10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR QUARTERLY PERIOD ENDED JUNE 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.

(Exact name of registrant as specified in its charter)

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)

(713) 796-8822

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check One):

Large accelerated filer o Accelerated filer þ Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No þ

Indicate the number of shares outstanding of each of the issuer’s classes of Common Stock, exclusive of treasury shares, as of the latest practicable date.

Class	Outstanding at July 31, 2007
Common stock, $0.005 par value		71,741,702

ENCYSIVE PHARMACEUTICALS INC.

TABLE OF CONTENTS

		PAGE NO.
Part I.	Financial Information
	Item 1: Financial Statements (Unaudited)
	Consolidated Balance Sheets as of June 30, 2007 and December 31, 2006		1
	Consolidated Statements of Operations and Comprehensive Loss for the three months and six months ended June 30, 2007 and 2006		2
	Consolidated Statements of Cash Flows for the three and six months ended June 30, 2007 and 2006		3
	Notes to Consolidated Financial Statements		4
	Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations		16
	Item 3: Quantitative and Qualitative Disclosures About Market Risk		26
	Item 4: Controls and Procedures		26
Part II.	Other Information
	Item 1: Legal Proceedings		27
	Item 1A: Risk Factors		28
	Item 2: Unregistered Sales of Equity Securities and Use of Proceeds		32
	Item 3: Defaults Upon Senior Securities		33
	Item 4: Submission of Matters to a Vote of Security Holders		33
	Item 5: Other Information		33
	Item 6: Exhibits		34
SIGNATURES			35
Certification of CEO Pursuant to Rule 13a-14(a)
Certification of CFO Pursuant to Rule 13a-14(a)
Certification Pursuant to Section 1350
Certification Pursuant to Section 1350

ENCYSIVE PHARMACEUTICALS INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

($ in thousands, except per share data)
(Unaudited)

	June 30,			December 31,
	2007			2006
ASSETS
Current assets:
Cash and cash equivalents	$	65,033		$	43,798
Restricted cash		97			—
Accounts receivable		7,877			5,211
Other current receivables, net of reserve of $0 and $65		693			141
Inventory, net of reserve of $1,546 and $496		2,347			2,343
Prepaids		2,328			1,926
Total current assets		78,375			53,419
Equipment and leasehold improvements, net		5,736			5,976
Deferred debt origination costs, net of accumulated amortization of $1,677 and $1,202		6,400			3,461
Intangible assets, net of accumulated amortization of $738 and $685		228			281
Total assets	$	90,739		$	63,137
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Accounts payable	$	3,338		$	3,435
Accrued expenses		30,032			22,133
Deferred revenue		642			1,286
Total current liabilities		34,012			26,854
Long-term debt		186,038			130,000
Commitments 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, 2007, 72,049,188 shares issued 71,836,188 outstanding; at December 31, 2006, 62,660,802 shares issued, 62,447,802 shares outstanding		360			313
Additional paid-in capital		358,042			329,817
Treasury stock, 213,000 shares at June 30, 2007 and December 31, 2006		(1,602	)		(1,602	)
Accumulated other comprehensive income		(53	)		33
Accumulated deficit		(486,058	)		(422,278	)
Total stockholders’ deficit		(129,311	)		(93,717	)
Total liabilities and stockholders’ deficit	$	90,739		$	63,137

See accompanying notes to consolidated financial statements

1

ENCYSIVE PHARMACEUTICALS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS

($ in thousands, except per share data)
(Unaudited)

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2007			2006			2007			2006
Revenues:
Sales	$	2,268		$	—		$	3,209		$	—
Royalty income		6,347			3,340			10,492			6,579
License fee and milestones		322			322			644			644
Total Revenues		8,937			3,662			14,345			7,223
Expenses:
Cost of goods sold		411			—			477			—
Research and development		16,685			14,676			34,184			33,055
Sales and marketing		9,590			11,767			20,476			21,603
General and administrative		6,277			5,364			11,893			11,106
Restructuring		7,942			—			7,942			—
Total expenses		40,905			31,807			74,972			65,764
Operating loss		(31,968	)		(28,145	)		(60,627	)		(58,541	)
Investment income		840			1,085			1,635			2,384
Interest expense		(2,744	)		(978	)		(4,788	)		(1,958	)
Loss before cumulative effect of change in accounting principle	$	(33,872	)	$	(28,038	)		(63,780	)		(58,115	)
Cumulative effect of change in accounting principle		—			—			—			107
Net loss applicable to common shares	$	(33,872	)	$	(28,038	)	$	(63,780	)	$	(58,008	)
Other comprehensive income:
Reclassification adjustment for gains included in net loss		—			—			—			—
Comprehensive loss	$	(33,872	)	$	(28,038	)	$	(63,780	)	$	(58,008	)
Loss per share:
Continuing operations, basic and diluted	$	(0.50	)	$	(0.48	)	$	(0.99	)	$	(0.99	)
Weighted average common shares used to compute net loss per share basic and diluted		67,557,566			58,464,618			64,617,391			58,367,915

See accompanying notes to consolidated financial statements

2

ENCYSIVE PHARMACEUTICALS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

($ in thousands)
(Unaudited)

	Six Months Ended June 30,
	2007			2006
Cash flows from operating activities:
Net loss	$	(63,780	)	$	(58,008	)
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation and amortization		532			499
Expenses paid with stock		82			50
Share-based compensation expense		1,038			4,101
Amortization of debt issue costs		475			329
Loss on disposition of fixed assets		4			33
Changes in operating assets and liabilities:
Restricted cash		(97	)		—
Accounts receivable		(2,333	)		1,946
Inventory		(4	)		(343	)
Prepaids		(395	)		43
Other current receivables		(540	)		99
Accounts payable and accrued expenses		7,756			513
Deferred revenue		(644	)		(644	)
Net cash used in operating activities		(57,906	)		(51,382	)
Cash flows from investing activities:
Purchases of investments		—			(9,974	)
Purchases of equipment and leasehold improvements		(237	)		(1,544	)
Net cash used in investing activities		(237	)		(11,518	)
Cash flows from financing activities:
Borrowing of long-term debt		60,000			—
Debt issue costs		(3,414	)		—
Repayment of long-term debt		(3,962	)		—
Proceeds from sale of common stock in private offerings		27,142			—
Proceeds from option exercises		10			430
Net cash provided by financing activities		79,776			430
Effect of exchange rate changes on cash		(398	)		—
Net increase (decrease) in cash and cash equivalents		21,235			(62,470	)
Cash and cash equivalents at beginning of period		43,798			127,913
Cash and cash equivalents at end of period	$	65,033		$	65,443
Supplemental schedule of cash flow information:
Interest paid		2,598			1,625

See accompanying notes to consolidated financial statements

3

ENCYSIVE PHARMACEUTICALS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL SATEMENTS

June 30, 2007 (unaudited)

(1) Liquidity and Management’s Plans

     The accompanying consolidated financial statements have been prepared assuming that Encysive Pharmaceuticals Inc. (the “Company” or “Encysive”), a Delaware corporation, will continue to operate as a going concern. The Company has sustained losses since its formation, and at June 30, 2007 had a stockholder’s deficit of $129,311,000. At June 30, 2007, the Company had cash and cash equivalents of $65.0 million, of which $4.3 million was used to pay principal and interest on long-term debt on July 2, 2007. Management believes that our existing capital resources will be sufficient to fund the Company’s operations into the first quarter of 2008, taking into consideration the effects of the Restructuring, discussed below. In order to continue as a going concern, the Company will need to receive significant additional funding. On June 15, 2007, the Company received its third approvable letter from the U.S. Food and Drug Administration (the “FDA”) for Thelin™ (sitaxsentan sodium), which is under review for the treatment of pulmonary arterial hypertension (“PAH”). In the third approvable letter, the FDA stated that Encysive’s development program for Thelin did not demonstrate the evidence of effectiveness needed for approval. These matters raise substantial doubt about the Company’s ability to continue as a going concern. These consolidated financial statements do not include the adjustments that would be necessary should the Company be unable to continue as a going concern.

     Although management entered into two financing arrangements, discussed below, to provide additional liquidity, the Company has received all remaining amounts available under these arrangements in the three months ended June 30, 2007, and these arrangements will not provide any additional liquidity in the future. The Company will require significant additional funding in order to continue to operate. Because the FDA has issued a third approvable letter, management believes that additional funding will be significantly more difficult to obtain on commercially acceptable terms, if at all.

     On October 19, 2006, the Company entered into a Common Stock Purchase Agreement (the “Azimuth Agreement”) with Azimuth Opportunity Ltd. (“Azimuth”), which provided that, upon the terms and subject to the conditions set forth therein, Azimuth committed to purchase up to $75,000,000 of common stock, or 11,866,851 shares of the Company’s common stock as of October 19, 2006, whichever occurred first, over the 18-month term of the Azimuth Agreement. The Company closed five draw downs under the Azimuth Agreement, and received aggregate gross proceeds of approximately $45.5 million and net proceeds of approximately $44.9 million after deducting estimated offering expenses. The Company has issued to Azimuth the maximum number of shares of the Company’s common stock permitted to be issued under the Azimuth Agreement and the Azimuth Agreement terminated pursuant to its terms.

     On February 6, 2007, the Company’s wholly owned subsidiary, Argatroban Royalty Sub LLC, a Delaware limited liability company (“Royalty Sub”), issued an aggregate principal amount of $60.0 million of its Argatroban PhaRMA^SM Secured 12% Notes due 2014 (the “Argatroban Notes”) to certain institutional investors in a private placement pursuant to Section 4(2) of the Securities Act of 1933, as amended (the “Securities Act”). Net proceeds from the financing were approximately $56.6 million after transaction costs, of which $10.0 million was withheld from the Company pending confirmation of treaty relief from U.K withholding tax obligations. The amount withheld, along with earned interest thereon, was released to the Company on June 18, 2007 when tax treaty relief was obtained. For additional information, refer to Note 9.

     The Company has an effective shelf registration statement on Form S-3, under which it could issue additional common stock, debt, or other securities for gross aggregate proceeds of up to approximately $68.0 million. The shelf registration statement does not provide any assurance that the Company will be able to sell any securities thereunder on commercially acceptable terms, if at all.

     On June 25, 2007, the Company announced that it is implementing a strategic restructuring (the “Restructuring”), to focus its resources on its most promising assets. In addition, on July 17, 2007, the Company announced that it had retained the investment banking firm of Morgan Stanley to assist in evaluating its strategic alternatives to maximize shareholder value. For additional information about the Restructuring and the engagement of Morgan Stanley, see Note 12(b), Restructuring, and 12(c), Subsequent Event, below.

4

(2) Organization and Significant Accounting Policies

     (a) Organization

     Encysive is a global biopharmaceutical company focused on the discovery, development and commercialization of novel synthetic small molecule compounds to address unmet medical needs. The Company’s research and development programs are predominantly focused on the treatment and prevention of interrelated diseases of the vascular endothelium and exploit its expertise in the area of the intravascular inflammatory process, referred to as the inflammatory cascade, and vascular diseases. Since its formation in 1989, the Company has been engaged principally in research and drug discovery programs and clinical development of certain drug compounds.

     The Company is presently working on a number of long-term development projects that involve experimental and unproven technology, which may require many years and substantial expenditures to complete, and which may or may not be successful. Sales of the Company’s first product approved by the FDA, Argatroban, for which it receives royalty income, began during November 2000. Sales of Thelin™ (sitaxsentan sodium), the Company’s first product approved by the European Medicines Agency (“EMEA”) began in the fourth quarter of 2006.

     (b) Basis of Consolidation

     The Company’s consolidated financial statements include the accounts of the Company, its wholly owned subsidiaries, ImmunoPharmaceutics, Inc. (“IPI”), a California corporation; Encysive, L.P. (“ELP”), a Delaware limited partnership; EP-ET, LLC, a Delaware limited liability company; Encysive (UK) Limited, a private company located in the United Kingdom (“UK”); Encysive Germany GmbH, a private company located in Germany; Encysive France S.A.S., a private company located in France; Encysive Italy S.r.l., a private company located in Italy; Encysive Canada Inc., a private company located in Canada; Encysive Switzerland GmbH, a private company located in Switzerland; and Royalty Sub.

