1,676Reserve for future Argatroban returns
    
    
    1,359
    
    
    
    1,149Accrued legal and professional fees
    
    
    140
    
    
    
    231Restructuring
    
    
    3,342
    
    
    
    Other accrued expenses
    
    
    751
    
    
    
    2,128Total
    
    $
    19,987
    
    
    $
    22,133
 (12) Commitments and Contingencies
 (a) Litigation
     14




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(b) Restructuring
    15




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(c) Foreign Currency Exchange Risk
  (d) Other contingencies
  16




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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 Nine Months Ended September 30, 2007, and September 30, 2006
 FORWARD LOOKING STATEMENTS
  17




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EXECUTIVE SUMMARY
   Thelin  for the treatment of Pulmonary Arterial Hypertension
  18




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
 TM TM
    19




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Argatroban
   Research Programs
   20




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##### Table of Contents



Critical Accounting Policies
 Revenue Recognition
 
    
    We recognize revenue from sales of Thelin when product is shipped and ownership
transfers to the customer. Sales revenue includes value added taxes billed to customers,
and is reported net of applicable discounts, allowances and returns.
    
    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 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 on 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.
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
    
    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.
  Cost of goods sold
  Stock Options
  Drug Manufacturing and Packaging
  Costs Related to Issue of Long-Term Debt
  Results of Operations
  22




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Three and Nine month periods ended September 30, 2007 and 2006
 Sales
   Royalties
  Total Revenues
  Cost of Goods Sold
  23




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##### Table of Contents



Research and Development Expense
   Sales and Marketing Expense
  General and Administrative Expense
  Restructuring Expense
    24




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Total Operating Expenses
  Operating Loss
  Interest Expense
  Investment Income
  Cumulative effect of Change in Accounting Principle
  Net Loss
  25




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Liquidity and Capital Resources
  Outlook for the Balance of 2007
   26




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Cash Used in Operating Activities:
  Cash used in Investing Activities:
  Cash provided by Financing Activities:
  Material Commitments:
  27




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##### Table of Contents



LessContractual
    
    
    
    
    
    than 1
    
    
    1-3
    
    
    3-5
    
    
    After 5Obligations
    
    Total
    
    
    year
    
    
    Years
    
    
    Years
    
    
    yearsLong-term debt
    
    $
    191,888
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    191,888Severance and
retention
    
    
    3,342
    
    
    
    3,342Operating leases
    
    
    3,295
    
    
    
    2,090
    
    
    
    1,175
    
    
    
    30
    
    
    
    Total
    
    $
    198,525
    
    
    $
    5,432
    
    
    $
    1,175
    
    
    $
    30
    
    
    $
    191,888
 Off-Balance Sheet Arrangements:
  Impact of Inflation and Changing Prices
  
 Item 3.

Quantitative and Qualitative Disclosures About Market Risk
 Foreign Currency Exchange Risk
  
 Item 4. Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
    28




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##### Table of Contents



Changes in Internal Controls Over Financial Reporting
  
 PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
      29




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Item 1A. Risk Factors
 The following risks should be read in conjunction with other risk factors disclosed under Item 1A.
Risk Factors, in our Annual Report on Form 10-K for the year ended December 31, 2006.
 If we are unable to raise significant additional capital, we will not be able to continue to
operate as a going concern.
  Our restructuring efforts may have an adverse impact on our current employees and on our ability to
retain and attract management and other key personnel.
      30




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We cannot guarantee our ability to enter into and consummate a definitive transaction as a result
of the evaluation of our strategic alternatives with Morgan Stanley or our ability to maximize
stockholder value through this process.
  
    
    exploration of strategic alternatives may distract management from focusing our
resources on our most promising assets and disrupt day-to-day operations, which could have
a material adverse effect on our operating results;
    
    the process of evaluating strategic alternatives may be time consuming and expensive
and may result in the loss of business opportunities and business partners;
    
    perceived uncertainties as to our future direction may result in increased difficulties
in recruiting and retaining employees, particularly senior management;
    
    numerous factors, some of which are outside our control, including factors affecting
the availability of financing for transactions or the financial markets in general; and
    
    we may not be able to successfully achieve the benefits of any strategic alternative
undertaken by us.
  We have recently experienced significant turnover in senior management.
  We have a history of losses and we may never become profitable.
  31




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##### Table of Contents



If we are unable to raise additional capital, we will be unable to conduct our operations and
develop our potential products.
  
    
    We have incurred and will continue to incur significant commercialization-related
expenses for Thelin. These costs include:
 -
    
    building a commercial infrastructure in Europe, Canada and other key geographic areas;-
    
    rebuilding a commercial infrastructure in the U.S. if Thelin receives FDA approval;-
    
    investing in market launch and market development activities in Europe,
Canada and other key geographic areas;-
    
    expenses related to reimbursement submissions and approvals;-
    
    market research;-
    
    building the necessary infrastructure in our support services functions, such
as finance, human resources and legal;-
    
    building the depth and breadth of our management team;-
    
    preparing and producing educational and promotional materials; and-
    
    establishing additional contractual relationships with manufacturing,
distribution and logistics services providers to support the commercialization of
Thelin.
 
