SecProbe.io

CORRESP
1
filename1.htm

corresp

    www.encysive.com

phone 713.796.8822

fax 713.796.8822

Encysive Pharmaceuticals Inc.   4848 Loop Central Drive • Suite 700 • Houston, Texas • 77081

FOIA Confidential Treatment Request

Confidential Treatment Requested by

Encysive Pharmaceuticals Inc.

004955-0001-0001

December 13, 2005

Via EDGAR and Federal Express

Mr. Jim B. Rosenberg

Senior Assistant Chief Accountant

U.S. Securities and Exchange Commission

Division of Corporate Finance

100 F Street, N.E., Mail Stop 6010

Washington, D.C. 20549

    Re:

    Encysive Pharmaceuticals Inc.

    Form 10-K for the fiscal year ended December 31, 2004

    File No. 000-20117

    Filed March 15, 2004

Dear Mr. Rosenberg:

     This letter is in response to your letter dated November 30, 2005, to Encysive Pharmaceuticals
Inc. (the “Company”), transmitting the comments of the staff (the “Staff”) of the Securities and
Exchange Commission (the “Commission”) relating to the above referenced Form 10-K. The numbered
paragraphs below correspond to the numbered comments in your letter.

Form 10-K for the fiscal year ended December 31, 2004

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Critical Accounting Policies, page 35

1. General background:

The Company advises the staff that it does not manufacture, sell or distribute Argatroban.
Argatroban is licensed to a pharmaceutical manufacturer (GlaxoSmithKline or GSK) which
distributes and sells the product and from which the Company receives a quarterly royalty
payment. At the time of each payment, the Company receives some limited

www.encysive.com

phone 713.796.8822

fax 713.796.8822

Encysive Pharmaceuticals Inc. 4848 Loop Central Drive • Suite 700 • Houston, Texas • 77081

FOIA Confidential Treatment Request

Confidential Treatment Requested by

Encysive Pharmaceuticals Inc.

004955-0001-0001

quarterly data related to the product’s gross sales, sales returns, discounts and
allowances. The Company is informed of the amount of product returns recorded each quarter;
however, the Company is not provided with information allowing it to identify the period or
periods to which such returns correspond. Thus, the Company does not have the ability to
analyze the relation of sales returns to sales made in any particular period, nor do we have
information related to estimated remaining product shelf life for distributed product.

We assume 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 have endeavored to develop a methodology to estimate such 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.

Argatroban is used in a hospital setting, and is a relatively expensive drug. Thus, we do
not believe that significant inventories are maintained by hospital pharmacies. Argatroban
has an expiration date of two years from manufacture date. Common industry practice is that
prescription drugs can be returned to the manufacturer at any time; however, product
normally is returned when the shelf life is reduced to six months or less. Our reserve is
an estimate of returned goods as a percentage of sales made in the preceding 18-month period
that may be returned in future periods. Upon initial sale of Argatroban, the Company
estimated that four percent of gross sales of Argatroban would be returned during future
periods. This percentage was based on management’s experience with other pharmaceutical
products.

    a)

    As discussed above, we believe, based upon common industry practice,
substantially all discounts and allowances pertain to current period sales. Since GSK
informs us of actual discounts and allowances recorded each quarter, we have not
estimated any amount for discounts and allowances. Estimated sales returns at December
31, 2004 and 2003 were approximately $3.0 and $1.0 million, respectively, which had the
effect of reducing cumulative reported royalty revenues by approximately $[*] million
and $[*] million, respectively.

www.encysive.com

phone 713.796.8822

fax 713.796.8822

Encysive Pharmaceuticals Inc. 4848 Loop Central Drive • Suite 700 • Houston, Texas • 77081

FOIA Confidential Treatment Request

Confidential Treatment Requested by

Encysive Pharmaceuticals Inc.

004955-0001-0001

As discussed above, we initially had no historical data upon which to base our
estimates. We evaluated the effect of varying estimates of future returns, as a
percentage of sales, and concluded that reasonable variances in those estimates would
have no material effect upon our financial position or results of operations.

    b)

    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 date. Common industry practice is that prescription drugs can be returned
to the manufacturer at any time; however, product is normally returned when the 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.

We are not aware of any product recalls or withdrawals, price changes from competitors,
or introductions of new or generic competition which would reasonably be likely to
impact returns of Argatroban.

    c)

    As discussed in response (b) above, we initially lacked any historical sales
data for Argatroban. We do not manufacture, sell or distribute Argatroban; our access
to quantitative information from external sources is limited. Our estimated sales
returns were based upon management’s experience with other pharmaceutical products in
the industry. In reviewing subsequent 2005 data, however, it appears that our
estimated percentage of future sales returns is reasonable. Cumulative product returns
through the third quarter of 2005 were approximately 2.97% of sales during the period
from November 2000 through the second quarter of 2004 (assuming all returns to date are
related to sales made more than 18 months ago). We believe our 4% estimate is
therefore reasonable, as it is conceivable that some returns may yet be made of expired
product in the future.

www.encysive.com

phone 713.796.8822

fax 713.796.8822

Encysive Pharmaceuticals Inc. 4848 Loop Central Drive • Suite 700 • Houston, Texas • 77081

FOIA Confidential Treatment Request

Confidential Treatment Requested by

Encysive Pharmaceuticals Inc.

004955-0001-0001

We have considered several qualitative factors in estimating future product returns. In
the pharmaceutical industry, product returns are primarily influenced by remaining shelf
life, product recalls, price changes from competitors, or introductions for new or
generic competition. As discussed above, we are not aware of any product recalls or
withdrawals, price changes from competitors, or introductions of new or generic
competition which would reasonably be likely to impact returns of Argatroban.