     (c) Revenue Recognition

     Revenue from sales of Thelin™ is recognized when product is shipped and ownership transfers to the customer. Sales revenue includes value added taxes billed to customers, and is reported net of discounts, allowances, and returns. Revenue from service contracts is recognized as services are performed. Royalty revenue is recognized as products are sold by a licensee and the Company has received sufficient information to record a receivable. The Company defers 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 the Company continues to have obligations under the terms of the arrangement. License fees received under the terms of licensing agreements for the Company’s intellectual property are similarly deferred and amortized into income over the estimated development period of the licensed item or items. The Company periodically evaluates its estimates of remaining development periods and adjusts the recognition of remaining deferred revenues over the adjusted development period remaining. Revenue from grants is recognized as earned under the terms of the related grant agreements, typically as expenses are incurred. Amounts received in advance of services being performed under contracts are recorded as deferred revenue and recognized as services are performed.

     (d) Debt issue costs

     The Company incurred costs, principally comprised of initial purchasers’ discounts and various legal and professional fees, of approximately $3,414,000 during the six months ended June 30, 2007 related to the issuance of the Argatroban Notes. Debt issue costs are deferred, and recognized from the issuance of the Argatroban Notes through the final maturity date of September 30, 2014. During the three months and six months ended June 30, 2007, interest expense included approximately $91,000 and $145,000, respectively in amortized debt issue costs. Remaining unamortized debt issue costs related to the Argatroban Notes were approximately $3,268,000 at June 30, 2007.

5

     The Company also incurred costs of approximately $4,663,000 related to the issuance of its 2.50% Convertible Senior Notes due 2012 (the “Convertible Notes”) in March 2005. Debt issue costs are deferred, and recognized from the issuance of the Convertible Notes through the date that the Company has the ability to call the Convertible Notes, March 20, 2010. Interest expense in each of the three months ended June 30, 2007 and 2006, includes approximately $166,000 in amortized debt issue costs, and interest expense in the six months ended June 30, 2007 and 2006, includes approximately $329,000 and $330,000 in amortized debt issue costs, respectively. Remaining unamortized debt issue costs were approximately $3,132,000 at June 30, 2007. For additional information about the Convertible Notes, see Note 9.

     (e) Use of Estimates

          Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities to prepare these consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. Actual results could differ from these estimates.

     (f) New Accounting Pronouncements

          In June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements. FIN 48 requires companies to determine whether it is “more likely than not” that a tax position will be sustained upon examination by the appropriate taxing authorities before any part of the benefit can be recorded in the financial statements. It also provides guidance on the recognition, measurement and classification of income tax uncertainties, along with any related interest and penalties. Previously recorded income tax benefits that no longer meet this standard are required to be charged to earnings in the period that such determination is made. FIN 48 also requires significant additional disclosures. The Company adopted the new standard during the first quarter of 2007 as required. The effect of adoption of FIN 48 did not have a material effect on the Company’s consolidated financial statements.

          In September 2006, the FASB issued Statement of Financial Standards No. 157, “Fair Value Measurements” (“FAS 157”). FAS 157 defines fair value, establishes a framework for measuring fair value, and requires enhanced disclosures about fair value measurements. FAS 157 does not require any new fair value measurements. FAS 157 is effective for fiscal years beginning after November 15, 2007. The guidance in FAS 157 will be applied prospectively with the exception of (i) block discounts of financial instruments; and (ii) certain financial and hybrid instruments measured at initial recognition under FAS 133, which are to be applied retrospectively as of the beginning of initial adoption (a limited form of retrospective adoption). The Company will adopt the new standard during the first quarter of 2008. The Company is currently evaluating the impact of FAS 157 and does not expect that the adoption of FAS 157 will have a material impact on the Company’s consolidated financial statements.

          In February 2007, the FASB issued Statement of Financial Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“FAS 159”). FAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value. FAS 159 is effective for fiscal years beginning after November 15, 2007, but may be adopted earlier provided that FAS 157 is also adopted. The Company will adopt the new standard during the first quarter of 2008. The Company is currently evaluating the impact of FAS 159 and does not expect that the adoption of FAS 159 will have a material impact on the Company’s consolidated financial statements.

(3) Inventory

     Inventory balances are determined using the first-in first-out method. At June 30, 2007, the Company had $2,347,000 of capitalized inventory costs, net of a reserve for obsolescence of $1,546,000 and at December 31, 2006, the Company had $2,343,000 of capitalized inventory costs, net of a reserve for obsolescence of $496,000.

6

(4) Capital Stock

     In March 2005, the Company issued the Convertible Notes in the principal amount of $130,000,000. As the Notes are convertible into the Company’s common stock, the Company has reserved 9,322,001 shares for issuance upon conversion, including 213,000 treasury shares. For additional information about the Convertible Notes, see Note 9. The Company has reserved Common Stock for issuance as of June 30, 2007, as follows:

Stock option plans	9,302,231
2.50% Convertible Senior Notes due 2012	9,322,001
Total shares reserved	18,624,232

(5) Cash, Cash Equivalents, and Restricted Cash

     Cash equivalents are considered to be those securities or instruments with original maturities, when purchased, of three months or less and are recorded at cost. Short-term investments consist of debt securities with remaining maturities of less than one year and original maturities greater than three months at the purchase date. The Company classifies all short-term investments as held-to-maturity. Held-to-maturity securities are those securities in which the Company has the ability and intent to hold the security until maturity. Short-term investments are stated at amortized cost plus accrued interest. Interest income is accrued as earned. The Company evaluates the carrying value of its securities by comparing the carrying value of the securities to their market value. In the event that the fair value of a security were to decline below its carrying cost, and in the opinion of management such decline was other than temporary, the Company would record a loss and reduce the carrying value of such security to its fair value. All of the Company’s funds were invested in cash or cash equivalents at June 30, 2007 and December 31, 2006.

     The Company deposited approximately $97,000 into an account with a bank to secure a letter of credit, which is classified as Restricted Cash on the consolidated balance sheet. $10,000,000 of the proceeds of the Argatroban Notes was initially withheld, pending resolution of a U.K. tax withholding issue. The $10,000,000 along with interest thereon was released to the Company on June 18, 2007. See Note 9.

(6) Net Loss per Common Share

     Basic net loss per common share is calculated by dividing the net loss by the weighted average number of common and common equivalent shares outstanding during the period. For the three-month periods ended June 30, 2007 and 2006, the weighted average common shares used to compute basic and diluted net loss per common share totaled 67,557,566 and 58,464,618, respectively. For the six-month periods ended June 30, 2007 and 2006, the weighted average common shares used to compute basic and diluted net loss per common share totaled 64,617,391 and 58,367,915 shares, respectively. Securities convertible into common stock comprised of stock options, shares of common stock reserved for issuance upon conversion of the Convertible Notes and unvested shares of restricted common stock totaling 17,314,429 and 15,849,804 shares at June 30, 2007 and 2006, respectively, were not used in the calculation of diluted net loss per common share because the effect would have been antidilutive.

(7) Income Taxes

     The Company did not incur tax expense (benefit) during the three and six month periods ended June 30, 2007 and 2006, due to operating losses and the related increase in the valuation allowance.

7

(8) Entity-Wide Geographic Data

     The Company operates in a single business segment that includes sales, research and development of pharmaceutical products. The Company’s revenues are primarily derived from GlaxoSmithKline plc, (“GSK”) and sales of Thelin™ in Europe. The following table summarizes the Company’s sources of revenues from its principal customers (dollars in thousands):

	Three Months Ended June 30,				Six Months Ended June 30,
	2007		2006		2007		2006
Entities:
GSK	$	6,347	$	3,340	$	10,492	$	6,579
Others		2,590		322		3,853		644
Total	$	8,937	$	3,662	$	14,345	$	7,223

     The following table summarizes the Company’s sources of revenues by geographical area (dollars in thousands):

	Three Months Ended June 30,				Six Months Ended June 30,
	2007		2006		2007		2006
Geographical Area:
United States	$	6,669	$	3,662	$	11,136	$	7,223
Europe		2,268		—		3,209		—
Total	$	8,937	$	3,662	$	14,345	$	7,223

     The following table summarizes the Company’s long-lived assets by geographical area (dollars in thousands):

	June 30,		December 31,
	2007		2006
Geographical Area:
United States	$	12,102	$	9,499
Europe		262		219
Total	$	12,364	$	9,718

(9) Long-Term Debt

     On February 6, 2007, the Company, pursuant to the terms of a purchase and sale agreement, sold, assigned and contributed to Royalty Sub, the rights of the Company to receive royalties and certain payments (the “Royalty Payments”) from sales of Argatroban in the United States and Canada, in exchange for approximately $56.6 million in cash, of which $10.0 million was deposited into a “Holdback Account” pending receipt of the U.K. Tax Confirmation (defined below), and a capital contribution by the Company to Royalty Sub in an amount equal to the excess of the agreed fair market value of the Royalty Payments over the amount of the cash portion of the purchase price. Also on February 6, 2007, Royalty Sub issued an aggregate principal amount of $60.0 million of Argatroban Notes to certain institutional investors in a private placement pursuant to Section 4(2) of the Securities Act.

     Funds in the Holdback Account, including interest, were released to the Company on June 18, 2007, upon receiving a confirmation from Her Majesty’s Revenue & Customs of the United Kingdom (“HMRC”) that, under the income tax treaty presently in force between the UK and the United States, either (i) no UK income tax is required to be withheld at source on the royalties in respect of sales of Argatroban in North America or (ii) if UK income tax is required to be withheld at source on such royalties, the Company or Royalty Sub is entitled to repayment from HMRC of such tax (the “U.K. Tax Confirmation”).

     The Royalty Payments, together with any funds made available from an account into which capital contributions will be made by the Company, if any, to Royalty Sub will be the sole source of payment of principal of, and interest on, the Argatroban Notes. The payment dates for the Argatroban Notes are March 30, June 30, September 30 and December 30 of each year. On March 30, 2007, the Company made a payment of approximately $4.4 million of which approximately $3.5 million was used to repay principal and $0.9 million to pay interest. Since June 30, 2007 was not a business day, a payment of

8

approximately $4.3 million was made on July 2, 2007 of which approximately $2.6 million was used to repay principal and $1.7 million to pay interest.

     See Item 2.03 of the Company’s Current Report on Form 8-K, the contents of which are incorporated herein by reference, filed with the Securities and Exchange Commission on February 8, 2007 for a more complete description of the terms of the Argatroban Notes and the related indenture.

     In March 2005, the Company issued $130,000,000 in Convertible Notes, due 2012. The Company will pay 2.50% interest per annum on the Convertible Notes on March 15 and September 15 of each year.

     Holders of the Convertible Notes may convert the Convertible Notes into shares of common stock at any time prior to the maturity date of the Convertible Notes at a conversion rate of 71.7077 shares of common stock per $1,000 principal amount of Convertible Notes, which is equal to an initial conversion price of approximately $13.95 per share, subject to adjustment as set forth in the indenture governing the Convertible Notes. In the event of certain types of fundamental changes, the Company will increase the number of shares issuable upon conversion or, in lieu thereof, the Company may in certain circumstances elect to adjust the conversion rate and related conversion obligation so that the Convertible Notes are convertible into shares of the acquiring or surviving company, or at the option of the Company, the Company may elect to pay the additional value represented by an increase in the conversion rate in cash to holders electing to convert their Convertible Notes. On or after March 20, 2010, the Company may redeem some or all of the Convertible Notes for cash at 100% of the principal amount plus accrued interest, if the trading price of the Company’s common stock exceeds 140% of the conversion price of the Convertible Notes then in effect for at least 20 trading days within a period of 30 consecutive trading days ending on the trading day prior to the date on which the redemption notice is mailed. Upon the occurrence of a fundamental change meeting certain conditions, holders of the Convertible Notes may require the Company to repurchase for cash all or part of their Convertible Notes.

