UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

(Mark One)

Commission File Number: 0-20117

ENCYSIVE PHARMACEUTICALS INC.

(713) 796-8822

Not Applicable

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 an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes þ No o

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.

ENCYSIVE PHARMACEUTICALS INC.

TABLE OF CONTENTS

ENCYSIVE PHARMACEUTICALS INC. AND SUBSIDIARIES

See accompanying notes to consolidated financial statements

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ENCYSIVE PHARMACEUTICALS INC. AND SUBSIDIARIES

See accompanying notes to consolidated financial statements

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ENCYSIVE PHARMACEUTICALS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

($ in thousands)

See accompanying notes to consolidated financial statements

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ENCYSIVE PHARMACEUTICALS INC. AND SUBSIDIARIES

March 31, 2005 (unaudited)

(1) Basis of Presentation

     The accompanying unaudited consolidated financial statements of Encysive Pharmaceuticals Inc., a Delaware corporation, and its subsidiaries (collectively referred to as the “Company” or “Encysive”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“USA”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. They do not include all information and notes required by accounting principles generally accepted in the USA for complete financial statements. It is recommended that these interim condensed consolidated financial statements be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004. Except as disclosed herein, there has been no material change in the information disclosed in the notes to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004. In the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three-month period ended March 31, 2005, are not necessarily indicative of the results that may be expected for any other interim period or for the year ending December 31, 2005.

(2) Organization and Significant Accounting Policies

     (a) Organization

     Encysive is a 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 FDA-approved product, Argatroban, for which it receives royalty income, began during November 2000.

     (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, LLP, a Delaware limited partnership, Encysive (UK) Limited, a private company located in the United Kingdom (UK), and its majority controlled subsidiary, Revotar Biopharmaceuticals AG (“Revotar”), a German corporation. All material intercompany balances and transactions have been eliminated.

     (c) Stock-Based Compensation

     At March 31, 2005, the Company had five stock-based compensation plans for employees and non-employee directors. The Company accounts for those plans under the recognition and measurement principles of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. The Company’s results of operations for the three-month periods ended March 31, 2005 and 2004, included stock-based compensation expense arising from the grant of shares of restricted common stock to employees and the recognition of deferred

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compensation expense arising from the grant of stock options in March 2003 to certain employees, which were subject to the approval of stockholders of an amendment to increase the authorized shares in the 1999 plan. No other stock-based employee compensation expense is reflected in net loss, however, as all options granted under those plans had an exercise price equal to the market price of the underlying Common Stock on the date of grant. The following table illustrates the effect on net loss and loss per share if the Company had applied the fair value recognition provisions of FASB Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation,” to stock-based employee compensation (dollars in thousands, except for per share data).

     In December 2004, the FASB issued Statement No. 123R, “Share-Based Payment” (“FAS 123R”), which requires the measurement of all employee share-based payments to employees, including grants of employee stock options, using a fair-value based method and the recording of such expense in our consolidated statements of operations and comprehensive loss. The implementation of accounting provisions of FAS 123R has been delayed and will now be effective for annual reporting periods beginning after June 15, 2005. The Company is required to adopt FAS 123R in the first quarter of 2006. The pro forma disclosures previously permitted under FAS 123 no longer will be an alternative to financial statement recognition. Although we have not yet determined whether the adoption of FAS 123R will result in amounts that are similar to the current pro forma disclosures under FAS 123, we are evaluating the requirements of FAS 123R and expect the adoption may have a significant adverse impact on our future consolidated statements of operations and comprehensive loss.

     The per-share weighted average fair value of stock options granted during the three-month periods ended March 31, 2005 and 2004, was $6.62 and $5.99, respectively, on the grant date using the Black-Scholes option pricing model with the following assumptions:

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     (d) Debt Issue Costs

     The Company incurred costs, principally comprised of underwriting fees and various legal and professional fees, of approximately $4,641,000 related to the issue of its 2.50% Convertible Senior Notes due 2012 (the “Notes”) in March 2005. Recognition of the debt issue costs is deferred, and recognized from the issuance of the Notes through the maturity date of the Notes, March 15, 2012. Interest expense in the three-months ended March 31, 2005, includes approximately $37,000 in amortized debt issue costs. Remaining unamortized debt issue costs were approximately $4,604,000 at March 31, 2005. For additional information about the Notes, see Note 9.