As discussed above, GSK informs us of product returns recorded each quarter, but we do
not know for which period or periods such returns relate. We are not able to provide
product returns in sales dollars, disaggregated by expiration period. At December 31,
2004, our estimated amount of product returns was approximately $3.0 million, which
would all be related to sales made in the most recent 18-24 month period.

    d)

    A roll-forward of each item that reduces gross royalty revenues for the periods
presented is as follows (in Thousands):

    Effect on Royalty Revenues

    Cash, trade

    Rebates

    and quantity

    and

    Sales

    discounts

    chargebacks

    Returns

    Beginning balance (1)

    35

    95

    [*]

    Current estimate related to sales made
in current or prior periods

    —

    —

    [*]

    Actual returns or credits related to sales made
in current or prior periods

    91

    316

    [*]

    December 31, 2002

    126

    411

    [*]

    Current estimate related to sales made
in current or prior periods

    —

    —

    [*]

    Actual returns or credits related to sales made
in current or prior periods

    145

    931

    [*]

    December 31, 2003

    271

    1,342

    [*]

    Current estimate related to sales made
in current or prior periods

    —

    —

    [*]

    Actual returns or credits related to sales made
in current or prior periods

    251

    1,327

    [*]

    December 31, 2004

    522

    2,669

    [*]

(1) Comprised of actual activity from November 2000 through December 31, 2001

www.encysive.com

phone 713.796.8822

fax 713.796.8822

Encysive Pharmaceuticals Inc. 4848 Loop Central Drive • Suite 700 • Houston, Texas • 77081

FOIA Confidential Treatment Request

Confidential Treatment Requested by

Encysive Pharmaceuticals Inc.

004955-0001-0001

We supplementally advise the staff that if we had used an estimate of 2.97% of trailing
18 month sales instead of 4% as an estimate for future returns, our reserve would have
been $[*] instead of $[*] as of December 31, 2004.

    e)

    As Argatroban is manufactured, sold and distributed by GSK, we do not have
information upon which to comment regarding the amount of and reason for fluctuations
with respect to amounts that reduce gross royalty revenue. In the pharmaceutical
industry, product returns are primarily influenced by remaining shelf life, product
recalls or withdrawals, competitive price changes or the introduction of generic or
other competition. We are not aware of any pending product recalls or withdrawals,
competitive price changes or new competition and, accordingly, have focused on
estimating the impact of product dating on returns. The effect of changes in our
estimates for future product returns upon royalty revenues was to reduce reported
royalty revenues by $0.4 million, $0.1 million and $0.1 million in the years ended
December 31, 2004, 2003 and 2002, respectively.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Commercialization Agreement, page F-23

    2.

    GSK paid $8.5 million in upfront license fees during August 1997, a $5 million milestone
payment in October 1997, and a $7.5 million milestone payment in June 2000. Under the
Company’s revenue recognition policies in effect at that time, since the payments were not
refundable, they were recognized upon receipt. Upon adoption of Staff Accounting Bulletin No.
101 (SAB101) at December 31, 2000, the Company deferred recognition of these up-front payments
over the estimated development period, reporting the amounts previously recognized under the
caption “cumulative effect of change in accounting principle.” Argatroban was approved by the
FDA for marketing in the U.S. in 2000, and the Company’s required development activities
ended. As a result, deferred revenue related to Argatroban was included in year 2000
revenues. We advise the staff that:

    •

    There is no revenue related to the license fees or milestone payments received from
GSK included in any of the years ended December 31, 2004, 2003 or 2002.

    •

    Following the adoption of SAB101, we recognized revenues on a straight-line basis
from the date of receipt through the FDA approval date for Argatroban.

    •

    The specific amortization period was from 1997 through 2000.

www.encysive.com

phone 713.796.8822

fax 713.796.8822

Encysive Pharmaceuticals Inc. 4848 Loop Central Drive • Suite 700 • Houston, Texas • 77081

FOIA Confidential Treatment Request

Confidential Treatment Requested by

Encysive Pharmaceuticals Inc.

004955-0001-0001

Confidential Treatment Request

     We hereby request, pursuant to 17 C.F.R. § 200.83 that the contents of this letter, as
indicated by [*], be maintained in confidence, not be made part of any public record and not be
disclosed to any person as it contains confidential information. In accordance with 17 C.F.R. §
200.83(d)(l), if any person (including any governmental employee who is not an employee of the
Commission) should request access to or an opportunity to inspect this letter, we request that we
be immediately notified of any such request, be furnished with a copy of all written materials
pertaining to such request (including, but not limited to, the request itself) and be given at
least ten business days advance notice of any intended release so that the Company may, if deemed
necessary or appropriate, pursue any remedies available to it. In such an event, we request that
you telephone Robert G. Reedy of Porter & Hedges, L.L.P. at (713) 226-6674 rather than rely upon
the United States mail for such notice. The address for Robert G. Reedy, the responsible
representative, is 1000 Main Street, 36th Floor, Houston, Texas 77002-6336.

     In connection with the Company’s response to the Staff, the Company acknowledges that (i) it
is responsible for the adequacy and accuracy of the disclosure in this filing, (ii) Staff comments
or changes to disclosure in response to Staff comments do not foreclose the Commission from taking
any action with respect to this filing and (iii) the Company may not assert Staff comments as a
defense in any proceeding initiated by the Commission or any person under the federal securities
laws of the United States.

     Please call the undersigned at (713) 578-6605 with any additional comments or questions you
may have.

Regards,

/s/
Stephen L. Mueller

Stephen L. Mueller

Vice President, Finance and Administration

    cc:

    Ms. Amy C. Bruckner, Staff Accountant

    Ms. Mary Mast, Senior Accountant