     The Convertible Notes are senior unsecured obligations and rank equally in right of payment with any senior unsecured indebtedness that the Company may incur in the future. The Convertible Notes will be effectively subordinated to all future secured indebtedness and all existing and future liabilities of the Company’s subsidiaries, including trade payables and senior in right of payment to any future subordinated indebtedness that the Company may incur.

(10) Share-Based Payment

     The Company has share-based awards outstanding under six different plans as follows:

     The Amended and Restated 1990 Incentive Stock Option Plan (“1990 Plan”) allows for the issuance of incentive and non-qualified options to employees, directors, officers, non-employee independent contractors and non-employee directors, pursuant to which 40,000 shares of Common Stock are reserved for issuance out of authorized but unissued shares of the Company. No new issuances are being made under the 1990 Plan.

     The Amended and Restated 1992 Incentive Stock Option Plan (“1992 Plan”) allows for the issuance of incentive and non-qualified options to employees, directors, officers, non-employee independent contractors and non-employee directors, pursuant to which 115,133 shares of Common Stock are reserved for issuance out of authorized but unissued shares of the Company. No new issuances are being made under the 1992 Plan.

     The Amended and Restated 1995 Stock Option Plan (“1995 Plan”) allows for the issuance of incentive and non-qualified options, shares of restricted stock and stock bonuses to employees, officers, and non-employee independent contractors, pursuant to which 523,495 shares of Common Stock are reserved for issuance out of authorized but unissued shares of the Company. No new issuances are being made under the 1995 Plan.

     The Amended and Restated 1995 Non-Employee Director Stock Option Plan (“1995 Director Plan”) allows for the issuance of non-qualified options to non-employee directors, pursuant to which 352,500 shares of Common Stock are reserved for issuance out of authorized but unissued shares of the Company. No new issuances are being made under the 1995 Director Plan.

     The Amended and Restated 1999 Stock Incentive Plan (“1999 Plan”) allows for the issuance of incentive and non-qualified options, shares of restricted stock and stock-based bonuses to directors, employees, officers and non-employee independent contractors, pursuant to which 5,692,906 shares of Common Stock are reserved for issuance out of authorized but unissued shares of the Company.

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     The 2007 Incentive Plan, as amended, (“2007 Plan”) allows for the issuance of incentive and non-qualified options, shares of restricted stock, and stock-based bonuses to directors, employees, officers and non-employee independent contractors, pursuant to which 2,578,197 shares of Common Stock are reserved for issuance out of authorized but unissued shares of the Company.

     Compensation expense in the three and six months ended June 30, 2007 includes a reversal of approximately $2,438,000 of compensation expense previously recorded for unvested options and restricted stock that was cancelled as a result of the Restructuring. Compensation expense related to all share-based awards during the three months and six months ended June 30, 2007 and 2006 was as follows ($ in Thousands):

	Three Months Ended June 30,					Six Months Ended June 30,
	2007			2006		2007			2006
Options	$	343		$	1,343	$	1,191		$	2,966
Nonvested shares of common stock		(955	)		672		(153	)		1,242
Total	$	(612	)	$	2,015	$	1,038		$	4,208

     Cash received from stock options exercised during the three and six months ended June 30, 2007 was $6,000 and $10,000, respectively. Cash received from stock options exercised during the three and six months ended June 30, 2006 was $10,000 and $430,000, respectively.

     The fair value of the Company’s stock option awards is estimated on the date of grant using a Black-Scholes option-pricing model that uses the assumptions in the table below. The fair value of the Company’s stock option awards, which are subject to graded vesting, is expensed over the vesting life of the stock options using the straight-line method. Expected volatility is based on an average of (i) historical volatility of the Company’s stock, (ii) implied volatility from the Company’s convertible debt and (iii) implied volatility from traded options on the Company’s stock. The risk-free rate for periods within the contractual life of the stock option award is based on the yield curve of a zero-coupon U.S. Treasury bond for the month during which the stock option award is granted with a maturity equal to the expected term of the stock option award granted. The Company uses historical data to estimate stock option exercises and forfeitures within its valuation model. The expected term of stock option awards granted is derived from historical exercise experience under the Company’s share-based payment plans and represents the period of time that stock option awards granted are expected to be outstanding.

     The significant weighted average assumptions relating to the valuation of the Company’s stock options for the three and six months ended June 30, 2007 and 2006 were as follows:

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2007			2006			2007			2006
Expected dividend yield		0.0	%		0.0	%		0.0	%		0.0	%
Risk-free interest rate		4.6	%		5.1	%		4.7	%		4.7	%
Expected volatility		77.1	%		71.8	%		77.6	%		64.9	%
Expected life in years		5.0			4.0			5.0			3.9

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     A summary of the Company’s stock option activity for the six months ended June 30, 2007 was as follows:

				Weighted		Weighted Average		Aggregate
	Stock			Average		Remaining		Intrinsic Value
	Options			Exercise Price		Contractual Term		(in Thousands)
Outstanding
at December 31, 2006		5,614,455		$	8.14		5.70	$	1,496
Grants		714,532		$	2.995
Forfeited or expired		(222,206	)	$	6.26
Exercises		(4,166	)	$	0.93
Outstanding
at March 31, 2007		6,102,615		$	7.61		6.15	$	708
Grants		560,000		$	2.06
Forfeited or expired		(317,821	)	$	5.66
Exercises		(6,666	)	$	0.93
Outstanding
At June 30, 2007		6,338,128		$	7.22		6.16	$	308
Vested and expected to vest in the future at June 30, 2007		6,288,010		$	7.25		0.47	$	308
Exercisable at June 30, 2007		4,394,840		$	7.96		4.90	$	308
Available for grant at June 30, 2007		2,964,103

     In March 2007, the Company adopted the 2007 Plan, which was approved by the stockholders at the Company’s 2007 annual meeting of stockholders in May 2007. At June 30, 2007 there were 981,951 options outstanding, and 1,596,246 shares available for grant under the 2007 Plan.

     The weighted average grant date fair value of options granted and total intrinsic value of options exercised during the three and six months ended June 30, 2007, and 2006, was as follows:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2007		2006		2007		2006
Weighted average:
Grant date fair value per option	$	1.35	$	2.05	$	1.70	$	4.34
Total intrinsic value of options exercised	$	18,000	$	41,000	$	30,000	$	532,000

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     The fair value of nonvested shares of common stock is determined based on the closing trading price of the Company’s common stock on the day before the grant date. The weighted average grant date fair value of nonvested shares granted during the three months ended June 30, 2007 and 2006 was $3.44 and $3.57, respectively, and during the six months ended June 30, 2007 and 2006 was $3.05 and $8.10, respectively. A summary of the Company’s nonvested shares activity for the six months ended June 30, 2007 was as follows:

				Weighted Average
				Grant Date
	Shares			Fair Value
Nonvested at December 31, 2006		823,675		$	8.83
Activity during quarter ended March 31, 2007
Grants		1,762,572		$	3.04
Vested		(35,783	)	$	8.59
Forfeited		(11,537	)	$	9.17
Nonvested at March 31, 2007		2,538,927		$	4.81
Activity during quarter ended June 30, 2007
Grants		63,231		$	3.44
Vested		(23,137	)	$	10.26
Forfeited		(1,231,645	)	$	4.37
Nonvested at June 30, 2007		1,347,376		$	5.05

     The Company began granting phantom units in 2006 to certain of its non-U.S. employees. The fair value of unvested phantom units is determined based on the closing trading price of the common stock on the day before the grant date. A summary of the Company’s unvested phantom unit activity for the six months ended June 30, 2007, was as follows:

				Weighted Average Grant
	Phantom Units			Date Fair Value
Unvested at January 1, 2007		124,682		$	4.10
Grants		170,943			3.00
Vested		—			—
Forfeited		(10,504	)		4.10
Unvested at March 31, 2007		285,121			3.44
Grants		21,803			3.44
Vested		—			—
Forfeited		—			—
Unvested at June 30, 2007		306,924		$	3.44

     At June 30, 2007, there was approximately $11.0 million of unrecognized compensation expense related to unvested share-based awards granted under the Company’s share-based payment plans of which approximately $4.3 million relates to stock options expected to be recognized over a weighted-average period of 1.5 years, and approximately $6.7 million relates to nonvested shares expected to be recognized over a weighted average period of 2.1 years.

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(11) Accrued expenses

     Accrued expenses consisted of the following items (dollars in thousands):

	June 30, 2007		December 31, 2006
Accrued compensation and benefits	$	971	$	4,498
Accrued research and development costs		13,093		11,498
Accrued interest on long-term debt		2,667		953
Accrued sales and marketing expenses		3,026		1,676
Reserve for future Argatroban returns		1,322		1,149
Accrued legal and professional fees		553		231
Restructuring		7,942		—
Other accrued expenses		458		2,128
Total	$	30,032	$	22,133

(12) Commitments and Contingencies

(a) Litigation

     On September 26, 2006, a purported class action complaint (the “Massachusetts Laborers complaint”) was filed in the United States District Court for the Southern District of Texas by Massachusetts Laborers’ Annuity Fund, on behalf of itself and all other similarly situated investors against the Company, Bruce D. Given, M.D., the Company’s former President and Chief Executive Officer, Richard A.F. Dixon, the Company’s Senior Vice President, Research and Chief Scientific Officer and Stephen L. Mueller, the Company’s former Vice President, Finance and Administration, Secretary and Treasurer. The complaint alleges violations of sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Securities and Exchange Commission Rule 10b-5, and focuses on statements that are claimed to be false and misleading regarding our drug sitaxsentan sodium. The plaintiffs seek unspecified damages on behalf of a purported class of purchasers of our securities during the period from February 19, 2004 through March 24, 2006.

     In addition, on October 10, 2006, a second purported class action complaint was filed in the United States District Court for the Southern District of Texas by Gustav R. Bastian, on behalf of himself and all other similarly situated investors against the Company, Dr. Given, Mr. Dixon and Mr. Mueller. The complaint asserts substantially the same factual allegations and legal claims as the Massachusetts Laborers complaint on behalf of the same putative class. A third substantially similar purported class action complaint was filed on October 20, 2006 by Steven O. Scott, and a fourth substantially similar purported class action complaint was filed on November 1, 2006 by Cami Janzen-Guare. These complaints assert substantially the same factual allegations and legal claims as the Massachusetts Laborers’ complaint and were filed in the same court on behalf of the same putative class.

     It is possible that additional complaints regarding the same subject matter may be filed in the future. The Court has consolidated the four existing putative class action lawsuits into a single civil action, and we expect that any future purported class action lawsuits involving the same subject matter as the existing lawsuits will likewise be consolidated into this action. The Court has also appointed a lead plaintiff and lead counsel in the consolidated action, who have filed a consolidated amended complaint. We have filed a motion to dismiss the consolidated action. Although we believe that the allegations in these cases are without merit and intend to defend all such litigation vigorously, litigation is subject to inherent uncertainties, and an adverse result in these or other matters that may arise from time to time could have a material adverse effect on our business, results of operations and financial condition.

     On November 22, 2006, John Jadelis, an individual claiming to be a stockholder of the Company, filed a purported shareholder derivative complaint in the United States District Court for the Southern District of Texas. The complaint names the Company as a nominal defendant and Bruce D. Given, the Company’s former President and CEO, Richard A.F. Dixon, the Company’s Senior Vice President of Research and Chief Scientific Officer, Stephen L. Mueller, the Company’s former Vice President, Finance and Administration, Secretary and Treasurer, Ron Anderson, Director, J. Kevin Buchi, Director, John H. Dillon, II, Director, John M. Pietruski, Director, James A Thomson, Director, Suzanne Oparil, Director, James T. Willerson, Director and Robert J.

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Cruikshank, Director, as defendants. The suit asserts claims for breach of fiduciary duty, abuse of control, insider selling, misappropriation of information, gross mismanagement, and waste of corporate assets, and seeks contribution and indemnification against the individual defendants. The lawsuit seeks damages on behalf of the Company against the individual defendants, as well as a constructive trust over the individual defendants’ assets or trading activities; restitution and disgorgement of all profits, benefits, and compensation obtained by the individual defendants; and the costs of attorneys’ fees expended by the plaintiff in litigating the derivative action. We have filed a motion to dismiss the derivative action.