(3) Capital Stock

     In March 2005, the Company issued the 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 Notes, see Note 9. The Company has reserved Common Stock for issuance as of March 31, 2005, as follows:

     The Company has proposed to its stockholders for consideration at its 2005 annual meeting scheduled for May 11, 2005, that the number of authorized shares be increased from 75,000,000 to 150,000,000.

(4) Cash, Cash Equivalents, and Short-Term Investments

     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 values of the securities to their market values. 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. Composition of cash and investments was as follows (dollars in thousands):

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Investments at March 31, 2005, and December 31, 2004, were as follows (dollars in thousands):

(5) 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 March 31, 2005 and 2004, the weighted average common shares used to compute basic and diluted net loss per common share totaled 57,655,886 and 52,178,130, respectively. Securities convertible into Common Stock comprised of stock options, warrants, shares of common stock reserved for issuance upon conversion of the Notes and unvested shares of restricted common stock totaling 15,033,552 and 5,423,117 shares at March 31, 2005 and 2004, respectively, were not used in the calculation of diluted net loss per common share because the effect would have been antidilutive.

(6) Income Taxes

     The Company did not incur tax expense (benefit) during the three-month periods ended March 31, 2005 and 2004, due to operating losses and the related increase in the valuation allowance.

(7) Entity-Wide Geographic Data

     The Company operates in a single business segment that includes research and development of pharmaceutical products. The following table summarizes the Company’s long-lived assets in different geographic locations (dollars in thousands):

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     The following table summarizes the Company’s revenues in different geographic locations (dollars in thousands):

     The Company’s revenues are primarily derived from several entities, each of whom represents a significant percentage of total revenues. The following table summarizes the Company’s sources of revenues from its principal customers (dollars in thousands):

(8) Foreign Subsidiary

     In April 2005, the stockholders of Revotar agreed to restructure Revotar’s capitalization (the “Restructuring”). Under the terms of the Restructuring, Revotar’s stockholders other than the Company have agreed to contribute additional funds to Revotar, and the Company’s ownership will be reduced to approximately 14% of the outstanding common stock of Revotar. Revotar’s other stockholders may also subsequently purchase the shares of Revotar common stock owned by the Company for nominal consideration. Upon the funding of Revotar by the other stockholders, the Company has agreed to license its worldwide rights to bimosiamose and certain follow-on compounds to Revotar for which it could receive substantial future royalty payments from Revotar in the event that these compounds are subsequently approved and commercialized, or licensed to a third party. Further, the Company has agreed to cancel its outstanding loan, and accrued interest thereon, of approximately $3.7 million. The transaction will become effective upon contribution of the additional capital by Revotar’s other stockholders. For additional discussion of Revotar’s indebtedness, see Note 9. Following the completion of the Restructuring, the Company’s consolidated financial statements will no longer include the results of Revotar. The Company’s management believes that the Restructuring will not have a material adverse effect on the Company’s results of operations or financial position.

     Encysive formed Revotar in 2000 to conduct research and development of novel small molecule compounds and to develop and commercialize selectin antagonists. The Company initially retained ownership of approximately 55% of the outstanding common stock of Revotar and has consolidated the financial results of Revotar into Encysive’s consolidated financial statements. Since the development and commercialization rights contributed by the Company to Revotar had no basis for financial reporting purposes, the Company assigned no value to its contribution of intellectual property rights. The Company’s equity in the originally contributed assets by the minority stockholders is included with the minority interest in Revotar on the consolidated balance sheets at March 31, 2005, and December 31, 2004.

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