    
    We expect to incur significant expenses in conjunction with additional clinical trial
costs for Thelin and TBC3711 and are incurring costs for clinical trials related to an
additional drug compound. These costs include:
 -
    
    hiring personnel to direct and execute clinical trials;-
    
    costs incurred by clinical investigators;-
    
    services of contract research organizations; and-
    
    purchasing and formulating quantities of drug compound to be used in such
clinical trials.
 32




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##### Table of Contents




    
    the outcome and timing of reimbursement approvals for Thelin in the various countries
in the EU, Canada and Australia, including pricing levels;
    
    competitive activity, including the timing of regulatory approvals and approved product
labels for products competitive with Thelin;
    
    our success in commercializing Thelin;
    
    scientific progress in our drug discovery programs;
    
    the number and magnitude of these research and development programs;
    
    progress with preclinical testing and clinical trials of new drug compounds;
    
    the costs and our success in filing, prosecuting and enforcing patent claims;
    
    competing technological and market developments and changes in our existing research
relationships;
    
    administrative costs and costs to commercialize Thelin as new product markets are
developed;
    
    working capital requirements to support inventory and accounts receivable;
    
    our ability to maintain and establish additional collaborative arrangements;
    
    effective and sustained commercialization activities and arrangements; and
    
    the result of our evaluation of strategic alternatives with Morgan Stanley.
 We cannot give investors in our common stock any assurance that we will be able to maintain
compliance with the $1.00 per-share minimum price requirement for continued listing on Nasdaq or
that our stock will not be de-listed by Nasdaq.
   We make business decisions based on forecasts of future sales of Thelin in markets where we have
approval that may be inaccurate.
  33




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##### Table of Contents



Legislative changes or regulatory decisions in Europe may adversely impact our orphan drug status
which may result reduced revenues in the European Union.
  We depend on third parties in the conduct of our clinical trials for our product candidates and any
failure of those parties to fulfill their obligations could adversely affect our development plans.
  Issuance of shares in connection with financing transactions or under stock plans will dilute
current stockholders.
   
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
  34




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##### Table of Contents



Item 5. Other Information
  
 Item 6.
    
    Exhibits
 Exhibit No.
    
    Description4.1
    
    Form of Common Stock Warrant (incorporated by reference to Exhibit 4.1 to the
Companys Current Report on Form 8-K (Commission File No. 000-20117) filed with the
Commission on August 23, 2007).4.2
    
    First Supplemental Indenture, dated as of September 21, 2007, between Royalty
Sub and U.S. Bank National Association, as Trustee, including the form of Argatroban
PhaRMASM Secured 18.5% Notes due 2014 attached as Exhibit A thereto (incorporated by
reference to Exhibit 4.2 to the Companys Current Report on Form 8-K (Commission File
No. 000-20117) filed with the Commission on September 21, 2007).10.1
    
    Form of Retention Agreement for Remaining Employees, including Named Executive
Officers (incorporated by reference to Exhibit 10.1 to the Companys Current Report on
Form 8-K (Commission File No. 000-20117) filed with the Commission on July 9, 2007).10.2
    
    Separation Agreement and Release dated July 12, 2007, between the Company and
Bruce D. Given, M.D. (incorporated by reference to Exhibit 10.1 to the Companys Current
Report on Form 8-K (Commission File No. 000-20117) filed with the Commission on July 16,
2007).10.3
    
    Securities Purchase Agreement dated August 20, 2007, between the Company and the
purchasers named therein (incorporated by reference to Exhibit 10.1 to the Companys
Current Report on Form 8-K (Commission File No. 000-20117) filed with the Commission on
August 23, 2007).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.
 35




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ENCYSIVE PHARMACEUTICALS INC.
 November 9, 2007
 
 SIGNATURES
  ENCYSIVE PHARMACEUTICALS INC.By:
    /s/ George ColeGeorge ColePresident and Chief Executive OfficerBy:
    /s/ Richard A. GoeggelRichard A. GoeggelVice President, Finance and Treasurer 36




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##### Table of Contents



INDEX TO EXHIBITS
 Exhibit No.
    
    Description4.1
    
    Form of Common Stock Warrant (incorporated by reference to Exhibit 4.1 to the
Companys Current Report on Form 8-K (Commission File No. 000-20117) filed with the
Commission on August 23, 2007).4.2
    
    First Supplemental Indenture, dated as of September 21, 2007, between Royalty
Sub and U.S. Bank National Association, as Trustee, including the form of Argatroban
PhaRMASM Secured 18.5% Notes due 2014 attached as Exhibit A thereto (incorporated by
reference to Exhibit 4.2 to the Companys Current Report on Form 8-K (Commission File
No. 000-20117) filed with the Commission on September 21, 2007).10.1
    
    Form of Retention Agreement for Remaining Employees, including Named Executive
Officers (incorporated by reference to Exhibit 10.1 to the Companys Current Report on
Form 8-K (Commission File No. 000-20117) filed with the Commission on July 9, 2007).10.2
    
    Separation Agreement and Release dated July 12, 2007, between the Company and Bruce
D. Given, M.D. (incorporated by reference to Exhibit 10.1 to the Companys Current Report
on Form 8-K (Commission File No. 000-20117) filed with the Commission on July 16, 2007).10.3
    
    Securities Purchase Agreement dated August 20, 2007, between the Company and the
purchasers named therein (incorporated by reference to Exhibit 10.1 to the Companys
Current Report on Form 8-K (Commission File No. 000-20117) filed with the Commission on
August 23, 2007).31.1
    
    Certification pursuant to Rule 13a-14(a) / Rule 15d-14(a), promulgated under the
Securities Exchange Act of 1934, as amended.31.2
    
    Certification 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.