     We anticipate that additional shareholder derivative lawsuits regarding the same subject matter may be filed in federal and/or state court during the upcoming months.

(b) Restructuring

     On June 25, 2007, the Company announced that it is implementing a strategic restructuring in order to focus its resources on its most promising assets. As a result, the Company intends to reduce its U.S. workforce by approximately 70 percent, to about 65 people. Approximately 150 employees, including the U.S. sales force, were terminated immediately, with a smaller group leaving in the coming months. The Company also eliminated the position of Chief Operating Officer.

     The Company is providing cash severance payments to employees directly affected by the workforce reduction. The Company estimates that it will record approximately $15 million in restructuring and severance costs in 2007, of which approximately $7.9 million was recorded in the three months ended June 30, 2007. In July 2007, the Company entered into retention agreements with the approximately 65 members of its U.S. workforce who will remain employed by the Company following the restructuring, including its named executive officers. In July 2007, the Company also entered into retention agreements with selected employees of its non-U.S. operations.

     These agreements provide for the payment of retention bonuses to the selected employees that remain employed by the Company for the applicable retention periods. Subject to certain conditions, including the continued employment of the selected employees by the Company through December 31, 2007 (the “Initial Retention Period”), an initial retention bonus, which will be equal to six months of the employee’s annual base salary, will be payable to the selected employees in two equal installments on each of September 30, 2007 and December 31, 2007. Following the Initial Retention Period, unless the Company provides the selected employees with written notice at least 30 days prior to the end of the Initial Retention Period or any Extension Period (as defined below), the agreements will automatically renew for additional successive two-month periods (each an “Extension Period”). Subject to certain conditions, including continued employment of the selected employees by the Company through the end of each Extension Period, an extra retention bonus, which will be equal to two months of the employee’s annual base salary, will be payable to the selected employees on the next business day immediately following the last day of each Extension Period. The costs related to the retention agreements were included in the estimated restructuring costs for 2007, discussed above.

(c) Subsequent Event

     On July 17, 2007, the Company announced it has retained the investment banking firm of Morgan Stanley to assist in evaluating its strategic alternatives to maximize stockholder value. The Company does not expect to publicly disclose further information regarding the status of the review of strategic alternatives until a definitive transaction is entered into or the process is completed. There can be no assurances that any particular alternative will be pursued or that any transaction will occur, or on what terms, or as to the timing of any transaction.

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(d) Foreign Currency Exchange Risk

     The Company is exposed to market risk primarily from changes in foreign currency exchange rates. We have contracts with entities outside the U.S. that are denominated in a foreign currency. To date, changes in foreign currency exchange rates have not had a material effect on our financial results.

(e) Other contingencies

     Like other biopharmaceutical companies, the Company is subject to other contingencies, including legal proceedings and claims arising out of its business that cover a wide range of matters, including, among others, environmental matters, contract and employment claims, and product liability. The Company may be involved in legal actions from time to time. The Company has used various substances in its research and development that have been or may be deemed to be hazardous or dangerous, and the extent of its potential liability, if any, under environmental, product liability and workers’ compensation statutes, rules, regulations and case law is unclear.

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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, 2007, and June 30, 2006

OVERVIEW

     The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes to the financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2006, and with the consolidated financial statements and related notes to the financial statements included elsewhere in this Form 10-Q. This Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements represent our management’s judgment regarding future events. In many cases, you can identify forward-looking statements by terminology such as ''may,’’ ''will,’’ ''should,’’ “target,” “seek,” “project,” ''could,’’ ''plan,’’ ''expect,’’ ''anticipate,’’ ''estimate,’’ ''believe,’’ ''predict,’’ ''intend,’’ ''potential,’’ or ''continue’’ or the negative of these terms or other words of similar import, although some forward-looking statements are expressed differently. All statements, other than statements of historical fact, included in and incorporated by reference into this Form 10-Q regarding our financial position, business strategy and plans or objectives for future operations are forward-looking statements. Among the factors that could cause actual results to differ materially from those indicated by such forward-looking statements are: the actual costs incurred in our restructuring; our ability to execute our revised strategic plan and the impact of reducing our workforce on our strategic plan; unexpected delays in regulatory approval of Thelin™ (sitaxsentan sodium) by the United States Food and Drug Administration, or the FDA, in the U.S. and our other products under development; our ability to enter into and consummate a definitive transaction as a result of the evaluation of our strategic alternatives or our ability to maximize stockholder value through the process; the high cost and uncertainty of the research, clinical trials and other development activities involving our products and compounds; timing and outcome of regulatory action on competing products; possible delays in the timelines for initiating clinical trials and obtaining results of clinical trials with respect to our products under development, including TBC3711; decisions by the FDA regarding whether and when to approve our New Drug Application, or NDA, for Thelin™; the unpredictability of the duration and results of the FDA formal dispute resolution process; our estimates of the sufficiency of our existing capital resources; our ability to raise additional capital to fund cash requirements for future operations;; market acceptance of Thelin™ in the European Union, or EU, Canada and Australia, and the actual rate of acceptance; the availability of sufficient funds to continue our research and development efforts and to repay our outstanding indebtedness; the availability of sufficient funds to commercialize Thelin™ in the U.S. should it be approved by the FDA; Thelin™’s orphan drug designation; reduced estimates of patient populations and diagnosis rates of patients with pulmonary arterial hypertension in the EU, Canada and Australia; the impact of reimbursement policies and governmental regulation of prices for Thelin™ in the EU, Canada and Australia; our ability to predict revenues from Thelin™ and expense levels in 2007 and beyond; the impact of existing and future EU and US regulatory provisions on product exclusivity, including orphan drug exclusivity for Thelin™, and the impact of legislation or regulations in countries within the EU, Australia and Canada affecting Thelin™’s pricing, reimbursement or access; the scope of our patents and challenges by others of the scope of our patents; our ability to attract and retain qualified personnel; the impact of competitive products on Thelin™ and Argatroban sales; the ability of our subsidiary to repay the notes secured by royalties on the sales of Argatroban; the impact of strategic relationships among our competitors; the breadth of approved labeling for competitive approved products; the speed with which reimbursement and pricing approvals, and product launches for Thelin™ may be achieved in the EU, Canada, Australia and in other countries where Thelin™ may be approved; difficulties or delays in importing, manufacturing, packaging or distributing Thelin™ in the EU, Canada, Australia and in other countries where Thelin™ may be approved; our ability to earn a profit from sales or licenses of Thelin™ or other drug candidates; our ability to establish future collaborative arrangements or licenses; and the availability of materials necessary for the manufacture of our products; as well as more specific risks and

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uncertainties facing us such as those set forth in “Item 1A — Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2006 and below.

     You should read these forward-looking statements carefully because they discuss our expectations about our future performance, contain projections of our future operating results or our future financial condition, or state other “forward-looking” information. You should be aware that the occurrence of any of the events described in “Risk Factors,’’ “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this Form 10-Q could substantially harm our business, results of operations and financial condition and that upon the occurrence of any of these events, the trading price of our common stock could decline, and you could lose all or part of your investment.

     All subsequent written and oral forward-looking statements attributable to us or to persons acting on our behalf are expressly qualified in their entirety by the applicable cautionary statements. We cannot guarantee any future results, levels of activity, performance or achievements. Except as required by law, we undertake no obligation to update any of the forward-looking statements in this Form 10-Q after the date of this Form 10-Q.

     As used in this Form 10-Q, the words “we,” “our,” “us,” “Encysive,” and the “Company” refer to Encysive Pharmaceuticals Inc., its predecessors and subsidiaries, except as otherwise specified. This Form 10-Q may contain trademarks and service marks of other companies.

     Encysive Pharmaceuticals Inc. is a global biopharmaceutical company that engages in the discovery, development and commercialization of novel, synthetic, small molecule compounds to address unmet medical needs. We focus our research and development programs predominantly on the treatment and prevention of interrelated diseases of the vascular endothelium and exploit our expertise in the area of the intravascular inflammatory process, referred to as the inflammatory cascade, and vascular diseases. We have successfully developed one FDA approved drug, Argatroban, for the treatment of heparin-induced thrombocytopenia, or HIT, which is licensed to and marketed by GSK. Our lead drug candidate, Thelin™ (sitaxsentan sodium) is an endothelin receptor antagonist for the treatment of PAH. Thelin™ has received marketing authorization in the EU, Canada and Australia, and we have requested formal dispute resolution with the FDA regarding the Thelin™ NDA. We are a multinational company with revenues from an approved product in the EU, and sales and marketing operations in several EU countries.

Thelin™ — for the treatment of Pulmonary Arterial Hypertension

     Thelin™ (sitaxsentan sodium) is a selective oral ETA receptor antagonist dosed once a day for the treatment of PAH. In August 2006, Thelin™ was approved by the European Commission, or EC, for use in patients with pulmonary arterial hypertension classified as World Health Organization, or WHO, functional class III, to improve exercise capacity, as well as in primary pulmonary hypertension and in pulmonary hypertension associated with connective tissue disease. After the EC approved Thelin™ for marketing and sale in the EU, we started to build the necessary commercial infrastructure, including the establishment of country sales organizations and the negotiation of third party distributor relationships, to promote and sell Thelin™ in various countries of the EU. The centralized licensing procedure of the European Agency for the Evaluation of Medicinal Products, or EMEA, permits us to market Thelin™ in all 27 member states of the EU, however in most of the EU countries we must negotiate pricing and reimbursement prior to commercial launch. In the fourth quarter of 2006, we made Thelin™ commercially available in the UK and Germany, and in April 2007 we launched Thelin™ in the Republic of Ireland and in The Netherlands. We anticipate subsequent product launches of Thelin™ in other EU countries, including Spain, France and Italy, as their respective national governments approve pricing and reimbursement.

     On March 7, 2007, we announced that the Australian Therapeutic Goods Administration, or TGA, had granted marketing approval for Thelin^™ 100 mg tablets as a once daily oral treatment for patients with PAH. We have subsequently applied for reimbursement in Australia and we are currently reviewing whether or not to add our own commercial infrastructure or commercialize through a third party in Australia.

     On May 30, 2007, the Therapeutic Products Directorate, or TPD, of Health Canada approved Thelin™ for the treatment of primary pulmonary arterial hypertension and pulmonary hypertension secondary to connective tissue disease, in patients with WHO functional class III who have not responded to conventional therapy. Thelin™ is also indicated in patients with WHO functional class II

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who did not respond to conventional therapy and for whom no appropriate alternative treatment can be identified. In anticipation of receiving approval for Thelin™ in Canada, we began to build a commercial presence in Canada.

     Thelin™ is also under review by the FDA in the U.S. In March 2006, we received an Approvable Letter from the FDA, or the March Approvable Letter, pursuant to which the FDA identified several concerns and observations that were required to be resolved before the drug could be approved, including the option of conducting additional clinical trial work. In May 2006, the FDA accepted for review our complete response to the concerns and observations noted in the March Approvable Letter, and designated the submission as a Class 1 review. The FDA established a new Prescription Drug User Fee Act, or PDUFA, target action date of July 24, 2006, and on such date we received a second Approvable Letter, or the July Approvable Letter, pursuant to which the FDA identified one of the substantive items raised in the March Approvable Letter as remaining unresolved. The FDA again offered the alternative of conducting additional clinical work. Following discussions with the FDA, we submitted a complete response to the July Approvable Letter, which was accepted by the FDA on December 28, 2006. On June 15, 2007, we received a third approvable letter, or Third Approvable Letter, from the FDA. In the Third Approvable Letter, the FDA stated that our development program for Thelin™ did not demonstrate the evidence of effectiveness needed for approval. The FDA encouraged us to conduct an additional study to demonstrate the drug’s effectiveness in exercise capacity as measured by change in six-minute walk distance. In July 2007, we held a formal Class A preliminary dispute resolution meeting with officials from the FDA regarding the Third Approvable Letter and the status of our NDA for Thelin. The meeting complied with the FDA’s guidance on formal dispute resolution requiring that a sponsor meet with the division reviewing its NDA prior to requesting formal dispute resolution. On August 6, 2007 we filed with the FDA a request for formal dispute resolution to contest the Third Approvable Letter. If formal dispute resolution is not successful, we will be required to conduct an additional clinical trial which will be costly and will take approximately two years to complete.

     During 2004, we obtained orphan drug designation for Thelin™ from both the FDA and the EC. Orphan drug designation grants exclusivity to Thelin™ upon product approval for seven years in the U.S. and ten years in the EU. During 2006, the EMEA requested additional information from us to support the orphan drug designation for Thelin™ and we have responded to that request. In May 2007, we met with officials from the EC to discuss the EMEA’s reassessment of the orphan drug status of Thelin™ in the EU, and following that meeting we submitted documents supporting our position that Thelin™’s orphan drug status should be maintained in the EU. At this time, we cannot assure you that Thelin™ will maintain orphan drug designation and its associated exclusivity in the EU for the full 10 year period. We anticipate that patent protection for Thelin™ may extend beyond expiration of orphan drug exclusivity in the U.S. and the EU.

     We have established central EU commercial operations near London, England, with regional sales offices established in Munich, Germany, Paris, France and Milan, Italy. We will evaluate the need to add additional infrastructure and commercial support as reimbursement is obtained in countries within the EU where Thelin™ is approved. We will also evaluate the need for commercial infrastructure and support worldwide if Thelin™ receives regulatory approval and reimbursement in other countries outside of the EU. In some markets, we may choose to use third parties to distribute Thelin™, or to provide other services such as reimbursement and/or sales support. We have added commercial infrastructure in Canada in anticipation of commercial launch later in the year.

     In anticipation of approval of Thelin™ by the FDA, we had hired and trained a U.S. sales force, formed a commercialization infrastructure and initiated other market launch preparation activities in the U.S, On June 25, 2007, the U.S. sales force and commercial infrastructure was terminated as part of our strategic restructuring, discussed below. If Thelin™ is approved in the U.S., we will need to establish a U.S. sales force and rebuild our U.S. commercial infrastructure.

Argatroban

     Argatroban, licensed from Mitsubishi Pharma Corporation, or Mitsubishi, and developed in North America by us, is a synthetic direct thrombin inhibitor that was approved by the FDA in 2000. It is indicated as an anticoagulant for prophylaxis or treatment of thrombosis in patients with HIT, and as an anticoagulant in patients with or at risk for HIT undergoing percutaneous coronary intervention, or PCI. Argatroban was approved in Canada in 2001 for use as an anticoagulant therapy in patients with HIT syndrome. We have licenses to a formulation patent, which expires in 2014, and a manufacturing process patent that expires in 2017. The composition of matter patent has expired. We are not aware of

18

any regulatory submissions by other parties for generic compounds that could compete with Argatroban. Argatroban is marketed and sold by GSK in the U.S. and Canada under a license agreement whereby our subsidiary described below receives royalties on sales.

     On February 6, 2007, our wholly owned subsidiary, Argatroban Royalty Sub LLC, or Royalty Sub, closed a private placement of $60 million in aggregate principal amount the Argatroban Notes to institutional investors. The Argatroban Notes are secured by royalties to be paid from sales of Argatroban and by a pledge by us of the stock of Royalty Sub. All interest and principal payments on the Argatroban Notes will be made solely from royalties and other payments payable under the license agreement with GSK, all of which have been transferred to Royalty Sub. The Argatroban Notes are non-recourse and non-convertible and have not been guaranteed by us. Royalty Sub will receive all royalties on the sales of Argatroban until the Argatroban Notes have been repaid in full; therefore, future royalties will not be available to fund our operations. For additional information about the Argatroban Notes, refer to Note 9 to the consolidated financial statements included herein.

Research Programs

     Our research efforts are concentrated on targets within the vasculature, and the potential indications of our drug candidates include cardiovascular diseases and a potentially wide variety of inflammatory diseases involving two complementary sets of targets. The first set of targets relate to G protein-coupled receptors, or GPCRs. Historically, GPCRs have been some of the most amenable targets for developing commercially successful pharmaceuticals, such as beta-blockers, antihistamines, and most anti-psychotics and anti-depressants. Endothelin receptors, targeted by Thelin™ and TBC3711, are examples of GPCRs.

     We have also developed expertise in pharmacologically intervening in the intravascular inflammatory cascade, representing a second set of intravascular targets. Bimosiamose, licensed to Revotar Biopharmaceutics A.G. and TBC4746, licensed to Schering-Plough are examples of drug candidates that we designed to target two distinct steps in this cascade, the selectins and VLA-4, respectively. Some of the targets in this cascade are GPCRs. Thus, we believe that our focus on endothelial cell and related vascular biology has opened up a broad range of disease targets with high unmet medical need.

     We have an ongoing study with TBC3711 in resistant hypertension, and are continuing to enroll patients in a Phase II proof of concept study of oral Thelin™ as a treatment for diastolic heart failure. This study is expected to be fully enrolled in the third quarter, with top line results available in mid 2008. Our CCR-9 antagonist is progressing through preclinical development and we expect to be in human testing for inflammatory bowel disease next year.

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

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	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.
•	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.

     Amounts received in advance of services being performed under contracts are recorded as deferred revenue, and recognized as services are performed. We periodically evaluate our estimates of remaining development periods, and adjust the recognition of remaining deferred revenues over the adjusted development period remaining. At June 30, 2007, remaining deferred revenue was approximately $0.6 million, which we expect to recognize over the next 12 months. A future change in our estimate of development periods could accelerate or decelerate the timing of future recognition of deferred revenue.

Cost of goods sold

     After the EC granted marketing approval in August 2006, Thelin™ became commercially available through third party distributors in the U.K. and in Germany during late 2006, and in the Republic of Ireland and The Netherlands in April 2007. Cost of goods sold is comprised of the direct cost of inventory consumed, value added taxes billed to customers along with the fees associated with third party distributors.

Stock Options

     The Company adopted the provisions of FAS 123R on January 1, 2006 using the modified prospective transition method. Under this transition method, compensation expense recognized during the three and six months ended June 30, 2006 included: (i) compensation expense for all share-based awards granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“FAS 123”), and (ii) compensation expense for all share-based awards granted subsequent to January 1, 2006, based on the grant date fair value estimated in

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accordance with FAS 123R. In accordance with the modified prospective transition method, results for prior periods have not been restated. See Note 10 to the consolidated financial statements for further detail on the impact of FAS 123R on the Company’s condensed consolidated financial statements.

Drug Manufacturing and Packaging

     Costs arising from the manufacturing and packaging of drug product, which is intended for use in clinical trials, are recognized as incurred and included in research and development expenses. Inventory balances are determined using the first-in first-out method.

Costs Related to Issue of Long-Term Debt

     Costs incurred in the issuance of the Argatroban Notes and the Convertible Notes, primarily comprised of initial purchasers’ discounts, legal and other professional fees have been deferred, and will be amortized and reported as a component of interest expense during the periods beginning with the issuance date to the date that we have the ability to call the debt.

Results of Operations

     The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Our operating results have fluctuated significantly during each quarter and year, and we anticipate that such fluctuations, which are largely attributable to increasing commercialization expenditures, will continue for the next several years. We have been unprofitable to date and expect to make substantial expenditures during the next several years as we invest in launching Thelin™ in Europe, obtaining regulatory approval of Thelin™ in the U.S., and if approval is received, the commercializing of Thelin™ in the U.S.

     We have sustained net losses of approximately $486.1 million from the date of our inception to June 30, 2007. We have primarily financed our operations to date through a series of private placements, including the Azimuth Agreement, and public offerings of our common stock and convertible debt, debt issued by our subsidiary that is secured by royalties on Argatroban and from funds received through our collaborations, research agreements and partnerships. See discussion of “Liquidity and Capital Resources” below.

     On June 25, 2007 we announced that we were implementing a strategic restructuring, to focus our resources on our most promising assets. In July 2007, we retained the investment banking firm of Morgan Stanley to assist in evaluating strategic alternatives to maximize stockholder value. We do not expect to publicly disclose further information regarding the status of the review of strategic alternatives until a definitive transaction is entered into or the process is completed. There can be no assurances that any particular alternative will be pursued or that any transaction will occur, or on what terms, or as to the timing of any transaction.

     See also Item IA — Risk Factors, in our Annual Report on Form 10-K for the year ended December 31, 2006 and in this Form 10-Q.

Three and six month periods ended June 30, 2007 and 2006

Sales

     After the EC granted marketing approval in August 2006, Thelin™ became commercially available through third party distributors in the U.K. and in Germany during late 2006, and in the Republic of Ireland and The Netherlands in April 2007. We reported sales of Thelin™ in Europe of $2.3 million and $3.2 million in the three and six months ended June 30, 2007, respectively.

     We have just started to commercialize Thelin™ in Europe, and as such, cannot make any sales projections or financial forecasts. Even though we have received regulatory approval to market Thelin™

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in Europe, Canada and Australia significant uncertainties make it difficult to forecast or predict future sales. Uncertainties which could materially affect our revenue projections include the market acceptance of Thelin™ in each country, pricing and reimbursement policies of third-party payers, the speed with which government or other third-party payers grant pricing and reimbursement approvals, competitive activity, the timing of competitive product approvals and the breadth of these products’ labeling, and other factors impacting the timing, effectiveness, and speed of our product launches.

Royalties

     Royalties increased $3.0 million and $3.9 million in the three and six months ended June 30, 2007 compared with the three and six months ended June 30, 2006, respectively. Royalties earned on sales of Argatroban under our agreement with GSK are based upon a tiered structure, which provides for increases in royalty revenue earned, as a percentage of sales, as Argatroban sales increase. The increase in royalties is due to higher sales of Argatroban, and a corresponding higher royalty rate, as a percentage of sales, in the three and six months ended June 30, 2007 as sales reached higher tiers within the agreement. Such sales thresholds are evaluated annually. As a result of the recent sale of the Argatroban Notes by Royalty Sub, all royalty revenues from sales of Argatroban will be used to pay interest and to repay the Argatroban Notes, and are no longer available to fund our operations until the Argatroban Notes are repaid in full.

Total Revenues

     Revenues in the three months ended June 30, 2007 increased $5.3 million, to $8.9 million from $3.7 million in the three months ended June 30, 2006. Revenues in the six months ended June 30, 2007 increased $7.1 million, to $14.3 million from $7.2 million in the six months ended June 30, 2006. These increases are due to sales of Thelin™ in Europe and to higher royalties earned on sales of Argatroban by GSK in 2007.

Cost of Goods Sold

     Cost of goods sold in the three and six months ended June 30, 2007 of approximately $411,000 and $477,000, respectively, was primarily comprised of the cost to manufacture, finish and package quantities of Thelin™ sold in Europe. There was no cost of goods sold in the three or six months ended June 30, 2006 as Thelin™ was not yet commercially available.

Research and Development Expense

     Research and development expense in the three and six months ended June 30, 2007 increased $2.0 million, and $1.1 million compared to the three and six months ended June 30, 2006, respectively. The increases were primarily comprised of the costs of ongoing long-term safety studies of Thelin™, and expenses related to various regulatory submissions for Thelin™, partially offset by a reversal of approximately $0.6 million in compensation expense as a result of the cancellation of unvested stock options and restricted stock due to the Restructuring. As discussed in Liquidity and Capital Resources below, we have restricted research and development activities to those necessary to maintain our existing programs and we expect ongoing research and development expenses to decline over the remainder of 2007 as a result of the Restructuring, discussed below.

Sales and Marketing Expense

     Sales and marketing expenses declined $2.2 million and $1.1 million, respectively in the three and six months ended June 30, 2007 compared with the three and six months ended June 30, 2006. Sales and marketing expense in the three and six months ended June 30, 2007 included a reversal of compensation expense of approximately $1.9 million, as a result of the cancellation of unvested stock options and restricted stock due to the Restructuring. We have made Thelin™ commercially available in the U.K., Germany, the Republic of Ireland, and The Netherlands and are actively preparing for the commercial launch of Thelin™ in other countries of Europe and in Canada. We have hired a sales force in the U.K. and in Germany and are hiring a sales force in France, Italy and Canada. As a result of the Restructuring, discussed below, we expect sales and marketing expenses in the U.S. to decline significantly over the remainder of 2007, however this decline is expected to be partially offset by increased commercialization activities in Europe and Canada.

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General and Administrative Expense

     General and administrative expense increased $0.9 million and $0.8 million, respectively, in the three and six months ended June 30, 2007 compared to the three and six months ended June 30, 2006. As a result of the Restructuring, discussed below, we expect General and Administrative expense to decline in the second half of 2007, but expect this expense to be higher than in the comparable prior-year periods. We intend to continue to build the infrastructure necessary to commercially support Thelin™ in Europe and Canada.

Restructuring Expense

     Following the receipt of the third Approvable Letter from the FDA, on June 25, 2007 we announced the implementation of a strategic restructuring in order to focus our resources on our most promising assets. As a result, we intend to reduce our U.S. workforce by approximately 70 percent, to about 65 employees. Approximately 150 employees, including the U.S. sales force, were terminated immediately, with a smaller group leaving over the following months. We also eliminated the position of Chief Operating Officer.

     We are providing cash severance payments to employees directly affected by the workforce reduction, and have entered into retention agreements providing for the payment of retention bonuses to approximately 65 members of our U.S. workforce who will remain with us following the Restructuring. We have also entered into retention agreements with selected employees of our non-U.S. operations. We estimate that the total restructuring charge will approximate $15 million, of which $7.9 million was recorded in the three months ended June 30, 2007.

     As a result of the restructuring, we intend to focus our resources on continued sales and marketing activities of Thelin™ in Europe, Canada and Australia; advancing regulatory approval for Thelin™ for PAH in the U.S.; continuing the clinical development of TBC3711; continuing the Phase II proof of concept study of oral Thelin™ as a treatment for diastolic heart failure; and completing activities to maintain the value of our Chemokine C-motif Receptor 9 and its two late stage pre-clinical programs against an undisclosed target. We also intend to maintain a smaller headquarters in the U.S.

     We have retained the investment banking firm of Morgan Stanley to assist in evaluating strategic alternatives to maximize stockholder value. We do not expect to publicly disclose further information regarding the status of the review of strategic alternatives until a definitive transaction is entered into or the process is completed. There can be no assurances that any particular alternative will be pursued or that any transaction will occur, or on what terms, or as to the timing of any transaction.

Total Operating Expenses

     Total operating expenses in the three and six months ended June 30, 2007 increased $9.1 and $9.2 million, respectively, compared to the three and six months ended June 30, 2006, primarily due to the restructuring expense of $7.9 million and increased research and development expenses. We expect our ongoing operating expenses to be approximately $20 million in the quarter ended September 30, 2007, and approximately $15 million in the quarter ended December 31, 2007.

Operating Loss

     Operating loss in the three months ended June 30, 2007, increased $3.8 million compared with the three months ended June 30, 2006, and operating loss in the six months ended June 30, 2007 increased $2.1 million compared with the six months ended June 30, 2006. These increases were due to higher operating expenses, partially offset by sales of Thelin™ and increased royalty revenues during 2007.

Interest Expense

     Interest expense increased $1.8 million and $2.8 million in the three and six months ended June 30, 2007, compared with the three and six months ended June 30, 2006, respectively. The increases are primarily due to interest on the Argatroban Notes, which were issued on February 6, 2007. Since all amounts received for royalties on sales of Argatroban in excess of accrued interest on the Argatroban Notes will be used to redeem Argatroban Notes each quarter, we expect interest expense to decline in the future.

Investment Income

     Investment income in the three and six month periods ended June 30, 2007, decreased approximately $0.2 million and $0.7 million, respectively, due to reduced funds available for investment during 2007.

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Cumulative effect of Change in Accounting Principle

     Prior to the Company’s adoption of FAS 123R, if unvested shares of restricted common stock were forfeited, the Company reversed any compensation expense that it had previously recorded on those shares at the time of forfeiture. Following the adoption of FAS 123R, the Company periodically adjusts the amount of expense recorded each period, based upon its estimate of future forfeitures. The cumulative effect of estimating future forfeitures of unvested restricted common shares granted before January 1, 2006, was $107,000, which is reported as a cumulative effect of change in accounting principle during the six months ended June 30, 2006.

Net Loss

     Net loss increased $5.8 million in each of the three and six month periods ended June 30, 2007, respectively, compared with the three and six month periods ended June 30, 2006. The increased net losses are primarily due to restructuring expense of $7.9 million and higher research and development expenses, partially offset by higher revenues in the 2007 periods.

Liquidity and Capital Resources

     While the Consolidated Financial Statements included herein have been prepared assuming that we will continue as a going concern, because of our losses and need for additional financing to execute our business strategy, our independent auditor’s report on our Consolidated Financial Statements for the year ended December 31, 2006 contained a statement relating to their substantial doubt about our ability to continue as a going concern. At June 30, 2007, we had cash and investments of $65.0 million, of which $4.3 million was used to pay principal and interest on the Argatroban Notes on July 2, 2007. See Note 5 to the consolidated financial statements. To date, we have financed our research and development activities and other operations primarily through public and private offerings of common stock, including an equity financing line with Azimuth; proceeds from the issuance and sale of our Convertible Notes and the Argatroban Notes; funds received through collaborations, research agreements, licenses and partnerships; and royalty revenue from sales of Argatroban. Although, we have recently received additional funds from our equity financing line with Azimuth described below and as a result of the confirmation of treaty relief from UK withholding obligations pursuant to the terms of the Argatroban Notes, we will require significant additional funding to continue to operate as a going concern, as described in more detail below. During the three months ended June 30, 2007, we completed three draw downs under the Azimuth Agreement, and received gross proceeds of $27.5 million. We have sold the maximum number of shares to Azimuth, and the Azimuth Agreement has terminated pursuant to its terms. We may also issue common stock, debt, or other securities for gross aggregate proceeds of $68.0 million pursuant to our effective shelf registration statement. Because the FDA has issued a third approvable letter, management believes that additional funding will be significantly more difficult to obtain on commercially acceptable terms, if at all.

Outlook for the Balance of 2007

     Until recently, the majority of our financial resources have been dedicated to the research and development of Argatroban, Thelin™ and other drug compounds. Beginning in 2005, we have spent an increasing percentage of our financial resources on preparations for the anticipated commercial launch of Thelin™ in the U.S., and more recently, in building the commercial infrastructure necessary to launch Thelin™ in Europe and Canada. As described below, we expect to continue to expand our commercial organization in Europe and continue to invest in Canadian launch preparations for Thelin™, however as a result of the restructuring, we have terminated our U.S. sales force and significantly reduced our commercial infrastructure in the U.S. While we continue to invest in developing several new drug compounds, we currently do not have any drug candidates that may be commercialized in the near future other than Thelin™.

     We have just started to commercialize Thelin™ in Europe, and as such, cannot make any projections or financial forecasts of sales or operating expenses. We believe, however, that the commercial launch of Thelin™ in Europe and anticipated launch of Thelin™ in Canada will require additional funding due to higher levels of sales and marketing expenditures, particularly in Europe, than in recent periods. Even though we have received regulatory approval to market Thelin™ in Europe, Canada and Australia, significant uncertainties make it difficult to forecast or predict future sales. Uncertainties that could materially affect any revenue projections include the market acceptance of Thelin™ in each country,

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approved pricing and reimbursement policies of third-party payers, the speed with which government or other third-party payers grant pricing and reimbursement approvals, competitive activity, the timing of competitive product approvals and the breadth of competitive product labeling, and other factors impacting the timing, effectiveness and speed of our product launches.

          We believe that our existing capital resources are sufficient to fund our operations into the first quarter of 2008. We have implemented a strategic restructuring to reduce our cash requirements and to focus our remaining resources in our most promising assets. As a result of the restructuring, we intend to focus our resources on continued sales and marketing activities of Thelin™ in Europe, Canada and Australia; advancing regulatory approval for Thelin™ for PAH in the U.S.; continuing the clinical development of TBC3711; continuing the Phase II proof of concept study of oral Thelin™ as a treatment for diastolic heart failure; and completing activities to maintain the value of our Chemokine C-motif Receptor 9 and its two late stage pre-clinical programs against an undisclosed target. As discussed herein, we also intend to maintain a smaller headquarters in the U.S. We have retained Morgan Stanley to assist in evaluating strategic alternatives to maximize shareholder value.

          As a result of these decisions, we expect our ongoing expenses to be approximately $20 million and $15 million in the third and fourth quarters of 2007, respectively. We also expect to continue to incur operating losses through 2007 and 2008. Because of this, we will require significant additional funding to continue our operations, even if Thelin™ is not approved by the FDA, and will require additional funding if Thelin™ is approved for commercial launch in the U.S. Working with Morgan Stanley to explore strategic alternatives, we will consider financing alternatives to raise additional capital, including, but not limited to, licensing or sales of our drug candidates, licensing or sales of some or all of our worldwide rights to Thelin™, issuances of common stock or other equity securities, and the sale of senior, convertible, or subordinated debt which may or may not be secured by our assets. Because the FDA has issued the Third Approvable Letter, we believe that additional funding will be significantly more difficult to obtain, and we cannot assure you that such funding will be available on commercially acceptable terms, if at all.

     Cash Used in Operating Activities:

          Cash and cash equivalents, including accrued interest thereon, was $65.0 million at June 30, 2007, compared with $43.8 million at December 31, 2006. We used $57.9 million in cash in continuing operations during the six months ended June 30, 2007, compared to $51.4 million during the six months ended June 30, 2006. The primary operating uses of cash in the 2007 and 2006 periods were to fund our general operating expenses and the ongoing research and development programs, as well as preparations for the commercialization of Thelin, partially offset by cash received from investment income and milestone payments. Cash received from GSK for royalties in the six months ended June 30, 2007 was used to pay interest upon and to partially repay the Argatroban Notes while in the six months ended June 30, 2006 cash received from GSK was available to fund operating activities.

     Cash used in Investing Activities:

          Investing activities are primarily comprised of purchases of equipment and leasehold improvements, and of our investments in debt securities. Cash is generated from investing activities when marketable securities mature and the resulting cash is utilized primarily to fund operating activities. Purchases of equipment and leasehold improvements were $0.2 million and $1.5 million in the six months ended June 30, 2007 and 2006, respectively. There were no purchases or maturities of investments in debt securities during the six months ended June 30, 2007, however in the six months ended June 30, 2006 we purchased short-term investments totaling $10.0 million

     Cash provided by Financing Activities:

          Cash provided by financing activities of $79.8 million during the six months ended June 30, 2007 was primarily comprised of proceeds from the Argatroban Notes and from the three draw downs under the Azimuth Agreement. We incurred $3.4 million in expenses associated with issuing the Argatroban Notes, and after receipt of royalties from GSK we repaid $4.0 million in principal of the Argatroban Notes during the six months ended June 30, 2007. Cash provided by financing activities of $0.4 million during the six months ended June 30, 2006 was comprised of proceeds from employee stock option exercises.

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Material Commitments:

     Our material contractual obligations are comprised of (i) amounts borrowed through the issuance of the Convertible Notes, (ii) amounts borrowed through the issuance of the Argatroban Notes and (iii) obligations under our operating lease agreements. In addition, we have signed a long-term purchase agreement for the manufacturing and supply of Thelin™; however, our obligations under the agreement are contingent upon receiving regulatory approval for the marketing of Thelin™ in the U.S.

     As of June 30, 2007, the Company had contractual obligations as follows (dollars in thousands):

			Less
			than 1		1-3		3-5		After 5
	Total		year		Years		Years		years
Contractual Obligations
Long-term debt	$	186,038	$	—	$	—	$	—	$	186,038
Severance and retention		4,843		4,843
Operating leases		3,872		2,090		1,708		74		—
Total	$	194,753	$	6,933	$	1,708	$	74	$	186,038

Off-Balance Sheet Arrangements:

     We have not engaged in off-balance sheet financing arrangements.

Impact of Inflation and Changing Prices

     The pharmaceutical research industry is labor intensive and wages and related expenses increase in inflationary periods. The leases of space and related building services for our Houston office and laboratory facilities each contain clauses that escalate rent and related services each year based on the increase in building operating costs and the increase in the Houston Consumer Price Index, respectively. To date, inflation has not had a significant impact on our operations.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Foreign Currency Exchange Risk

     The Company is exposed to market risk primarily from changes in foreign currency exchange rates. We have contracts with entities outside the U.S. that are denominated in a foreign currency. To date, changes in foreign currency exchange rates have not had a material impact on our financial results.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

     As of the end of the period covered by this report, our management carried out an evaluation, with the participation of our principal executive officer (the “CEO”) and our principal accounting officer (the “PAO”), of the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 of the Securities Exchange Act of 1934. Based on those evaluations, the CEO and PAO concluded:

     (i) that our disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including the CEO and PAO, as appropriate to allow timely decisions regarding required disclosure; and

     (ii) that our disclosure controls and procedures are effective.

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Changes in Internal Controls Over Financial Reporting

     There have been no changes in our internal controls over financial reporting during the period covered by this report that have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

     On September 26, 2006, a purported class action complaint (the “Massachusetts Laborers complaint”) was filed in the United States District Court for the Southern District of Texas by Massachusetts Laborers’ Annuity Fund, on behalf of itself and all other similarly situated investors against the Company, Bruce D. Given, M.D. (the Company’s former President and Chief Executive Officer), Richard A.F. Dixon (the Company’s Senior Vice President, Research and Chief Scientific Officer) and Stephen L. Mueller (the Company’s former Vice President, Finance and Administration, Secretary and Treasurer). The complaint alleges violations of sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Securities and Exchange Commission Rule 10b-5, and focuses on statements that are claimed to be false and misleading regarding our drug sitaxsentan sodium. The plaintiffs seek unspecified damages on behalf of a purported class of purchasers of our securities during the period from February 19, 2004 through March 24, 2006.

     In addition, on October 10, 2006, a second purported class action complaint was filed in the United States District Court for the Southern District of Texas by Gustav R. Bastian, on behalf of himself and all other similarly situated investors against the Company, Dr. Given, Mr. Dixon and Mr. Mueller. The complaint asserts substantially the same factual allegations and legal claims as the Massachusetts Laborers complaint on behalf of the same putative class. A third substantially similar purported class action complaint was filed on October 20, 2006 by Steven O. Scott, and a fourth substantially similar purported class action complaint was filed on November 1, 2006 by Cami Janzen-Guare. These complaints assert substantially the same factual allegations and legal claims as the Massachusetts Laborers’ complaint and were filed in the same court on behalf of the same putative class.

     It is possible that additional complaints regarding the same subject matter may be filed in the future. The Court has consolidated the four existing putative class action lawsuits into a single civil action, and we expect that any future purported class action lawsuits involving the same subject matter as the existing lawsuits will likewise be consolidated into this action. The Court has also appointed a lead plaintiff and lead counsel in the consolidated action, who have filed a consolidated amended complaint. We have filed a motion to dismiss the consolidated action. Although we believe that the allegations in these cases are without merit and intend to defend all such litigation vigorously, litigation is subject to inherent uncertainties, and an adverse result in these or other matters that may arise from time to time could have a material adverse effect on our business, results of operations and financial condition.

     On November 22, 2006, John Jadelis, an individual claiming to be a shareholder of the Company, filed a purported shareholder derivative complaint in the United States District Court for the Southern District of Texas. The complaint names the Company as a nominal defendant and Bruce D. Given, the Company’s former President and CEO, Richard A.F. Dixon, the Company’s Senior Vice President of Research and Chief Scientific Officer, Stephen L. Mueller, the Company’s former Vice President, Finance and Administration, Secretary and Treasurer, Ron Anderson, Director, J. Kevin Buchi, Director, John H. Dillon, II, Director, John M. Pietruski, Director, James A Thomson, Director, Suzanne Oparil, Director, James T. Willerson, Director and Robert J. Cruikshank, Director, as defendants. The suit asserts claims for breach of fiduciary duty, abuse of control, insider selling, misappropriation of information, gross mismanagement, and waste of corporate assets, and seeks contribution and indemnification against the individual defendants. The lawsuit seeks damages on behalf of the Company against the individual defendants, as well as a constructive trust over the individual defendants’ assets or trading activities; restitution and disgorgement of all profits, benefits, and compensation obtained by the individual defendants; and the costs of attorneys’ fees expended by the plaintiff in litigating the derivative action. We have filed a motion to dismiss the derivative action.

     We anticipate that additional shareholder derivative lawsuits regarding the same subject matter may be filed in federal and/or state court during the upcoming months.

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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.

     While the Consolidated Financial Statements included herein have been prepared assuming that we will continue as a going concern, because of our losses and need for additional financing to execute our business strategy, our independent auditor’s report on our Consolidated Financial Statements for the year ended December 31, 2006 contained a statement relating to their substantial doubt about our ability to continue as a going concern. At June 30, 2007, we had cash and investments of $65.0 million, of which $4.3 million was used to pay principal and interest on the Argatroban Notes on July 2, 2007. See Note 5 to the consolidated financial statements. To date, we have financed our research and development activities and other operations primarily through public and private offerings of common stock, including an equity financing line with Azimuth; proceeds from the issuance and sale of our Convertible Notes and the Argatroban Notes; funds received through collaborations, research agreements, licenses and partnerships; and royalty revenue from sales of Argatroban. Although, we have recently received additional funds from our equity financing line with Azimuth described below and as a result of the confirmation of treaty relief from UK withholding obligations pursuant to the terms of the Argatroban Notes, we will require significant additional funding to continue to operate as a going concern, as described in more detail below. During the three months ended June 30, 2007, we completed three draw downs under the Azimuth Agreement, and received gross proceeds of $27.5 million. We have sold the maximum number of shares to Azimuth, and the Azimuth Agreement has terminated pursuant to its terms. We may also issue common stock, debt, or other securities for gross aggregate proceeds of $68.0 million pursuant to our effective shelf registration statement. Because the FDA has issued the Third Approvable Letter, we believe that additional funding will be significantly more difficult to obtain, and we cannot assure you that such funding will be available on commercially acceptable terms, if at all.

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.

     On June 25, 2007, we implemented a restructuring plan intended to reduce our operating expenses following our receipt of the Third Approvable Letter from the FDA on June 15, 2007. As a result, we reduced our U.S. workforce by approximately 70 percent to about 65 people. The planning and implementation of our restructuring has placed, and will continue to place a strain on our managerial, operational and other resources. We cannot assure you that our restructuring efforts will enable us to reduce our costs to the extent anticipated.

     Our success depends largely upon the continued service of our senior management and scientific staff and our ability to attract, retain and motivate qualified scientific, senior management, sales and marketing and professional support staff personnel. Our success is also dependent on our retaining and expanding our personnel as needs arise in the areas of sales and marketing, and professional support staff, in order to successfully commercialize Thelin™ in the EU and Canada. Since receiving marketing approval for Thelin™ from the EC in August 2006, we began to establish sales and marketing operations and hire sales representatives in the UK, Germany, France and Italy and other countries of the EU. We may also need to hire additional qualified personnel in management, finance and accounting, human resources, regulatory affairs, legal and other key areas in order to successfully commercialize Thelin™ in the EU and Canada.

     The industry in which we compete has a high level of employee mobility and aggressive recruiting of skilled personnel. We face intense competition for such personnel from other pharmaceutical companies, academic institutions, government entities and other organizations. We cannot assure you that we will be successful in attracting, hiring or retaining qualified personnel.

     Since receiving the Third Approvable Letter, we have lost several employees and we may lose key employees in the future for reasons discussed above. The loss of any of our key employees could adversely affect our business and cause significant disruption in our operations.

28

     The workforce reduction could also result in reduced productivity by our remaining employees, which in turn may affect our business and financial results in future quarters. We cannot assure you that future reductions or adjustments to our workforce will not be made or that issues associated with such reductions will not recur.

We have recently experienced significant turnover in senior management.

     Over the past 12 months, we have experienced significant turnover in our senior management team, including the departures of our President and Chief Executive Officer, Chief Financial Officer, Vice President of Clinical Development, Vice President of Finance and Administration, and Executive Director of Business Development. As a result of these changes, we essentially have a new management team. It is not yet possible to assess how effective this management team will be and whether they will be able to accomplish our strategic business objectives. In addition, because we have a relatively small organization, the loss of executive officers or other key employees could adversely affect our operations. Further, changes in senior management are disruptive to the organization and changes may slow our progress toward our strategic goals.

We have a history of losses and we may never become profitable.

     Until recently, the majority of our financial resources have been dedicated to the research and development of Argatroban, Thelin™ and other drug compounds. Beginning in 2005, we have spent an increasing percentage of our financial resources on preparations for the anticipated commercial launch of Thelin™ in the U.S., and more recently, in building the commercial infrastructure necessary to launch Thelin™ in Europe and Canada. As described below, we expect to continue to expand our commercial organization in Europe and continue to invest in Canadian launch preparations for Thelin™, however as a result of the restructuring, we have terminated our U.S. sales force and significantly reduced our commercial infrastructure in the U.S. While we continue to invest in developing several new drug compounds, we currently do not have any drug candidates that may be commercialized in the near future other than Thelin™.

     We have just started to commercialize Thelin™ in Europe, and as such, cannot make any projections or financial forecasts of sales or operating expenses. We believe, however, that the commercial launch of Thelin™ in Europe and anticipated launch of Thelin™ in Canada will require additional funding due to higher levels of sales and marketing expenditures, particularly in Europe, than in recent periods. Even though we have received regulatory approval to market Thelin™ in Europe, Canada and Australia, significant uncertainties make it difficult to forecast or predict future sales. Uncertainties that could materially affect any revenue projections include the market acceptance of Thelin™ in each country, approved pricing and reimbursement policies of third-party payers, the speed with which government or other third-party payers grant pricing and reimbursement approvals, competitive activity, the timing of competitive product approvals and the breadth of competitive product labeling, and other factors impacting the timing, effectiveness and speed of our product launches.

     Based upon our current cash position, we believe that our existing capital resources are sufficient to fund our operations into the first quarter of 2008. We have implemented a strategic restructuring to reduce our cash requirements and to focus our remaining resources in our most promising assets. As a result of the restructuring, we intend to focus our resources on continued sales and marketing activities of Thelin™ in Europe, Canada and Australia; advancing regulatory approval for Thelin™ for PAH in the U.S.; continuing the clinical development of TBC3711; continuing the Phase II proof of concept study of oral Thelin™ as a treatment for diastolic heart failure; and completing activities to maintain the value of our Chemokine C-motif Receptor 9 and its two late stage pre-clinical programs against an undisclosed target. As discussed herein, we also intend to maintain a smaller headquarters in the U.S. We have retained Morgan Stanley to assist in evaluating strategic alternatives to maximize shareholder value.

     As a result of these decisions, we expect our ongoing expenses to be approximately $20 million and $15 million in the third and fourth quarters of 2007, respectively. We also expect to continue to incur operating losses through 2007 and 2008. Because of this, we will require significant additional funding to continue our operations, even if Thelin™ is not approved by the FDA, and will require additional funding if Thelin™ is approved for commercial launch in the U.S. Because the FDA has issued the Third Approvable Letter, we believe that additional funding will be more difficult to obtain on commercially acceptable terms, if at all. Working with Morgan Stanley, we will consider financing alternatives to raise additional capital, including, but not limited to, licensing or sales of our drug candidates, licensing or sales of some or all of our worldwide rights to Thelin™, issuances of common

29

stock or other equity securities, and the sale of senior, convertible, or subordinated debt which may or may not be secured by our assets. We cannot assure you that such funding will be available on commercially acceptable terms, if at all.

     We cannot assure you that we will be able to develop, produce at reasonable cost, obtain regulatory approvals, or market successfully, any of our product candidates, including Thelin™. All of our products will require regulatory approval before they may be commercialized. Products, if any, resulting from our research and development programs other than Argatroban and Thelin™, or the use of our products in new indications, may not be commercially available for a number of years, if at all, and we cannot assure you that any successfully developed products will generate substantial revenues or that we will ever be profitable.

If we are unable to raise additional capital, we will be unable to conduct our operations and develop our potential products.

     Even with the Restructuring, we expect to continue to incur substantial research and development expenditures as we develop new drug candidates, and continue to invest in the development and commercialization of Thelin™. We also anticipate that our operating expenses will continue to increase due to the following factors:

• 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.

     Notwithstanding revenues that may be produced through potential sales of Thelin™, we will need to secure additional financing to continue our current operations, including the required levels of research and development to reach our long-term goals. Estimates of our future cash requirements will depend on many factors, including:

• the outcome and timing of reimbursement approvals for Thelin™ 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;

30

• 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; and

• effective and sustained commercialization activities and arrangements.

We make business decisions based on forecasts of future sales of Thelin™ in markets where we have approval that may be inaccurate.

     Our forecasts of future sales of Thelin™ in markets where we have approval are based on many assumptions, including, but not limited to, reliance on external primary and secondary market research, our own internal research, population estimates, estimates of disease diagnostic rates, treatment trends, and sales of similar and competitive products, and market estimates by third parties. Any of these assumptions can materially impact our forecasts and we cannot assure you that the assumptions are accurate. In addition, our sales forecasts include the transition of our current clinical trial patients to Thelin™ commercial supply. We cannot assure you that patients currently receiving Thelin™ in our clinical trials will be prescribed Thelin™ when the clinical trials are terminated.

We are the subject of securities class action and shareholder derivative lawsuits that may result in substantial expenditures, and divert management’s attention.

     On September 26, 2006, a purported class action complaint (the “Massachusetts Laborers complaint”) was filed in the United States District Court for the Southern District of Texas by Massachusetts Laborers’ Annuity Fund, on behalf of itself and all other similarly situated investors against the Company, Bruce D. Given, M.D. (the Company’s former President and Chief Executive Officer), Richard A.F. Dixon (the Company’s Senior Vice President, Research and Chief Scientific Officer) and Stephen L. Mueller (the Company’s former Vice President, Finance and Administration, Secretary and Treasurer). The complaint alleges violations of sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Securities and Exchange Commission Rule 10b-5, and focuses on statements that are claimed to be false and misleading regarding our drug sitaxsentan sodium. The plaintiffs seek unspecified damages on behalf of a purported class of purchasers of our securities during the period from February 19, 2004 through March 24, 2006.

     In addition, on October 10, 2006, a second purported class action complaint was filed in the United States District Court for the Southern District of Texas by Gustav R. Bastian, on behalf of himself and all other similarly situated investors against the Company, Dr. Given, Mr. Dixon and Mr. Mueller. The complaint asserts substantially the same factual allegations and legal claims as the Massachusetts Laborers complaint on behalf of the same putative class. A third substantially similar purported class action complaint was filed on October 20, 2006 by Steven O. Scott, and a fourth substantially similar purported class action complaint was filed on November 1, 2006 by Cami Janzen-Guare. These complaints assert substantially the same factual allegations and legal claims as the Massachusetts Laborers’ complaint and were filed in the same court on behalf of the same putative class.

     It is possible that additional complaints regarding the same subject matter may be filed in the future. The Court has consolidated the four existing lawsuits into a single civil action, and we expect that any future purported class action lawsuits involving the same subject matter as the existing lawsuits, will likewise be consolidated into this action. The Court has also appointed a lead plaintiff and lead counsel in the consolidated action, who have filed a consolidated amended complaint. We have filed a motion to dismiss the consolidated action. Although we believe that the allegations in these cases are without merit and intend to defend all such litigation vigorously, litigation is subject to inherent uncertainties, and an adverse result in these or other matters that may arise from time to time could have a material adverse effect on our business, results of operations and financial condition.

     On November 22, 2006, an individual claiming to be a shareholder of the Company filed a purported shareholder derivative complaint in the United States District Court for the Southern District of Texas. The complaint names the Company as a nominal defendant and certain of the Company’s current and former officers and all of the Company’s current directors as defendants. The suit asserts claims for breach of fiduciary duty, abuse of control, insider selling, misappropriation of information, gross mismanagement, and waste of corporate assets, and seeks contribution and indemnification against the individual defendants. The lawsuit seeks damages on behalf of the Company against the individual

31

defendants, as well as a constructive trust over the individual defendants’ assets or trading activities; restitution and disgorgement of all profits, benefits, and compensation obtained by the individual defendants and the costs of attorneys’ fees expended by the plaintiff in litigating the derivative action. We have filed a motion to dismiss the derivative action.

     We anticipate that additional shareholder derivative lawsuits regarding the same subject matter may be filed in federal and/or state court during the upcoming weeks or months. Any litigation to which we are subject may be costly and, further, could require significant involvement of our senior management and may divert management’s attention from our business and operations.

Legislative changes or regulatory decisions in Europe may adversely impact our orphan drug status which may result in loss of revenues in the European Union.

     The EC has designated Thelin™ as an orphan drug. Orphan drug status precludes European regulators from approving marketing applications in the EU for medicinal products that are chemically similar to Thelin™ for a period of ten years. We have been requested to provide information to support the designation of Thelin™ as an orphan drug in the EU and have responded to this request. In May 2007, we met with officials of the EC to discuss the EMEA’s reassessment of the orphan drug status of Thelin™ in the EU, and following that meeting, we submitted documents supporting our position that Thelin™’s orphan drug status should be maintained in the EU. If the EC amends its decision designating Thelin™ as an orphan drug, or if the EC decides not to renew the orphan drug designation of Thelin™ after the first five years following marketing approval, Thelin™ will lose its orphan drug status and European regulators may approve medicinal products that are chemically similar to Thelin™. In such case, we would need to rely on our existing patent protection to prevent the commercialization of competing products in the EU. This protection presently extends to 2016, subject to any available extensions, and may be broader or narrower than that offered by orphan drug status, depending on the scope of patent claims applicable to Thelin™. If Thelin™ loses its orphan drug status in the EU, and existing patent claims applicable to Thelin™ cannot prevent commercialization of competing products, Thelin™ will face increased competition, which may decrease the amount of revenue we receive from Thelin™.

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.

     We depend on independent clinical investigators, contract research organizations, hospitals and other third party service providers and our collaborators in the conduct of our clinical trials for our product candidates. We rely on these parties for successful execution of our clinical trials but do not control many aspects of their activities. For example, the investigators are not our employees. However, as the sponsor of these trials we are responsible for ensuring that each of our clinical trials is conducted in accordance with the clinical investigational plan, protocols for each clinical trial, good clinical practices and other regulatory requirements. Third parties may not complete activities on schedule or may not conduct our clinical trials in accordance with regulatory requirements or our stated protocols. The failure of these third parties to carry out their obligations could delay or prevent the development, approval and commercialization of our product candidates.

Issuance of shares in connection with financing transactions or under stock plans will dilute current stockholders.

     We issued $130 million of our Convertible Notes, which are convertible into approximately 9.3 million shares of our common stock. In addition, pursuant to our stock plans, our management, upon approval by our Compensation and Corporate Governance Committee, is authorized to grant stock awards to our employees, directors and consultants. Stockholders will incur dilution upon the conversion of the Convertible Notes, or the exercise of any outstanding stock awards. In addition, if we raise additional funds by issuing additional common stock, or securities convertible into or exchangeable or exercisable for common stock, further dilution to our existing stockholders will result and new investors could have rights superior to existing stockholders.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

     None.

32

Item 3. Defaults Upon Senior Securities

     None

Item 4. Submission of Matters to a Vote of Security Holders

     On May 9, 2007, we held an annual meeting of our stockholders. The holders of 54,011,014 shares of common stock were present in person or represented by proxy at the meeting. At the meeting, the stockholders elected the following persons to serve as directors of the Company until the next annual meeting of stockholders or until their successors are duly elected and qualified:

	Number of Votes		Number of Votes
Name of Nominee	Voted For		Withheld
Ron J. Anderson, M.D.		48,954,856		5,056,158
J. Kevin Buchi		48,977,479		5,033,535
Robert J. Cruikshank		48,873,124		5,137,890
John H. Dillon II		48,985,721		5,025,293
Richard A. F. Dixon, Ph.D.		48,923,125		5,087,889
Bruce D. Given, M.D.		48,822,633		5,188,381
Suzanne Oparil, M.D.		48,997,359		5,013,655
John M. Pietruski		48,919,354		5,091,660
James A. Thomson, Ph.D.		48,843,136		5,167,878
James T. Willerson, M.D.		48,830,121		5,180,893

     The result of the vote by holders of common stock to adopt the 2007 Incentive Plan, as amended, was as follows:

Number of Votes	Number of Votes		Number of Votes		Number of
Voted For	Voted Against		Abstaining		Broker Non-Votes
15,037,559		6,789,658		340,671		31,843,126

     The result of the vote by holders of common stock to ratify the appointment of KPMG LLP as the Company’s independent auditors for 2007, was as follows:

Number of Votes	Number of Votes		Number of Votes
Voted For	Voted Against		Abstaining
52,204,776		1,622,606		183,632

Item 5. Other Information

     None.

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Item 6. Exhibits

Exhibit No.	Description
10.1	Encysive Pharmaceuticals Inc. 2007 Incentive Plan, as amended (incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement on Form S-8 (Commission File No. 333-142764) filed with the Commission on May 9, 2007).
10.2	Letter Agreement dated June 24, 2007, between the Company and George W. Cole (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 June 26, 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.

34

ENCYSIVE PHARMACEUTICALS INC.

August 8, 2007

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized, on the 8th day of August 2007.

ENCYSIVE PHARMACEUTICALS INC.
By:	/s/ George Cole
	George Cole
	President and Chief Executive Officer
By:	/s/ Richard A. Goeggel
	Richard A. Goeggel
	Treasurer (Principal Financial and Accounting Officer)

35

INDEX TO EXHIBITS

Exhibit No.	Description
10.1	Encysive Pharmaceuticals Inc. 2007 Incentive Plan, as amended (incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement on Form S-8 (Commission File No. 333-142764) filed with the Commission on May 9, 2007).
10.2	Letter Agreement dated June 24, 2007, between the Company and George W. Cole (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 June 26, 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.

36

EX-31.1

Exhibit 31.1

Certification pursuant to Rule 13a-14(a) / Rule 15d-14(a),
promulgated under the Securities Exchange Act of 1934, as amended.

I, GEORGE W. COLE, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Encysive Pharmaceuticals Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

     (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

     (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

     (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

     (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the

audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

     (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

     (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 8, 2007

/s/ George W. Cole                    

George W. Cole
President and Chief Executive Officer

2

EX-31.2

Exhibit 31.2

Certification pursuant to Rule 13a-14(a) / Rule 15d-14(a),
promulgated under the Securities Exchange Act of 1934, as amended.

I, RICHARD A. GOEGGEL, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Encysive Pharmaceuticals Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

     (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

     (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

     (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

     (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the

audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

     (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

     (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 8, 2007

/s/ Richard A. Goeggel                    

Richard A. Goeggel
Treasurer

2

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002

     In connection with the Quarterly Report of Encysive Pharmaceuticals Inc. (the “Company”) on Form 10-Q for the quarter ended June 30, 2007 (the “Report”), as filed with the Securities and Exchange Commission on the date hereof, I, George W. Cole, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:

     1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

     2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ George W. Cole                    
George W. Cole
President and Chief Executive Officer

August 8, 2007

A signed original of this written statement required by Section 906 has been provided to Encysive Pharmaceuticals Inc. and will be retained by Encysive Pharmaceuticals Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002

     In connection with the Quarterly Report of Encysive Pharmaceuticals Inc. (the “Company”) on Form 10-Q for the quarter ended June 30, 2007 (the “Report”), as filed with the Securities and Exchange Commission on the date hereof, I, Richard A. Goeggel, Treasurer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:

     1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

     2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Richard A. Goeggel                    
Richard A. Goeggel
Treasurer

August 8, 2007

A signed original of this written statement required by Section 906 has been provided to Encysive Pharmaceuticals Inc. and will be retained by Encysive Pharmaceuticals Inc. and furnished to the Securities and Exchange Commission or its staff upon request.